Enoughwealth's Personal Finance Blog

Vanguard Australia had an interesting article last week describing a savings technique that I've been using myself for several years to painlessly boost retirement savings. The basic idea is to increase your savings by a tiny percentage each year - doing it so gradually that you never notice the extra amount you're putting away. That way you don't miss what you've never had (in terms of disposable cash flow), so it's entirely "painless".
I increase my savings rate each June by a fraction of what I expect my pay rise to be for the coming year - arranging to increase my payroll deduction into Superannuation via Salary Sacrifice before the pay rise comes into effect.

Incidentally, savings via a superannuation (retirement) account will get an even bigger tax concession from 1 July 2007 with the move to reduce the rate of tax on end benefits to 0%. So, if you're taxable income is more than $25,000 pa contributing via salary sacrifice means paying 15% contribution tax rather than 30%, and from next July there'll be no tax on your retirement income stream from superannuation. The savings are of course even more worthwhile for higher income earners on a higher marginal tax rate.

A couple of things to watch out for:
* maximum pre-tax contributions from 1/7/2007 are expected to be $50,000 per annum, and this includes the 9% Superannuation Guarantee Levy amount your employer already contributes. But this would only affect very high income earners!
* another $150,000 per year can also be contributed as an undeducted contribution. So it may be worthwhile moving some existing savings into your superannuation account. However, this strategy wouldn't be suitable for your "emergency" fund, as super can't normally be withdrawn until you reach retirement age. There's also a risk that the rules could change again before you withdraw the funds during retirement!
* check that your employer won't reduce the SGL amount they contribute if you salary sacrifice - the SGL amount should be based on your nominal salary, rather than the reduced amount left after deducting the salary sacrifice. Most employers are fine with this (they should be - salary sacrifice actually saves them money by cutting the amount of payroll tax they have to pay!) but technically they only have to pay SGL based on your wage.

Marginal Tax rates 2006-07

Taxable Marginal Tax Saved by using
Income Tax rate Salary Sacrifice
$0 – $6,000 Nil not a good idea!
$6,001 – $25,000 15% nothing up front, but the savings in super are tax sheltered.
$25,001 - $75,000 30% 15%
$75,001 –- $150,000 40% 25%
Over $150,000 45% 30%

(nb. these rates don't include the 1.5% medicare levy)

I was sacrificing 9.8% of my salary last year, and this year used my pay rise to increase it to 12.7%. Due to getting a small (3%) pay rise and the cut in income tax rates, I still ended up with a few dollars a week more in my pay packet - enough to cover the increased petrol prices at least. From now until I retire (approx. 20 years) this will mean around $50,000 extra going into my super account. This should add around $75,000 to my superannuation balance at retirement!

ps. For lower income earners (<$30,000) it's important to still make a $1000 "after tax" contribution so that you get the free money (co-contribution) on offer from the government. You can probably do this via B-Pay straight from your bank into your superannuation account, and the tax office will automatically determine your eligibility and arrange for the co-contribution when you lodge your tax return. For those earning between $30,000-$50,000 the co-contribution phases out. You still get $1.50 from the government for every $1 you contribute, but the maximum amount reduces, so you should contribute less than $1,000 if you earn >$30,000. eg. If you earn $40,000 you'd get the maximum $900 co-contribution if you made a $600 "after tax" (undeducted) contribution. The ATO has a simple
calculator available on their website. It's funny to note that a lot of the financial press regularly gets this wrong - suggesting that you still have to make a $1,000 contribution to get the maximum available co-contribution, even if you earn over $40,000!

Here's the first snapshot of how my "Little Book that Beats the Market" Portfolio (hereafter to be known as the "LBP") is tracking so far. I'll post and update every month:




Highlights of my LBP Plan:
* 100% geared using Portfolio loan secured against real estate equity
[loan interest rate currently approx. 7.25%]
* LBP performance target 15% pa [net of costs] over medium-long term [5-20 years]
* invest in monthly $5000USD lots (~$7000AUD) over an 18 month period
* pick one stock each month using the "Little Book" website list of prospects
[using filter criteria of >$127m market cap, and list 100 to pick from]
* stocks purchased using Comsec Pershing US brokerage facility
* sell each stock after 18 months, and buy a replacement using the realised funds
* fund interest payments on loan from my cashflow and any dividends received

I read "The Little Book that beats the market" while I was browsing through a bookshop several weeks ago. The author, Joel Greenblatt, is a Columbia Business School adjunct professor, and in this book he proposes that investors can achieve better than "market average" returns using a "value" approach to investing. It's an entertaining read, but I don't really think you need to buy the book unless you want it on your bookshelf - a quick skim through gives you the basic theory behind his approach to stock picking, and the data required to apply it yourself to Australian stocks isn't readily available (as far as I know), and everything you need for US stock picking is provided on a free website (see below). However, if you want to buy a copy for your investment library (or to wave around at dinner parties once you've made a million trading this system), amazon.com has it for about $13US (nb. if you use this link I'll get a 4% commision):



If you've read it in the local library (or bookshop) there is a website (magicformulainvesting.com) that conveniently provides you with lists of suitable US stocks that rank highly under his system. The data is apparently updated daily, so any time you want to pick a stock using his method you just log in, enter a couple of criteria (minimum market capitalisation and how many stocks to list), and voila - you are ready to take the plunge.

Over the years I've drifted into the semi-strong efficient market camp, and so I nowadays invest in Vanguard Index Funds as the "core" of my portfolio, but I still like to dabble in direct investments to add interest (and, if I'm lucky, some performance) to my stock portfolio. I wanted to start adding some direct investments in US equities to my portfolio this year, so when I read this book I decided to take the plunge into direct US share investing using this system to select stocks. The main adjustments required are to ensure that you hold each stock for more than twelve months so you get the 50% capital gains tax discount (in Australia), and to buy fewer than the 30 stocks he recommends to reduce trading costs. I intend to buy a stock each month and hold each of my stocks for 18 months so that my "churn" is reduced a bit. My total US portfolio will thus end up containing 18 stocks - enough diversification to achieve whatever performance this system can yield. The book advises selling each stock after 12 months, but buying US stocks through Comsec (via the US broker Pershing) costs $65US each way, which is a LOT more than the $5US trades available in the States. I'm buying a $5,000US lot each month, which means that my round trip cost per lot will be around $130US ie. 2.6% - or about 1.75% per annum. As Vanguard International Index Funds will cost around 0.75% per annum, you have to outperform the market by at least 1% to match simple indexing.

Prof. Greenblatt's private investment partnership, Gotham Capital, is supposed to have produced 40 per cent a year returns over the past 20 years. My "target" is to achieve 15% per annum return (after trading costs). I am borrowing 100% of the amount I am investing using part of a Portfolio Loan (line of credit) I have from St George bank. This has the same interest rate as our property loans (currently around 7%), so if everything goes well I'd achieve around 8% return using OPM (other people's money). Of course, if things don't work our I'll lose money hand over fist . As my total investment will end up around $90,000 US ($120,000 AUD) I expect the worst case would be around $36,000 loss (interest payments and capital if the investments average a 20% loss) - around 5% of my net worth. nb. Back-testing his formula between 1988 and 2004, Greenblatt only had one down year, with the magic portfolio returning 30.8 per cent a year, against a 12.4 percent annual return for the S&P 500. It wasn't clear whether the back testing used random selections of 30 stocks picked from the universe of stocks thrown up by the magic formula - I'll be just picking one from the list each month that catches my eye.

I've been using this system now for three months, having bought H & R Block (HRB), Motorola (MOT) and Microsoft (MSFT) so far. HRB has gone down since I bought it, MOT and MSFT up, so overall I'm up about 3% after round trip costs - I'll post a detailed update on how this portfolio is going each month... wish me luck!

I have quite a lot of real estate assets - they actually make up a larger percentage of my portfolio than I'd really like (due my wife and I starting out buying a rental property while living with my parents, then later on buying our own place). As they form such a large part of my investment portfolio, I like to be able to update the relevant asset and liability values each month, so that my net worth figure is a reasonable estimate.

The land valuations available via the council rates notices or annual state government land tax calculation are not really much use, as they are based on land value only, and are also only updated on a multi-year cycle.

My method for getting a reasonable monthly figure is to use the bank mortgage statement for the outstanding loan balance at the end of each month, and a simple algorithm for estimating the current valuation of each property. The algorithm is based on the MEAN value of sales in the relevant postcode area (obtained each month from the "suburb snapshot" available by postcode area on the homepriceguide.com.au website for example,2086). I use a simple multiple of the mean price, based on the ratio that applied when I initially purchased the property. For example, my rental property cost 0.9156 x the mean price for the area, so each month I estimate the current valuation as 0.9156 x the latest mean price value.

This allows me to update both house prices and loan balances, and track my progress against what I expected for my property portfolio - paying off the loans over 20 years and property values increasing by approx. 6% per annum in the long run:
It is interesting to also track the percentage change in prices each month, as this clearly shows the "boom & bust" of the Sydney property cycle - as it applies to the specific areas where my properties are.

Let's face it. Superannuation is a business, and Fund managers want to make as much profit as possible - by taking as big a cut as possible out of our money!

A typical example was the response to the Treasurer's proposed cut in Superannuation tax (to 0%) on end benefits. After an initial "any cut in superannuation tax is wonderful" reaction from the Funds (because it will encourage more money to flow into superannuation instead of other investments, and hence generate more fee income for them). It quickly became a unified call from the Fund managers to "cut the tax on money going IN to superannuation instead". Allegedly this will mean bigger end benefits for members, but the only detailed analysis of this I've seen showed that the difference between eliminating tax on end benefits compared to eliminating it from contributions is minimal.

The REAL reason (that no one has mentioned) is that a cut in tax on end benefits doesn't directly increase Super Fund profits, all else being equal (ie. ignoring any increase due to increased contributions into Superannation). On the other hand, eliminating the 15% contribution tax means that super funds will get an immediate 15% increase in the amount of fees they collect on contributions! And the bucket of money sitting in your retirement account (and subject to a typical 2% MER) would get 15% larger over time.

Funny that none of the Fund managers seem to have pointed that out, or have offered to cut their fees if the tax cut was applied to contributions instead of end benefits!


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

Reading a post on Canadian Capitalist's blog about how much he saves started me thinking about how much I'm actually saving these days. Beyond a glib "as much as possible" it's actually not that easy to work out, as the use of gearing can complicate things.

It's easy enough to break down my standard home loan payments into a saving (principal repayments) and an expense (interest) component, and the same used to apply to my investment property loan. But nowadays we've switched the rental property loan to interest only, and the extra payments that used to help reduce the loan prinicpal (ie. were counted as "savings") are now being used to pay the interest (an "expense") on loans used for 100% geared investments in US shares (via a Portfolio Loan line of credit from St George) and an investment in the Macquarie Equinox Select Opportunities Trust (funded entirely by a loan from Macquarie Bank).

So, even though my income has hardly changed (a very slight increase in dividend income from the US shares and 1% interest income from the Equinox trust) more of my cash flow is now going into interest payments (an expense) than into reducing debt (savings). So it appears my savings rate has decreased, even though I'm not spending any more than before on consumption and household expenses.

Similarly, the bit of dividend income that is getting reinvested (via a DRP) is counted as "savings", but I don't think share purchases made using an increased margin loan balance can be counted as "savings", as this increase in assets is totally offset by an equivalent amount of increased debt (ie. there is no change in net worth when the purchase is made).

The dividends received add to my total income, and the interest on the margin loan is an expense, but using reasonably high levels of gearing the interest expenses generally exceed the dividend income - ie. negative gearing. While the main goals of using gearing are to increase the returns and diversification of my investment portfolio, it also has the effect of reducing my taxable income and replacing it with (hopefully) some long-term capital gains. But from a savings point of view it is simply converting one form of expense (taxes) into another (loan interest).

This is why the use of gearing makes any meaningful calculation of percentage of income being saved very difficult, and make it meaningless to compare the "savings rate" of investors using gearing with other investors that save without any gearing.

The best approximation I can come up with for FY 05/06 is:


Savings - 32%
Taxes - 9%
Mortgage Interest - 21%
Investment Interest - 21%
Other - 17%

nb. The tax figure is low as it is based on income tax assessed last FY as a proportion of my grossed up income, ie. before deductions such as superanuation (SGL and salary sacrifice) and margin loan interest. It also doesn't include any GST, fuel taxes etc.

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

If you want to boost your investment returns, are comfortable taking on increased risk, have adequate resources to ride out any market downturns, and are investing for the long haul, then perhaps gearing is for you. Then again, maybe not. Reminder: This Blog is NOT financial advice

The concept of margin lending is pretty simple - you buy some shares of mutual funds using some of your own money plus some money borrowed from a margin lender. Each share and fund is assigned a margin, which is the maximum percentage that will be lent against that security. Once you have a few securities in your margin lending account, the overall margin of the account determines how much your total loan can be. The "margin value" of your account goes up and down with the prices of the securities, so if you borrow close to the maximum and the market tanks, you'll get the dreaded "margin call" - which means that you have to bring your loan balance back within bounds. This can be done by adding in some more funds or securities, or selling some of the securities in your account. So it's a good idea to be conservative in your use of gearing (eg. use only 50% when the limit is 70%) and to have some funds to draw on in a real crash(eg. some redraw available from your home loan account). [One of the most infuriating features about using gearing is that when the market crashes and you keep your nerve and are dying to pick up some "bargains" is exactly when you're most likely to hit your margin limit and can't afford to borrow any more!]

Over the years I have moved my mutual fund and direct shares investments into margin loan accounts with three providers - Leveraged Equities, Comsec and St George Margin Lending. Although the basic product is similar, there are differences that set them apart and can be important.

A general comparison of available margin lenders can be found on infochoice.

I started out with ungeared share investments, then transferred my holdings into a margin lending account with Leveraged Equities. They have been around longer than most, and nowadays are owned by Adelaide Bank - not that they offer any sort of guarantee! Leveraged equities has a minimum loan balance of $20,000 - you can start off with less, but you'll still pay interest on $20,000.
Pros: They have an default loan limit of $1,000,000 but you don't have to get approval for a specific amount and they don't need your income details. They really do secure the loan only against the underlying securities (but you'd still owe them the balance if a market crash left you with no equity). This is different from Comsec and St George which have to approve a particular limit, based on your income ad other assets and debts when you apply. You then have to apply if you need an increased limit later on. Another nice feature is that you can transfer funds easily to and from your nominated bank account and the margin loan account. This can be handy if you want to borrow funds to invest in some other investment eg. An agricultual scheme. Beware: if you used the funds for something else (eg. paying off your car loan) the interest on that part of the loan balance wouldn't be tax deductible, which would make the paper work way too hard.
Cons: You can't trade directly, online - you have a broker linked to your margin account and trade through them. This means you have to trade by phone and tell your broker that the trade is on your margin account. Also, the interest rate is generally a bit higher than some other lenders.

Comsec: My second margin lender. I opened this account as you CAN trade on your Comsec Margin account via the internet, which is cheaper and, for me at least, is less hassle.
Cons: One feature I hate is that you have to have separate accounts if you want to trade options or overseas shares. In an ideal world you could do it all within the one account - they'd just assign zero margin limit to such securities. They also charge a $10 "transfer fee" to settle your online trades via the margin account, which seems a real ripoff as you are making the trade online from within the margin account! It makes the online trades less economical for small parcels.
Pros: You have your loan details, contract notes and access to research all within the one online account.

St George: Similar to Comsec, but, as a "Gold" customer (due to having my home loans with them) I can get a small discount off the standard margin loan interest rate. But you have to ask for it, the margin lending group seems to work quite independently of the rest of the bank. eg. Your margin loan doesn't appear with your other accounts when you do internet banking with St George. This seems a bit strange, especially when you have a "Portfolio Loan" with the bank.
Cons: As with Leveraged Equities, you have to trade via your broker, which is not ideal. You also get assigned a set loan limit when you open the account, so you have to apply if you want to increase the limit later on.

All three margin lenders have lists of "approved" securites that they'll lend against, and may differ in the margin limit assigned to each security. This may matter if you already have some shares you want to lodge as security. Their interest rates differ a little bit, with the banks usually a bit cheaper on the variable rate compared to LE. You can prepay the interest on a portion of your loan balance (up to 12 months in advance is tax deductible at the date it is paid) - the rates on offer can differ quite a lot, so it pays to compare rates.

Some drawbacks of having multiple margin accounts:
* The holdings are each under a separate HIN, so if you have the same secuity in two accounts you'll get two dividend payments, annual reports and so on.
* The margin utilisation is calculated individually for each account, and it's not practical to shift funds from one lenders account to another.
* You get multiple monthly statements, and have a bit more paperwork at tax time.

As their are no account keeping fees there's really no cost in using more than one margin lender.

If you're aything like me, incorporating the level of risk that you believe you're comfortable with into your asset allocation could still result in unpleasant surprises in the long run.

I've often read that for the long-term investor, time heals all wounds - that is, while equity investments may have large year-on-year variation in performance (a.k.a. "risk"), over long periods of time this variability "evens out" and the long-term performance will display less variation. That is, "risk" decreases over time.

However, I'd recently read a contrary view (unfortunately I can't recall the reference) which stated that time won't decrease the amount of variation (in dollar terms) in your final outcome. This seems to be at odds with the generally accepted view, but in fact it is just a different way of looking at the expected results - concentrating on the variability in the final dollar value of your portfolio rather than in the percentage average return overall.

While it is true that over time the average return will tend closer to the expected long-run value over time, this does NOT mean that in the long run your portfolio will end up with a final value close to what you thought you could reasonably expect. Due to the effect of compounding, over longer time horizons even small variations in average return have a big result.

Even though I was aware of this fact (and have an understanding of the "magic of compounding") it really didn't hit home for me until I ran some simulations of my portfolio (using my current investment mix and projected returns and std deviations loosely based on data from Portfolio Solutions)

It turns out that while the most likely outcome is as I'd expected (around $3 million AUD by the time I retire around 2027), there are several "outlier" scenarios where the end value of my portfolio would be less than $1 million - which is pretty depressing compared to my current net worth and what I could achieve by just investing the entire portfolio in "safe", fixed interest assets! Of course, with my current portfolio mix there is a similar probability that I could end up with over $5 million.

Before we look at the results of my modelling (done in excel) I should point out that it was a bit rough and ready. I had to use guestimates as to reasonable return and std deviation values to use for my "alternate" investments (gold, agribusiness trusts, coins) and "hedge" funds (OMIP series and Macquarie Equinox Select Opportunities). For the other asset types I adapted the values listed by Portfolio Solutions. Because I didn't have any information on covariance between by investments I've lumped all assets of the same class together (ie. All Australian share holdings are lumped together as one total amount, combining my superannuation funds, direct share holdings and geared share fund investments in my model). Hopefully any covariance errors should largely cancel each other out - lumping the like investments together assumes a covariance of "1", whereas they would really have a value slightly less than "1". And the model also generates each years return for each different asset type independantly, based on the asset types return and std deviation values and the amount invested at the start of the year (see this site for an excel formula that can be used for modelling normally distributed returns using mean and std deviation values). This means that the different asset classes have an implied covariance of "0", when in fact some would have a covariance value in the range 0-1 (eg. Australian and International shares), and some of the others would have negative covariance values. According to MPT by having a mix of assets my total portfolio should have significantly less risk than shown in the model. But this is still good as a "worst case" scenario. If I get in the mood I may attempt to calculate return and risk values to use for my Hedge and Alternate investment classes using the monthly unit price data I have for OMIP funds etc.

I think the main take-home lesson from this exercise is to remember that ANY one of the projected scenarios is equally likely to happen, but that you'll only get one bit at the cherry. So you could end up with one of the less likely outcomes - either very good or very bad. While looking at average results and the most likely outcome is useful for planning purposes, if you are taking on increased risk in order to achieve higher returns, you have to have a hard look at what the end result could actually be, and be comfortable with whatever happens. Que Sera, Sera!

Table 1: My current Portfolio Asset Mix


ASSET Gearing Annual Expected Performance
Type PV % Mix (Loan) Addition LVR Return Risk (std dev)
Au Shrs $595,596.00 34.5% $262,719.20 $ 8,299.35 44.1% 8.00% 17.00%
Int Shrs $232,864.00 13.5% $ 92,572.80 $ 6,453.95 39.8% 8.00% 15.00%
Au Prop $761,770.00 44.1% $350,554.00 $13,559.70 46.0% 7.50% 14.00%
Hedge $ 88,100.00 5.1% $ 57,620.00 $ 0.00 65.4% 11.00% 20.00%
Fixed Int $ 2,770.00 0.2% $ 554.00 $ 0.00 20.0% 5.00% 3.00%
Alternate $ 44,500.00 2.6% $ 0.00 $ 0.00 0.0% 3.00% 3.00%


Excel Formula for calculating a random return from an assets expected return and standard deviation:
Rn = SQRT(-2*LN(RAND()))*COS(2*PI()*RAND())

Figure 1: A plot of two runs of the model showing the degree of variability over time.


Figure 2: A plot of the first 32 out of 200 simulations.


Figure 3: A histogram of the end value of my Portfolio in 200 simulations.

My $6000 0% for 6 months transfer offer for my new Coles Source MasterCard arrived safely onto my NAB VISA account - it appeared as a Credit on my NAB account the day after the amount was charged to my Coles Source MC. It was a bit of a shock to see a four thousand dollar credit balance on my VISA account - I usually run up about $1500-$2000 on the card each month and pay it off in full (so no interest charges), so the $6000 transfer means that I can afford to pay an extra $2000 each month off my Citibank RediCredit balance for the next three months. The Citi line of credit account was used to make some tax deductible investments in June (so I get the tax deduction up front), but even though the interest is tax deductible, at 11% it's worth using the free money from the balance transfer for six months. Unfortunately having to do it via a credit to my VISA account means that it will take three months for the entire $6000 to come off my RediCredit balance - so for the six months period I'll save interest on $2000, $4000, $6000x4 - so the average is $5000 reduction in the balance being charged 11% - so I'll save $275 in interest payments. Even after allowing for getting 40% back as a tax refund this means the zero balance transfer offer is worth $165 - for about 1 hour spent filling in forms etc.

I have to make absolutely certain that I pay off my Coles Card balance in Feb (the offer period ends 22/2) otherwise they'll start charging the cash advance rate on the balace transfer amount. I also can't charge anything to the Coles card while the balance transfer hasn't been paid off, otherwise it will be charged interest (any payments come off the balance transfer amount first). But this isn't a problem as I normally charge everything to my NAB VISA card to earn FlyBuys points.

I've now also applied for a Virgin Money Card which has a similar 6 months interest free balance transfer offer. They've approved the application, but I just did the 100 pts identification paperwork at the post office yesterday and mailed copies of some rental and dividend income statements (I had to photocopy 30 pages of dividend statements!). I won't know the credit limit until they process this, but I asked for a $6000 balance transfer to my NAB VISA account - we'll see if this goes through, and when.

As the cash flow benefits of this balance transfer wouldn't kick in for 3 months I'll have to check with NAB how a cash advance on the VISA card would be treated when I have a Credit balance on the account. If I can withdraw the $6000 immediately to pay off my Citibank account, so much the better.

All this balance transfer action is only worthwhile if you can use the amount to save interest on some existing credit balance - but most people would have a home loan, margin loan or similar to apply it to (even if it has to go indirectly, as I've done, by diverting normal monthly credit card payments into the desired loan account). You also have to be able to pull the money back out at the end of the period so you can pay the balance transfer off before it starts costing you interest.

It also wouldn't be a good idea if you needed the credit elsewhere - for example when applying for a home or investment property loan they ask for all your credit card limits - they treat them as existing debt even if you have no current balance, as you could utilise the credit at any time. I don't have to worry as I'm already fully geared in real estate, and have established all the margin lending credit limits that I need.

I must confess, aside from spending time on "big ticket" items (like continual self-education to boost my salary income, reading about investing and trying to inch towards the efficient frontier by tweaking my asset mix and minimising fees) I also like to waste my time dabbling in getting "freebies".

For anyone else who likes getting something for nothing (of course this assumes that your down time would otherwise earn $0 per hour - say watching TV) I list a few of my favourites.

1. Email cash - You can earn a regular 5c per day doing a couple of clicks on their website, occasionally get advertising emails which also pay 5c when you open them and click the link. Most fun is the daily number guessing game which you get to pick 5-7 numbers between 1-1000. If your number comes up you get 200 pts ($2 worth). You can invest up to 10000 pts ($100 worth) in their "eBank" which pays around 15% interest. When you have some pts to cash in you just exchange them for e$ which can be used to buy a real money cheque. Cheques are only available for $30, and there is a 1e$ admin fee. So far I have got about $90 of real cash from this. Makes a good diversion during a tea break or when you're on hold. If anyone wants to join up, go to email cash. Using this link will get me a few pts for a referral

2. FlyBuys - Joining this program is free, and just flashing the card when buying your normal shopping at Coles, Myer, Shell petrol, Target etc. will get you 1 pt per $5. You can earn pts much faster however if you have a NAB credit card. You'll then get a 2nd pt per dollar on such purchases if you pay by CC. You will also get 1 pt per dollar for all purchases using your NAB CC. Obviously this is NOT good if it means you run up CC debt. I always pay off the balance in full during the interest free period (up to 55 days) so my only cost is the annual card fee (about $28 pa). I use my CC for all my regular payments - shopping, doctor, dentist, water, phone, electricity, car rego etc, etc, so I put through about $2000 per month on CC and earn around 6,000 pts per month. You can redeem 13,500 pts for $100 paid off your NAB CC - so I'm getting about $45 value per month for free.

3. Mypoints - a US based email "clicking" program. You can redeem pts for Barnes & Noble gift cards or webcertificates. If you have a US address available to get the gift cards sent to, then you can use the gift card number and PIN number to order B&N books online and get shipped as gifts to the US. Not really worth getting books sent to Australia as the P&H is exhorbitant. If you redeem for a webcertificate, you basically get a VISA debit card number with an available balance. Theoretically you could use this to pay yourself if you have a merchant website - eg. CC payment processing via Paypal. I'll let you know if this actually works out in practice. I tried it once years ago and had trouble "activating" the Webcertificate so couldn't use it, so I've since just redeemed MyPoints for B&N giftcards to send friends and relatives in the US.

The efficient frontier is a nice idea that actually makes a lot of sense - for any particular level of risk there is a maximum expected return that can be achieved. The efficient frontier is found by plotting the risk and return for the universe of all possible combinations of assets that you want to include in your portfolio, and joining the dots of the ones with the highest return for a particular standard deviation.

[graphic from styleadvisor.com]

For a good explanation of this see www.efficientfrontier.com or read this chapter from "Investment Strategies for the 21st Century" by Frank Armstrong [available free online!]

My difficulty is that my portfolio includes more than just equity funds, bond funds and fixed interest - I have direct property investments, alternative investments (agricultural trusts and hedge funds), direct share investments (local and US), and make use of leverage through property and margin loans. Aside from difficulty in calculating expected return and risk values for some of these investments, there doesn't seem to be much analysis of how gearing (the the risk associated with the loans) gets incorporated into modelling of the efficient frontier.

Wikipedia mentions that the use of leverage can actually lift you ABOVE the efficient frontier - but I'm not sure exactly why. To quote:
"An investor can add leverage to the portfolio by holding the risk-free asset. The addition of the risk-free asset allows for a position in the region above the efficient frontier. Thus, by combining a risk-free asset with risky assets, it is possible to construct portfolios whose risk-return profiles are superior to those on the efficient frontier.
* The investor who borrows money to fund his/her purchase of the risky assets has a negative risk-free weighting -i.e a leveraged portfolio. Here the return is geared to the risky portfolio. This combination will again offer a return superior to those on the frontier."

Unfortunately I haven't yet found a more detailed treatment of this elsewhere on the net. Also, in practice, your gearing uses margin loans or home equity loans at 2-3% above the risk free rate, so I'm not sure how this ties in with the presumption of leveraged investments utilizing the risk-free asset.

Any comments or references?

I just got notification from QBE that they have more money than they know what to do with, so they're discontinuing the dividend reinvestment and dividend election (bonus share) plans.

Aside from having to send in my bank details (again!) so that dividends can be direct credited, I'm not too fussed. DRPs used to be a good deal in the days when they were issued at a discount to the prevailing share price, but they were always a pain to keep track of for CGT calculations (even more so under the old indexation method). These days they're mostly issued at the prevailing price, so you don't get much benefit apart from saving brokerage fees. A few companies round UP to the next whole share, which can be great value for small shareholders with only a couple of thousands shares in the company - getting 8 shares instead of 7.13 can boost the dividend yield substantially.

However, this will affect my sons holding in QBE shares. He was in the Bonus Share Plan, so he didn't get any dividend to declare on his tax return (but he would later pay CGT on the entire value of the BSP shares when sold, as they are deemed to have had zero cost basis). Now he'll be getting taxable dividends to include on his tax return. Luckily he will be under the income threshold where paying the exhorbitant 'child' tax rates cuts in, and he'll get the franking credits refunded, so it's not all bad news.

My first attempt to do a 0% balance transfer from my new Coles Source card was a flop - apparently a Citibank Redicredit account is not acceptable.

I'm a bit unhappy that the customer service dept. had sent out a letter on the 11th confirming that my transfer request had been processed, but then ever informed me that it had been reversed. (I only found out when I checked my account online this morning).

Anyhow, I tried again this morning - this time with a transfer to my NAB VISA credit card, which I use for paying all my rates, bills etc. (I get lots of Fly Buys. points that way, without any extra spending). As I put through around $2000 per month on this card and pay off the balance in full each month, a $6,000 transfer from the Source card will mean I can pay $2000 extra off my Citibank LOC account for the next three months. I used the LOC to fund some end of tax year deductible investments, so the interest is tax deductible, but it's still worth reducing the outstanding balance by using the 0% transfer money.

When the 0% offer period ends in Feb '07 I'll just pay it off with some spare funds I have sitting in an HSBC Serious Saver account.

We'll see if the balance transfer works properly this time...

If it does, Virgin Money is currently offering a 0% balance transfer for new customers, so I may have a go at that one next. As I've already got all my Margin Loan limits and home loans established, it doesn't matter if I have a few extra credit applications on file.

Had a nice, cheap evening out tonight. Vanguard Australia had arranged for Dr. Burton Malkiel to give a talk in Sydney. There was quite a good turnout, and the setting was great - in the Ballroom of the Westin Hotel in Sydney.

If you've read his famous book "A random walk down wall street" (and the Vanguard product brochures) there was nothing new in the one hour session. But the professor is a very entertaining speaker, and it gave my wife a quick overview of efficient market theory and how it suggests index funds are a good 'core' choice for your portfolio.

Afterwards I bought a new copy of the book, and had it signed by the Author. I also got to ask the Vanguard officials how come the US parent has low, low fees (around 0.25%) while the Australia version starts at 0.9% and only gets cheap (0.35%) for amounts above $100,000 that are invested in a single fund. With Dr. Malkiel predicting single digit returns are likely in the future, an extra 0.5% fee off your 9% total return will have a big impact over time. The suits from Vaguard said that the Australian Fund is smaller than the US one, but that they were "looking into" the fees. I won't be holding my breath. In the US "no load" funds can only charge a certain maximum for advertising before they can't call themselves "no load" - here there's no such rule, so I think the current Vaguard Australia customers are paying for the companies growth strategy.

All in all, a very economical and enjoyable night out.
ps.
Total costs (2 persons)
Lecture - free
Parking - $4 at Pyrmont (a healthy walk through Darling Harbour to the city)
Entrees and drinks before - free
Dinner afterwards - $17 (OK, it was actually 2x take-away)

total = $21.00!

Well, it had to happen. With the proliferation of online savings accounts all offering the same high interest rates, some of them are struggling and going under.

I'm not too fussed as I also have an ING direct online account which I tend to use more anyway. The Esanda one gave me $25 when I opened the account - the main reason I opened it. Probably a lot of other folks did the same thing.

When announcing the closure they informed me that their parent company (ANZ bank) has already opened an ANZ online account for me! But I'll NOT be taking up their kind offer to activate this account by taking in 100 pts of ID to an ANZ bank to open a regular bank savings account with them - they charge $5 per month in fees!

As the ANZ online account ONLY works with an ANZ bank account, it's not really competitive with ING, which lets you link to ANY existing bank or credit union account that you have.

Well, if you write a blog you obviously want to be read - so pfblogs.org seems a good idea.

I'm not so keen about the need to pay $2 a month if you want to be a "friend" and get a better ranking in the blog posts listings - apparently you used to just have to give them a mention and add a permanent link to become a "friend".

There is also a commercial (with ads) version pfblogs.com - I would have expected THAT one would be the one to charge to become a "friend"!

Well, it's that time of the year again. I did my wife's tax return last weekend (using eTax) and she got her refund deposited into her account on Friday! I've now started the annual grind of doing my taxes. Once you've done your own return a few times, it's fairly straight forward, just need to check on any relevant changes and spend the time to add up all dividends, deductible expenses etc. Well worth a couple of hours effort to save the cost of a tax preparer.

As a wage slave my return is fairly simple, but having some direct share investments can be a headache when you sell them and have to report for the Capital Gains Tax item - especially if you've acquired them in odd lots via DRPs and maybe sold some of your holding previously. I used to enter all trades and dividends into Quicken, and it was great for being able to select which lots of a share to deem as being sold. However, I haven't had time to keep Quicken updated since I married in '99, so I've had to manually track through all trades for shares I've sold to calculate capital gains info the last few tax returns.

Hopefully now that I've started using Quicken 2006 I'll be able to add in all the info for my current holdings over the next few months.

Much of investing performance comes down to patience and a long-term outlook. Overtrading will kill you with fees (but your broker will love you), and trying to time the market is almost guaranteed to reduce your performance. However, I still enjoy monitoring my net worth, and it lets me feel like I'm "doing something" when all my investments are in place and just need to be left alone.

I've just started recording my net worth info using www.networthiq.com. I already I track my networth daily using a spreadsheet (data from various online accounts daily). I used to use Quicken, which was great for budgeting and handling the calculations for Capital Gains Events (ie. share sales) as it handled individual lots very well. But since getting married and starting a family I didn't have the time to keep Quicken regularly updated, so I've had to manually do CGT calculations at tax time each year.

I've installed the 2006 version of Quicken (it was free with last month's Money magazine), and so far I'm keeping up to date. Entering 20 years of share transactions will be this years major project! I'm still working out how to record my property and mortgage info in Quicken, but getting it to only count half of these values in my networth report (I only want MY networth, and the property investments and mortgages are in joint names with my wife).

I also want to write some PERL scripts that will automatically login to all my online accounts and grab the relevant daily information and display in one place - this will save me logging into half a dozen accounts each day!

Anyway, although it's a bit redundant I'll update monthly data from Jan '03 to the present into NetWorthIQ over the next few weeks so it can be easily displayed for this blog. I'm not sure that it will be of any practical use to anyone, but in the Blogosphere I think having an 'Open Wallet' gives you cred. It's always nice to know where someone writing about investing is 'coming from'.

Just thought I'd jot down some notes about what I've been doing regarding my son's finances. He's turned 6 and is already quite money-wise. He enjoys earning some money busking at the Art Gallery with his recorder, and used to do a local paper round [with a lot help from dad the taxi service/heavy lifter]. As all his basic living expenses are taken care of and $3 per week pocket money, he manages to save 100% of his earnings! At his age and net worth he'd definitely be classed as a PAW (nb. see the millionaire next door for a great read and to find out the difference between PAWs and UAWs)

There whole area of money and kids can be quite complex here in Oz - especially as there is such a low threshold for 'unearned income' (around $1400 pa) beyond which a massive marginal tax rate of around 66% applies!

A couple of good things that you might not be aware of
1. Gifts don't count, so little Johnny doesn't have to include pocket money, xmas money from Grandma etc. on his tax return (you HAVE applied for a tax file number of his behalf, haven't you?)
2. Beware of investing too much in stocks etc. on his behalf - if he gets more than $1400 in dividends etc. he'll pay a fortune in tax (it's to avoid you putting all your money in your kids names to minimise tax). Anyhow, these days superannuation is such a good deal that you'd be better socking spare money into your super than your kids investments. If he does invest in shares, select those that have a Bonus Share Plan (so they don't issue dividends) would be a good way to accumulate more shares without earning taxable income. There will be a larged capital gain when he eventually sells the shares though - the Bonus Shares have a zero cost base.
3. EARNED income is treated entirely differently to unearned income - normal adult tax rates apply, so, basically earning $5,000 a year on a paper round didn't make him liable for any tax. Also, any interest or dividends on EARNED income that has been invested is also taxed at the normal adult rates - so make sure you he has separate bank accounts, Chess share HIN etc. My son has one St George Happy Dragon account where he saves his pocket money etc., where the interest will be considered unearned income, and he also has a separate Online banking account which is ONLY used to receive his paper round wages by direct payment. Any interest on this account can be thus be included when calculated the earned income total for his tax return.
4. He has a so-called "child super" account used for retirement investing in his name. Superannuation is another way to invest that avoids any issues with high taxation - super is only taxed at 15%, even for kids. The Macquarie account he uses is invested in a 50/50 mix of International Equities and Geared Local Shares - which is quite risky (volatile) but should give high returns over his long,long investment horizon (54 years till retirement!).
5. He also has second PERSONAL RSA (retirement savings account) with AMP so he can make personal undeducted contributions into superannuation and be eligible for the annual government "co-contribution". For each annual personal undeducated superannuation contribution of $1000 he receives the $1500 as a government co-contribution! A pretty good immediate return of 150%!

Well, the Reserve Bank has done to expected and raised interest rates by 0.25%, and talk has now turned to anticipation of another increase in November.

Of course, no-one really knows what will happen - just before the previous rate rise the consensus opinion of the "experts" was that rise would be the last. Reading the commentary in the financial press is a bit like watching a herd of cattle stampeding this way and that.

In reality, interest rates are not particularly high, now just approaching the level they peaked at in the last rate tightening phase, and probably not likely to go much higher. With the US economy slowing and the Chinese economy overheating, it's quite possible that in another year we'll be fearful of a resources-bust lead recession!

Anyhow, with housing construction at very low level, vacancy rates dropping and prices levelling out in the eastern states, it's probably a good time to start looking around if you intend to buy a rental investment property before the next housing boom starts.

Personally I'm a bit over-weight in property, with a large home loan balance outstanding (variable rate) and a considerable outstanding mortgage remaining on an investment property (which is on a five year fixed rate interest only loan). But it's still interesting to look at how unit prices are tracking in the suburbs of Sydney - some recently completed units near Epping Station caught my eye. If the price is right these may be attractive once the new rail line through Nth Ryde is soon completed.

While blogging about wealth creation, it's natural to ponder the possibility of making some revenue at the same time. When I joined blogger.com I was offered a sign-up to Google adsense. Theoretically, when lots and lots of people start reading this blog, some will click on the google ad links, and I'll get paid a pittance.

So far? In 12 days I recorded 30 page views, with a *huge* spike of 8 hits the day after I mentioned this blog in a post to mymoneyblog. However, there hasn't been a single click yet, and while google doesn't advertise the payment rate I expect it's in the order of cents per THOUSAND clicks, so I certainly won't be getting get rich that way

However, there are lots of other methods that *could* earn revenue from a blog - see How to Make Money with Your Blog Site for some of them.

Over time, I may try some of the ideas from this blog and see if any of them work in practice!

Meantime, the most important thing will be to blog something that is interesting enough for you to come back regularly and read

Although, from a wealth accumulation viewpoint, you're generally better off spending your spare time on continuing education than wasting it trying to get small amounts of money for free, you sometimes need 'downtime' just vegging out in front of the TV, listening to music, or, in my case, getting a trickle of money for nothing. (It also helps subsidise the cost of the broadband connection).

Many US blogs (eg. mymoneyblog) have quite a bit of information about using a 0% APR credit card transfer offer to access to free money which is then invested to earn some interest when deposited into a savings account. In Australia things are a bit different - your credit card apps don't drop your credit rating (this isn't any), but they do appear on your credit report, and, more importantly, if you're honest in your application, there is a limit on the total line of credit you'll be able to get (based on your income and existing repayments). Also, in Australia, these interest free offers often only run for 6 months (compared to 1 year in the US) and you can only get the balance transfer from an existing credit card or other account - you can't simply get a check for the transfer amount as seems to be possible in the US.

For these reasons, I took a while to figure out a way that would make the 0% offers available in Australia work in a similar way to the US - and I think I've found a way. I'll outline the "PLAN" today, and we'll see how it actually works out...

Before, we start, let me remind everyone that I'm not giving any financial advice here (I'm not allowed!), just blogging what I'm doing myself. If you want to try it yourself, it's entirely your own choice, and you'll need to do your own investigations into the risks involved.

Now, my plan:
1. Open a new Coles Source Mastercard (currently with a bonus $20 giftcard offer) [http://www.source.com.au/MasterCard/ColesGiftCard/] or any similar card offering a 0% balance transfer offer (and no annual fees) - I got one with a reasonable credit limit without any problems.
2. In the specific case of a Coles Source MC - I bought $30 worth of groceries at Coles to earn a 4c/L fuel discount voucher AND qualify for the gift card offer.
3. I'll now pay off the purchase amount so I don't have a balance on the card (otherwise it would be charged interest while I have a balance transfer amount on the card)
4. When I send in the 100 point identify check form, I'll apply for a balance transfer to my RediCredit account with Citibank.
5. As I currently have a balance owing on the Citibank account (for some margin loan interest prepayment) I'll be saving 11.99% interest on the balance transfer for 6 months. If I didn't have any current debt on the Citibank account I could draw a cheque to myself and deposit it into an online savings account earning around 5.85%
6. Don't purchase anything using the Coles MC while the balance transfer amount is owing - otherwise you'll pay the normal interest charges until the balance transfer amount has been paid off in full.
7. Before the 6 months interest free period ends I'll pay off the balance transfer amount owing on the Coles MC - either with cash I've got sitting in a savings account, or I could pay off using my Redicredit account (back to square one).

The end result - we'll see. But, hopefully, I'll have saved 11.99% interest on the balance transfer amount for 5-6 months. Assuming a balance transfer of $6,000 this will be worth around $350 - not bad for around 20 minutes work.

Hi. I'm Ralph. I started my personal finance blog Enough Wealth back in July, and I'm now setting up this blog to serve as a mirror/backup site (with links to the original posts) and to make use of the extra features not available on blogspot - mainly some stats and CATEGORIES.

I post every day, and will add the latest post title with a link to the original post stored on Enough Wealth - you can either read my blog there, or, you may prefer to browse past posts here, where they are categorised.