Enoughwealth's Personal Finance Blog

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

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

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

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

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

personal finance
investing
money
saving

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

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

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

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


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

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

personal finance
money
saving

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

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

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





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

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

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

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

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

PORTFOLIO PERFORMANCE:

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

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

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

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

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

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

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

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

The current status of my balance transfers experiment:

Card #1 Coles Source MasterCard:

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

Card #2 Virgin Money MasterCard:

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

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

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

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

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

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

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

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

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

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



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

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

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

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

The Financial Times.com reported that the Chigago's Mercantile Exchange has launched futures and options that can mitigate the risk of house price movement:

"The CME will offer futures and options based on house prices in New York, as well as Washington, Boston, Miami, Chicago, Denver, Los Angeles and San Francisco. Las Vegas and San Diego, two of the hottest real estate markets over the past two years and the source of feverish discounting by some new-home builders, are also included, and could create volatility."

If you have a large fraction of your investment portfolio tied up in real estate (eg. your home), this could be a way to protect against declines in the value of your home now that the US property "bubble" appears to have started to deflate.

"Retail investors can use the futures in three main ways. The simplest, direct investment, lets you take a view on a housing market by going long if you think it will go up, or short if you think it is going down. This is not possible for all futures contracts. These will be settled in cash, unlike, for example, the CME’s frozen pork belly contracts.

A similar shorting strategy would allow homeowners planning to move within a limited time frame to lock in the current value of their property, with the contract paying out the difference, or at least part of the difference, if house prices decline before their planned move.

Each contract is valued at $250 multiplied by the index value. Thus to cover the value of a $500,000 home in Chicago, where in January 2006 the index stood at 163.98 – would require 12 contracts.

Finally, owners could link the value of their home to an index. For example, the home above could be listed at a constant 3,000 times the value of the Chicago index, tying its worth to the index and providing transparency to future buyers."

The SMH (Sydney Morning Herald) had a good article "Eased tax rules tempting more into margin loans" that summarises the benefits and risks of gearing into share investments via a margin loan.


"...153,000 brave souls [are] now leveraged against the stockmarket."

"The concept of negative gearing is relatively simple. It's "gearing" because you borrow money to buy a bigger portfolio, pocketing the full benefit of any after-tax capital gain.

It's "negative" because it's designed to run at a loss, which you can claim each year as an offset against your income from other sources to reduce your tax burden."

"The end of the housing boom has sparked a hunt by investors for the next pot of investment gold."

"While the median price of houses in Sydney has fallen 8.5 per cent since peaking in December 2003, the sharemarket has surged more than 50 per cent."

The main benefit of negative gearing is that you are able to convert income taxed at your marginal tax rate, into capital gains, that are taxed at a reduced rate:

"Back in 1999, the Federal Government halved the tax on capital gains for assets held for more than 12 months."

However, gearing into shares is more risky than borrowing to invest in real estate, due to the possibility of getting a margin call if the market slumps:

"After falling pretty steadily for the last two years, the average number of daily margin calls doubled in the June quarter, from one in every 4000 accounts to one in 2000.

A margin call is particularly devastating because as a consequence shares are often sold at depressed prices, magnifying losses."

Traditionally diamonds have been a terrible "investment" for small investors - usually restricted to just buying a mounted diamond engagement ring of dubious quality from a retail jeweller, all the while knowing that at best you're going to end up paying twice what the stone is worth, plus a small fortune for the setting. As a "real" investment diamonds were disadvantaged both by the mark-up charged by retailers for unmounted gems and by De Beers having a virtual monopoly until recently - marketing around 80% of gem quality diamonds and controlling the supply of gems in order to "support" prices. [The was an urban myth that De Beers had a large concrete slab poured to "lock away" a huge amount of gemstones to keep them off the market...]

However, although De Beers still mines around 40% of the world's rough diamonds, and is by far the largest seller of gem-quality diamonds, it was allegedly "decartelised" in 1999-2000 when Ashton Mining (owner of the huge Argyle Diamond mine in Western Australia) decided to start market its own diamonds. Unfortunately, Argyle's diamonds are mainly of industrial grade, so even today the competition with De Beer's is rather limited.

Since 2000 De Beer's excess stock of diamond gemstones has slowly been released into the market, which has depressed prices somewhat at the lower end (smaller stones), as can be seen in the International Diamond Exchange IDEX index below:



As the De Beer's stockpile slowly unwinds, is it now time to look again at diamonds as another alternative investment, similar to gold and silver? A few things make me think not (yet):
1. I'm not sure what fraction of De Beer's huge store of diamond gemstones has actually been sold off - there could still be a huge, unknown oversupply.
2. The trading of individual stones is problematic due to each stone being individually valued based on the "4Cs" (colour, clarity, cut and carats) with the evaluation of these being more art than science. The same stone can get slightly different appraisals from the various certified diamond valuers.
3. Trading the IDEX index would be an option (excuse the pun) to overcome this, but I don't think this index is actually traded anywhere - it's used mainly for diamond merchants to monitor changes in the market for physical diamond gemstone trades.
4. Artificial diamonds may reduce the demand for natural gems in the future.
5. They're still huge, relatively untapped diamond fields off-shore along the coast of africa, and new fields may be discovered such as the ones fairly recently developed in North Australia and Canada.
6. Diamond gemstones are not "consumed" (apart from some loss when they are recut into more fashionable shapes), so each year production is adding to the total "pool" of available gems. At the same time the population in the developed world is aging, and birth rates in the rapidly developing countries trending down, so demand may diminish over time.

I recently finished builing a tree-house for my two sons. I had always thought that having a tree-house would be "cool", and as our house has a huge liquid amber tree growing right outside our front porch I couldn't resist letting my "inner tradesman" run amok. (Actually its TOO close to the house - one day I'll have to get it removed before it damages the house).

Luckily my eldest son was keen on the idea, having enjoyed reading the "magic treehouse" series of books (written by Mary Pope Osborne) in pre-school. The materials cost around $500 altogether, mostly spent on the wood decking and handrails, plus some screws, decking nails and poly rope for the ladder. Luckily I already had some suitable wood lying around to use for the main beams and floor joists, and had all the required tools already.

Construction took longer than expected (doesn't it always) - around 5 days all told, spread over several weekends and a couple of days off work (the company I work for allows you to take up to half of your "sick leave" entitlement as "personal days"). I went for a simple "open" architecture - just a floor and safety rails (with fly-screen glued and nailed to the rails for added safety). As my two boys are aged 6 and 0, they'll be able to enjoy playing in it with their friends for the next 15 years, so the cost works out at only 32c per week per boy





When the boys are older I'll be able to increase the "fear factor" by adding a "flying fox" (zip-line) which is available as a kit for around US$80 [link]. Hopefully the tree doesn't do any more damage to our house in the meantime - it had already put a small crack in the brickwork at the front of the house before we bought the place 3 years ago, and we've had a couple of visits from the plumber to clear tree roots out of the sewer pipes. Hmmm - perhaps the total "cost of ownership" will average out at a bit more than 64c a week.

I've update my figures in NetworthIQ for the end of September - my share investments had a good month (up $14,725 or 5.6%) and my retirement (superannuation) fund also id well (up $5,436 or 1.9%). I expect these two to trend together as my super asset mix is biased mostly towards share investments (45% AU shares, 45% Int shares, 10% Property).

My direct property investments looked bad this month - after an abnormally large increase in their "estimated values" last month, this month saw a downward adjustment back towards more realistic valuations. One of the problems using the available 6-mo median sales price data for each suburb is that the sales volumes are quite low, so a few unusual sales can skew the results up or down. Overall, my property investment was down $10,068 or -1.4% this month, which was only slightly offset by my mortgage balance decreasing by $626.

Overall, my networth increased $10,720 or 1.14% during September - an amount equivalent to the grand total I managed to save up during my university years (doing factory work every holiday)! As my Great-grandma used to say "Look after the pennies and the pounds look after themselves".



personal finance
investment
wealth
stocks real estate

Our rental property has now been vacant for almost a month now... there's nothing to do but wait for the right tenants to turn up. The property is over 40 years old, and pretty much in "original" condition, so we're only asking for a modest amount of rent for this suburb. Unfortunately, whilst the small cliff that the house is perched on gives wonderful valley views [link], it also puts off prospective tenants that have small children.

We're soon going to have to start "redrawing" the extra payments we'd made on our home loan over the years in order to make the loan payments while the wife is on maternity leave and then goes back to work part-time. I hate to think how much longer it will take us to pay of our home loans for every week we're missing out on any rental income. I always told the wife I prefer investing in the stock market...

My direct share investments in Australian Shares as at 1 October.

These shares are held in accounts with two margin lenders (Comsec Securities and Leveraged Equities).

Ticker % of my 12-mo Margin
(code) Company Name Portfolio Gain Account
------ --------------------------- ---------- ----- -------
AEO Austereo 0.56% 13.70% LE
AGL Aust Gas Light 3.53% 47.20% LE,CS
AMP AMP 1.39% 28.30% LE
ANN Ansell 1.11% -5.40% LE
ANZ ANZ Bank 6.51% 17.10% LE
APA Aust Pipeline Trust 2.67% 43.10% CS
ASX Aust Stock Exchange 1.44% 24.30% CS
BHP BHP Billiton 4.21% 16.30% LE
BSL Bluescope Steel 1.11% -30.20% LE
CBA Commonwealth Bank 1.31% 25.10% CS
CDF CDF Stock Fund 18.59% 5.50% LE,CS
CHB Coca Cola Hellenic 1.13% 23.60% LE
DJS David Jones 1.53% 44.60% LE
FGL Foster's Group 5.25% 12.50% LE
IFL IOOF Holdings 2.64% 30.70% CS
IPE ING Private Equity 1.68% -44.90% CS
IPEO IPE Options 0.65% -44.90% CS
LLC Lend Lease Corp 1.69% 19.30% LE
MYP Mayne Pharma Ltd 2.62% n/a LE
n/a CFS Geared Global Fund 1.21% n/a CS
NAB National Aust Bank 2.48% 16.60% LE
NCM Newcrest Mining 1.46% 7.20% CS
OST Onesteel 1.85% 14.70% CS
QAN QANTAS Airways 1.87% 23.50% LE
QBE QBE Insurance 8.40% 35.70% LE,CS
RIO Rio Tinto 0.93% 22.80% CS
SGM Sims Gp Limited 3.75% 11.20% LE
SUN Suncorp-Metway Bank 4.09% 13.90% LE
SYB Symbion Health 2.09% -34.90% LE
THG Thakral Holdings 0.74% 16.10% CS
TLS Telstra Corp 4.06% -0.40% LE
VRL Village Roadshow 0.79% -12.20% LE
WBC Westpac Bank 1.51% 12.80% CS
WDC Westfield Group 3.23% 19.00% LE
WPL Woodside Petroleum 1.93% 11.90% CS
------ --------------------------- ---------- -----
TOTALS 100.0% 14.37%

Gearing Summary:

Margin Investment Loan My Gearing
Lender Value Balance Equity % LVR
------- ----------- ----------- ----------- ------- -----
Comsec $185,030.12 $94,108.28 $90,921.84 103.5% 50.9%
Leveraged $270,499.73 $155,626.48 $114,873.25 135.5% 57.5%

Overall $455,529.85 $249,734.76 $205,795.09 121.4% 54.8%



With my margin loans interest rate for the past year averaging around 7.5% pa, the average total return (capital gain + dividends) of 14.37% for my investments meant gearing added to my overall portfolio performance over the past year. This was a good year (bull market), giving a geared return of around 22%! In the longer term I'm aiming to average approx. 10% total return on the investments, giving a geared return of around 12.5%... we'll see how it works out

Insurance is undoubtably a "good thing". Unfortunately there is still an archaic commision-based sales system in place that adds huge costs to many insurance products.

While you can shop around via the internet for car and home insurance these days, and competition has therefore brought costs down, the story seems to be totally different when it comes to life insurance and loss of income insurance.

I have my life insurance via my company's superannuation scheme, which has the benefit of being paid for out of "pre tax" dollars. The group rates that apply are comparable to what I could get outside of super [I think the situation would be different in the US where there is more discretion in the setting of individual rates]. However, the downside is that this requires being a member of my company's "preferred" superannuation provider. Now that "choice of superannuation fund" has become a reality in Australia, I'm tempted to shift from my current BT/Westpac scheme into one run by Vanguard in order to save on fees, but I'm not sure that I'd be able to get the same amount of Death &TPD life cover outside of my superannuation scheme.

The BT scheme I'm in has a MER (fee) of around 2.25% of my superannuation balance, although I'm lucky that my employer has arranged for a "rebate" of some of the fee back to members. This reduces the overall MER to around 1.5%. This is still a fair bit higher than Vanguard Superannuation, where fees start at around 1.1% for the first $50,000 (.75% admin/plan fee + .29%-.37% management fees) and then reduces to around 0.85% for the balance above $50,000. Over 20 years the extra 0.65% would have quite an impact on the final balance when I retire! Based on published research about the likelihood of getting outperform from an active fund manager vs. an index fund, I don't think I'll end up ahead by paying the higher management fees.

Even with the Vanguard Fund, the fees in Australia are significantly higher than what Vanguard charges in the US. And in the case of the Superannuation funds, I can't see why the .75% admin/plan fee on the first $50,000 ($375) can't cover their cost per plan for administration overheads. As far as I'm concerned the admin fee for the balance over $50,000 should be zero, and their profit margin come only from the 0.29% - 0.37% management fees (more than sufficient for a mix of index funds!)

My other main insurance expenses are private health cover (around $50 /mo) and around $75 /mo for income protection insurance. These too have negatives - the medical insurance is really only worthwhile to save tax - otherwise I'd probably have to pay a medicare tax surcharge the same or higher than the insurance is costing. In terms of benefits, the hospital-only cover we've got has reimbursed one ambulance fee in the past five years. It was of no use for the delivery of our baby last month, as we couldn't arrange accomodation at the private hospital, so had to "go public". In any case the care in public hospitals is generally just as good as private, and being a private patient would still have cost us several thousand dollars more out of pocket due to the gap between the medicate scheduled fees, the private cover, and what the private charges are. I suppose the "payoff" for having private cover will come if we ever need "elective" surgery, such a hip replacement or some such.

The loss of income insurance costs are not too steep. Planning of working for another 20 or so years before retirement, and having two kids, the odds (around 20%) of suffering a medical disability that severly reduces my income earning ability and increases living costs is too high to be uninsured. Having a two year waiting period before payments commence kept the premiums down - I rely on having several months paid leave and sick leave accumulated, plus sufficient investments to see me through. One thing that does irritate is that the loss of income insurance pays "commisions" of 50%+ of the first year's premiums to the online insurance agent I used to arrange the cover. And, what's worse, they will be getting a "trailing commision" of 30%+ of each payments I make in future years!

If you want to do a quick "high level" plot of your net worth goal, there are many calculators available on-line, such as this one from National Australia Bank. You just plug in your current net worth, expected annual savings, average investment return and period. It provides a value for each future year, which would be print out and use to check yourself against each year going forward. For more detailed modelling (eg. breakdown by asset class, sensitivity analysis for the expected variability (risk) of returns, annual review of expected vs. actual position) I use an excel spreadsheet. But this is good enough for a "back of the envelope" calculation of your overall goal:

For all my readers who don't live in Sydey, here is an informative article from today's Sydney Morning Herald: Road to wealth may lie in marching out of step. Nothing revolutionary, but a nice reminder of some of the aspects of behavioural finance that prevent us acting as "rational" investors all the time. The bit about "oversold" (low p/e) stocks ties in with my "Little Book" Investment Portfolio (see previous posts 1, 2)

An article in today's Sydney Morning Herald "We of the never-never home loans" highlights the recent rapid increase in the proportion of "interest only" home loans. Traditionally these were mainly used by investors to maximise the effectiveness of negative gearing strategies. But, over the past couple of years homes have become less affordable due to the 1999-2003 housing boom, so more and more home loan borrowers have chosen the lower repayments of an interest only loan to be able to buy a home.

The problem is that a large proportion of these borrowers really can't afford to service the loan, and are a risk of defaulting on loan payments if anything goes wrong.

Banks have been increasingly lending to such "high risk" borrowers in order to maintain their market share and profitability. Despite a couple of periods where stock analysts were advising that bank stocks had peaked, with their profit margins starting to be squeezed, banks have been a consistently good investment over the past decade:



Now, however, I'm thinking seriously about reducing my exposure to bank stocks. The trend in home loan defaults is a bit worrying, and may impact bank profits in the medium term:



Then again, realising capital gains is always a pain in the tax, especially this financial year when my wife is on maternity leave - any extra taxable income could impact her chance of getting any family tax benefit, which means the effective tax rate of realising capital gains this year is prohibitive. Also, as a "long term" investor, trying to dabble in market timing is generally a bad idea.

eenie, meenie, miny, moe...

Disclaimer: I am NOT giving financial advice. Do NOT really on any opinion expressed in this blog when making decisions about YOUR money. Do your own research, seek professional advice as needed. I currently own shares in the following banks: ANZ, CBA, NAB, SUN and WBC.

While reading through the archives of the "It's Your Money:Money Musings" blog, I came across this post about class, which relates to an online "class calculator" tool available here from the New York Times. Although it's obviously US-based, the results should be applicable for Australian readers also - although, of course, we Aussies don't have any such thing as a "class system"

Money Musings found his "class" came out as:
Occupation: 49th Percentile
Education: 79th Percentile
Income: 78th Percentile
Wealth: 55th Percentile
AVERAGE: 64th Percentile

When I tried it I got:
Occupation: 81st Percentile
Education: 97th Percentile
Income: 91st Percentile
Wealth: 93rd Percentile
AVERAGE: 90th Percentile

Which seems pretty much spot on - one of my short term goals is to have a personal net worth that exceeds the 90th percentile household net worth for my age group (using data from the most recent HILDA survey), and, eventually, to exceed 1% of the cut-off the the annual BRW Rich 200 list.

One thing I noticed is that you can influence the outcome by picking the best description of your occupation - as a Chartered Chemist I can hit the 81st Occupation percentile using the "chemists and material scientists" grouping, but if I put in my current occupation (Process Improvement Manager="other business operations specialists") I only rate the 49th percentile!

Another thing to note is that there is no adjustment made for age. As Money Musings says, it is"Difficult to compare the net worth of a 50something with that of a 30something..."

Just in case anyone needed any more evidence that most "professionals" giving advice or managing equity investments are just guessing (and sometimes getting lucky), here's an illuminating graph from a recent article in the New York Times' Your Money section. It shows that the number of investment newsletter editors who were recommending a reduction in market exposure corresponded with the arrival of a good "buying opportunity". You can flash this graph at the next financial planner who tries to sell you a managed fund that charges exhorbitant fees based on an ability to "time the market"

ps. The cartoon is also cute.

Canadian Capitalist has a post about the "Smith Manouevre" - basically just paying off your undeductible home loan as quickly as possible, and simultaneously borrowing to invest in the stock market. Apparently there has been "a fair bit of discussion going on about The Smith Manoeuvre (SM) in Jonathan Chevreau’s columns in The Financial Post and on his Wealthy Boomer Blog"

I wasn't even aware that this basic idea had been given a name!

Canadian Capitalist goes on to say "I doubt that there is a causal link between leveraging and wealth and what wealthy people do after they have accumulated assets is immaterial to the argument.

Personally, I want to keep things simple. Sock away the maximum possible in a RRSP" [retirement account] "and pay down the mortgage with the rest of the savings. The way I see it, I can earn a guaranteed, risk-free, after-tax return of 5.25% (our mortgage interest rate) by paying down the mortgage, which I think is pretty darn good."

I generally like what CC blogs, but I didn't realise he was so conservative an investor. Sensible levels of tax deductible debt to invest via gearing (eg. into a rental property, or diversified stock portfolio) is a well accepted method of improving your investment returns. If you use the extra amount invested to increase your diversification you can even boost your returns without increasing risk (variability of returns).

One thing I that I don't like about gearing is that the interest rates are generally 1-2% higher than those available for investment property loans (which are the same as for a home loan). These days I'm trying to reduce the average interest rate I'm paying for my investment loans, by only adding to my leveraged portfolios with the margin lender that has the lowest rate, and also doing my direct US share investments using funds from a St George Porfolio loan - which is secured against my equity in my home and investment property, so is at the same rate as a home loan.

Gearing can have significantly improve your portfolio performance over time - for example, if an ungeared, diversified portfolio of local and international shares, property, bonds etc. returns as average of 9% pa, you borrow to invest at an interest rate of 8%, and you gear 100% (LVR of 50%), you would improve your ROI from 9% to 10% - over 20 years this would mean a $100,000 portfolio had a final value of $611,000 rather than $514,000 - an improvement of 18%!

What I would like to do one day is compare the average interest rate charged for margin loans (I think it's around 3% above the cash rate, but I'll have to check the current average interest rate vs. cash rate and look at the past 10 years figures to see how consistent this is) vs. the average return on a range of typical portfolios eg. conservative, balanced (cash/bonds/stocks/property), and somewhat aggressive. I suspect gearing is only worthwhile if your risk tolerance allows you to invest aggressively, as the return on a conservative portfolio would probably average less than the interest being charged on a margin loan.

One of the unsung benefits of using gearing is that it provides a means to reduce taxable income (eg. dividends, rental income, wages) by providing a tax deduction for the margin loan interest, and effectively converts this into capital gains which are tax deferred (until the CGT event eg. sale) and ultimately gets taxed at only 50% of your marginal tax rate (if you hold the asset > 12 months). Of course, the main reason for gearing should be to boost your long term ROI, not to reduce your tax bill!

With the recent changes to superannuation taxation, gearing is probably less attractive compared to salary sacrificing into superannuation, but it doesn't have as much legislative/political risk as super.

Personal finance, Money, Investing, Investment, Wealth.

As your credit report can affect your borrowing power, and, at least in the US, what interest rate you are charged, it is important to obtain and check what information the credit agencies have on you.

The NYT had a good article on this topic today, relevant to US readers. Main points are:
* There is only one Web site—www.annualcreditreport.com—where you can either download or order your free reports by phone or mail (the toll-free number is (877) 322-8228).
* You should check your report once a year and correct any errors.

For Australian readers, two main agencies maintain credit databases, and you need to obtain and check the report from each. This will cost a fee(eg. $27 from Baycorp) if you apply online. If you write in and ask for a copy of your details you can get it for free in around 10 days. (They obviously want to make it as hard as possible to make a "free" request.). A form is available online from Baycorp Advantage and Dun and Bradstreet.

There is good information on what's included in your credit reports available from here. The most relevant bit is
"If requested in writing, credit reporting agencies must provide you a report detailing all records on your file. The credit provider must provide a copy of your file within 10 working days of receiving your written request. Section 33 of the South Australian Fair Trading Act 1987 states that this must be provided free of charge to South Australians. If you require a copy urgently, you can request this online or by fax. However, a fee will be charged for this express service."

Most other states have similar legislation, so just write in and ask for a copy of your report from each agency.

Personal finance, Money, Investing, Investment, Wealth.

Sort of

My wife gave birth to a healthy baby boy yesterday, so our "investment" in children has doubled overnight [editor: this post was originally done on 23sep]. This will probably mean fewer posts for a while... though I may do one on the cost of disposable nappies!

Disclaimer: I'm not a financial advisor, so DON'T take anything I write as advice! When I mention specific securities (such as in this post) I obviously have an financial interest in them.

As previously mentioned, most of my investments are in real estate, index funds, or stock funds in my retirement account (superannuation). But I occasionally dabble in trading via the small fraction of my portfolio that is in direct share investments via margin loan accounts. It stops me getting bored and doing something silly with the asset allocation of the major part of my portfolio!

I had bought 2,500 shares of ING Private Equity Access Limited (IPES) when they first were floated as stapled securities for $2.00 each`(15/11/04), and then bought another 1,500 for $1.77 on 11/8/05 .

They stapled securities converted into 2 ordinary shares (IPE) and 1 option (IPEO) to buy an IPE share for $1.00 (option expiry date is 31/10/07) on 7/11/05 for each stapled security. So I ended up with 8,000 IPE shares and 4,000 IPEO options.

After bottoming out around $0.80 per share, IPE has started to trend up in the past few months, now trading around $0.94. So I've just about broken even on the average cost of my holding.

The interesting thing is that the shares are trading for way under the reported NTA value of around $1.20 per share, and the are still 75% invested in a mix of top 100 listed equities, with only a quarter or so of their funds committed to private equitiy investments so far. Even so, the private equity investments made so far have gained around 5% in value, which is a good result considering private equity investments are meant to perform over the longer term.

Of course, listed investment companies usually trade as a discount to NTA, but their price should trend towards the value of the underlying assets in the longer term, and you get a good dividend yield in the meantime. The IPEO options have over a year until expiry, and will be really worth something if the price of IPE gets above $1.00

Based on a few heroic assumptions (guesses), I decided to buy 50,000 IPEO yesterday at $0.039. With Comsec brokerage of $19.95 and the $10.00 margin loan account transaction fee, the total cost of the parcel was $1,979.95 - ie. average cost of IPEO 3.96c

Last time IPE was trading close to $1.00 the options were around 6c- presumably based on the time value of not having to pay the $1.00 execution price until 31 oct 2007. Of course, this "time value" will slowly dissipate between now and 31/10/07 (Slowly at first, then very fast towards the end). If you wanted to try some more precise modelling of the option price over time I think the Black-Scholes equation is available online somewhere (I can't be bothered).

My guess is that the general market could rise 10% or so above it's current level at sometime between now at 31/10/07 - which should push the IPE shares to over $1.06 This should give the options a value upwards of 6c each. Any increase in the price of IPE shares above $1.06 should translate directly into a further gain in the IPEO price. eg. If IPE reached $1.10 by early next year, the options should trade around 12c - 15c each.

Anyhow, worst case is I loose the entire $1,979.95 if the options expire worthless in October 2007. Best case is I'll be deciding next October whether to take a capital gain on the options or pay the $50,000 to invest a significant sum in IPE at $1.00 for the long term...

nb. One thing to note is that IPEO options are VERY thinly traded, so even small trades can impact the pricing. My small trade yesterday was the entire volume for a typical week! And the current buy-sell spread is 34% (a buy quote of 3.3c {45,000 shares} and a sell quote 5c {22,500 shares})

Personal finance, Money, Investing, Investment, Real Estate, Wealth.

2million has a post on starting to plan for his wedding - there are a lot of interesting comments about how much is "enough" to spend on a great wedding ("perfect" weddings don't exist in reality, and planning for them costs a fortune).

I put in my two cents worth on how to plan an affordable wedding that still provides priceless memories (and not too much stress for everyone):

As my wife's parent were both deceased, I (and my parents) paid for our wedding. We did it "on the cheap", but it was still very nice - and I used the money we saved to splurge on a "round the world, New York , London and Paris (with QEII from NY to the UK)" honeymoon

We spent a few enjoyable weekends driving around Sydney looking for a church with the right "atmosphere", did up our own wedding invitations using some nice paper, an inkjet printer and a sketch of the church the minister gave us. The biggest saving was to do the reception as an "afternoon tea" at my parent's house, which was possible because we only invited very best friends and our relatives (we don't have many living here in Australia anyhow), so we only had around 30 guests. We also got a couple of standard cakes with suitable icing from a local bakery and staked them up to construct a wedding cake - "real" wedding cakes cost a fortune and are practically inedible. It looks fantastic on the wedding photos.

We also got several of the relatives to take photos, videos etc. and got copies of everything. Unless you're planning on sending your footage to "funniest home videos" you don't need a "professional" photographer (most are pretty average anyhow).

The wife borrowed her wedding dress from one of her best friends, and my sister made up a veil and other bits and pieces which made nice keepsakes . (You intend to keep the dress and the wedding cake forever? Sounds like "Great Expectations")

Anyhow, you should discuss this option with your fiancee (doing a "home made" wedding rather than the "crass, commercialised" version) and see what she says. You never know till you ask.

Our rental property has been vacant for 1-1/2 weeks now. Hopefully the real estate agent will get us a new tenant before too long - it's alarming how quickly the balance in our joint bank account drops with the fortnightly loan payments coming out (our home + rental property) if there's only the money going in from me and the missus, and no rent. We had a really good tenant for the first 5 years after we bought the property in 2000, but the most recent tenant was only on a 6-months lease, and as soon as the lease expired they moved to a slightly better (and more expensive) house in the same suburb. I'd like the next tenant to sign a 12-month lease as we could do with some certainty of income - the wife started her maternity leave last week (offspring #2 is due in the next week or two), so we'll be using up the prepayments we had accumulated to make our home loan payments over the coming year.

The property has been advertised for three weeks, and there've been some inspections by prospective tenants, but no takers so far. It shouldn't be too hard to rent out though, as vacancy rates have been dropping for the past year and our rental is in the bottom 25% for the suburb. We set the initial rent at the bottom end of what the agent had recommended, and I now just do an annual rent review based on the rent statistics published each quarter in the NSW Rent & Sales Report. I plot our rent vs. the average to check when an increase is justified: