Enoughwealth's Personal Finance Blog

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Enough Wealth

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

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



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



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

Enough Wealth

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

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

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

Enough Wealth

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

Press Release:

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


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



Enough Wealth

This month I selected King Pharmaceuticals (KG) from the MagicFormula listing to add to my "Little Book That Beats The Market" Portfolio of US Shares (100% geared). I bought 260 KG @ $18.49. My US Stock Portfolio currently stands as:
Symbol P/E Last Shrs Trade Date Paid Comm Value Gain
HRB 27.74 21.48 200 28-Jun-06 24.16 130 $5,534.66 -$ 820.54 -12.91%
MOT 12.89 19.01 265 24-Jul-06 18.98 130 $6,490.15 -$ 119.76 - 1.81%
MSFT 23.79 27.61 200 21-Aug-06 24.64 130 $7,114.15 $ 635.29 + 9.81%
ASEI 22.64 51.78 100 18-Sep-06 49.51 130 $6,667.52 $ 162.31 + 2.50%
PWEI 6.65 33.32 150 13-Oct-06 33.29 130 $6,435.75 -$ 124.21 - 1.89%
OVTI 13.68 11.82 300 13-Nov-06 16.47 130 $4,566.06 -$1,926.25 -29.67%
EPIQ 11.60 18.24 320 11-Dec-06 15.65 130 $7,515.84 $ 937.22 +14.25%
CRYP 12.42 22.84 200 10-Jan-07 23.92 130 $5,882.05 -$ 408.14 - 6.49%
VRGY 47.26 25.00 270 14-Feb-07 18.29 130 $8,692.85 $2,203.16 +33.95%
KG 15.56 18.35 260 07-Mar-07 18.49 130 $6,144.24 -$ 176.88 - 2.80%
10 symbols Total(AUD): $65,039.86 $ 362.09 + 0.56%
The commision amounts include an allowance of another $65 for selling costs. There is no allowance for dividends received (around $300) or interest paid on the Portfolio Loan (currently around $400 a month).
At the moment the performance of this portfolio is largely governed by what individual stocks I have selected (semi-randomly) from the Lists genereated on the www.magicformulainvesting.com website. For example, in the first trade I was tossing up whether the buy H&R Block or Hasbro toys - in the end I chose to purchase HRB (which has dropped nearly 13%). HAS in the same period has gained in price. Over a period of several years, once I am fully invested (with a portfolio of 18 stocks), the performance of my particular portfolio should be more in line with what can reasonably be expected from application of the "Little Book" methodology.
My US Stock Portfolio now has the following composition:


Enough Wealth

Sponsored Post:

One of the nice things about sponsored posts is that they sometimes point you to a worthwhile site that you probably would not have come across otherwise. Debt Consolidation News is one such site. It has a nice, clean appearance, and is easy to navigate around the site (although there are some problems, which I'll cover below). The site has archives going back to June 2006, so it has been going for quite a while, and has a wide range of posts about credit cards, debt, getting out of debt, student loans, saving and various other related topics.

Browsing through the site some of the more interesting posts for me included one on "teaching kids about money" which linked to an article with a few good ideas on how to interest your kids in finances and money, and one on the 100 most famous quotes about finance (although I can think of a few other quotes that I'd have included in place of some of the ones on this list!).

However, one short-coming in the site is the very short list of categories. The side bar only lists seven major categories. While this helps retain the clean appearance of the website, I think it's a triumph of style over substance. Once of the beauties of the internet is that you can have multiple links to a page, so there's no reason not to use many categories to allow readers to easily find all articles relating to a particular topic, such as kids, education, student loans, UK, US, or whatever. The fact that there is no site search tool built-in to the site design makes this even more infuriating. While there's plenty of material here to interest you, you'll probably have to browse through all the archives to find the articles that you may want to read. So this site is more suited to browsing through at your leisure than for a quick visit in search of a particular debt-related topic.


Enough Wealth

Australian and the Asian Markets were all down again today - it looks like this may end up being a "real" correction of 10-15% rather than just a "blip" that we've had several times before during the past three years of bull run. It will be interesting to see what the US bloggers post tomorrow if the US Market also drops a couple of percent tonight - there were already some "newbie" stock investors posting comments about "crashes" or "corrections" after just dropping 3%!

If the market levels out after a 10-15% correction I may have to seriously consider whether to take a profit on my ASX200 Index Put Options, and hope the bull market resumes for the remainder of the year. Or whether to hold on to them, and possibly buy some additional Put Option Contracts so that I'm fully covered against a possible bear market (30%-50% drop?).

So far my Australian Stock Portfolio is down around $40,000 from the peak - it will be interesting to plot my stock portfolio "losses" vs. the "gains" on my Option Contracts that Comsec emails to me each day (based on the previous days closing "market price" for the Options Contract). In theory the 3 contracts should offset something like 25%-30% of my portfolio losses.

Enough Wealth

It turns out the $13,500 balance transfer to my day-to-day CC had come from my BankWest CC (I asked for the Balance Xfer when I accepted an increases credit limit for this card), not the new HSBC CC I'd applied for recently. It was just coincidence that the BankWest CC xfer happened at the same time the new HSBC CC arrived in the post. I rang HSBC to activate the new CC today and was told that the $10K balance xfer for this card had been processed on the 27/2 so there should now be an extra $10K credit balance sitting in my NAB day-to-day CC account. I'll withdraw that $10K on Monday and deposit the funds into my Credit Union account so it can be added to my online savings account earning 6.1%.

I'll have a total of $34,500 of 0% balance transfer funds invested at 6.1% once I do the deposit on Monday. $11,000 of this is from the Virgin CC where the 0% period ends on 10 April, so I'll be repaying this amount on 5th April (to make sure it gets processed before the Easter Holiday period).

The new 0% offers are only until August and September this year, so I'll have to keep an eye out for any new offers that arise in the meantime.

Enough Wealth

February was looking good until the very end when the Great Fall of China undid nearly all of the progress for the month. Luckily my retirement account did OK as I'd rebalanced it recently to reduce the excess allocation to Australian stocks that had developed over the past three years bull run:
* Average property prices were unchanged this month for the suburbs where my two houses are located.
* My stock portfolio equity went up only $3,523 (0.94%) this month but my retirement account increased significantly - up by $6,064 to $330,662 (up 1.87%).

My Networth as at 28 Feb now totals $1,066,778 (AUD), an overall increase of 0.79% for the month.

As discussed in previous posts, I'm bought 3 ASX200 Index 5500 Dec-20 Put options to partially protect against significant losses if the market drops substantially.

Moom asked what date the ASX200 Put Options that I mentioned in my previous post expire - they are the 5500 options which expire on 20-Dec (XJOQT). I bought them on 9-Feb at 158.00, so the 3 contracts (each contract is for 1,000 options) cost $4,795.77 (including brokerage).

For interest I looked up the ASX200 index (XJO) closing value and plotted it against the "market price" for the XJOQT options that Comsec has been emailing me each day since I opened my position. As you can see, the option price has a negative correlation to the ASX200 Index, but the correspondence isn't perfect as the market for the options is quite thin and the buy-sell spread is larger than you'd get trading stocks. As the Options don't expire until Dec-20 their current price is a combination of the strike price relative to the current Index value, and the "time value" of the option until expiry. At the moment it appears (from the graph of option price vs. index value) that each contract would be worth around $5,000 if the index dropped to the 5500 level (another 5.5% drop from current levels), but at the expiration date of 20-Dec the options would have no value above the 5500 level, and will be "cashed out" for $10 per 1 pt below 5500 on 20-Dec (if I hold them until expiry).



As my entire direct investment in the Australian stock market is around $600K each 1pt decline in the market costs me around $100. Therefore I'd have to be holding 10 of the Index Put Option contracts to be fully covered for losses below the contract strike price. With only 3 contracts I'd be making $30 profit on the contracts for each 1 pt decline to offset against the $100 loss on my stock holdings. As my stock portfolio is currently geared around 100% I'd need 5 contracts to make my portfolio losses match the actual % market decline below the 5500 level, and 10 contracts to be fully "insured" against any loss if the market drops below 5500 prior to Dec-20.

I'll buy another 5 or 7 contracts if the market resumes it's bull run and goes above the 6100-6200 level. Hopefully I can get fully "insured" against drops below the 5500 level for a total cost of around $10K (around 1.7% of my portfolio value, or around 3.3% of my equity). This would "cap" my exposure in a bear market to a maximum loss on my Australian stock portfolio to around $35K, or about 10% of my equity in AU stocks. I'd still retain my exposure to any upside if the market continues it's bull run. If the market gains another 10% by the second half of '07 (around the 6400-6500 level) I'll look to start selling off half my AU stock portfolio and use the proceeds to eliminate my gearing until the end of the next bear market is in sight (ie. All Ords back down to around the 4000 level).

Although this all smacks of an attempt to "time the market" I think it's prudent to make use of Put options when the market has gone up around 20% for each of the past three years, and to look at reducing my use of gearing when the market's p/e appears to be getting stretched at the end of an extended bull run.

Well, a correction was well-overdue, so a one-day drop of around 3% in the stock market was no great surprise, although the alleged "trigger" for the event (the Chinese market taking a hit) was a surprise, as is normally the case. On the up-side it makes the $5K I spent on buying 3 Index Put Option contracts on 9 Feb look more like sensible insurance, rather than simply throwing money down the drain.

I'd need to be holding 12 5500 ASX Put contracts to fully cover any losses to my stock portfolio due a bear market (or severe correction), so I'm not fully insured yet. I was hoping to pick up some additional ASX 5500 Dec Put Options as the market continued it's bull run - on Friday the Australian market had closed over 6000 for the first time and the cost of the Put Options had dropped as low as $0.98 at one stage (I had bought the previous 3 contracts for $1.58 on 9 Feb). Although I thought about buying some more Put options last Friday, in the end I didn't bother. (If I had I'd be thinking how great I was at market timing!

Unfortunately the price for the options probably won't be as attractive even when/if the market recovers back to the 6000 level as the increased volatility will make the options more expensive.

HSBC sent my new CC yesterday. When I checked my everyday CC account the $13,500 balance transfer had already gone through into the account on the 19th, so I withdrew $10K and deposited it into my Credit Union account where I can leave it in the high interest account until the 0% balance transfer period ends on 1 October. As part of the balance transfer was used up on the current months accumulated charges on my everyday CC, I'll deposit the remaining $3,500 into the Credit Union account next month instead of having to make a CC payment.

I should earn around $480 interest on the $13,500 "free" loan from HSBC by 1 October, and the only cost was a $10 cash withdrawal fee from my everyday CC account and about 10 minutes work all up to apply for the card and shift the $10K cash from one bank to another.

I'll just have to remember to cancel this HSBC CC once I've repaid the balance transfer amount in October, otherwise they'll start charging an annual card fee next year (this particular card only waived the annual fee for the first year).

Autumn Semester started last week. I'm taking two courses for the Graduate Diploma in Secondary Education I've just commenced, and one course for the Master of IT I'm halfway through. The fees are similar for both - around $800 HECS (I pay in advance, rather than accumulate a tax debt) for the two Education subjects and $800 fee for the one IT subject. I also had to purchase a textbook for the IT course ($111.55 even with the Co-op bookshop member discount!), so the total education costs for this semester are around $1710. Luckily there are too many students enrolled as Distance Education students in the Education at CSU this year, so the Uni cancelled the one week residential school in Bathurst. That would have cost another couple of hundred dollars for little benefit, so I'm glad it's not on anymore.

I worked out that if I quit my current position to start teaching in about three years, I'd have to work two extra years as a teacher to make up for the reduction in annual pay. I've no idea yet if I'll actually enjoy being a High School teacher, so I can't tell if I'd want to work longer as a teacher compared to my current job. Then again, I should have enough for a comfortable retirement whether I work to 61, 65 or 68.

A few years ago countrylife.co.uk had a scottish manor house (Merton Hall) for sale for around A$1m (it was before the recent boom in UK house prices, and was in need of renovation as it had been used as a boarding house for a boy's school). I was keen enough to go to the trouble of getting my father to join me in making a bid on the property, although in the end we were not the winning bid. I've always fancied buying an "estate" with an historic house and grounds, although it's currently still way out of my price range, and country houses have never really been much of an investment in the long term (although if we had succeeded in buying Merton Hall it would have done well in the past three years due to the real estate boom in the UK).

So, I still browse around what is available, looking for bargains and being amazed at some of the massive prices asked for some modern "estates". Recently two extremes caught my eye - the world's most expensive house (at A$138M), and a real "fixer-upper" in Poland that is going for around A$62K:



What I'd like is somewhere between these two extremes, but, when I'm in a more sensible mood I realize that I'd be much better off investing my money and just staying in a castle of manor house on my holidays.

No matter whether you've been investing for a day or a decade, there's always the niggling thought that someone out there knows the "secret" to timing the market. So you may give your money to a professional to manage (eg. Actively Managed Funds), or read books or take courses on a technique to boost your returns above the market average. All these things will cost you time and/or money. Occasionally one method you try for a while (day/month/year) will actually produce good results, so you'll tend to think you've discovered the "secret" and stick to that method until it ultimately fails (and in the meantime possibly blog about it, tell your friends, write a book, or teach your "secret" in seminars).

I must admit that I've done this over the years, and I still will invest a portion of my money using particular techniques in attempt to boost returns - for example my "Little Book that Beats the Market" US Stock Portfolio (Value Investing), and toying with the idea of moving some of my domestic stock investments from my geared personal stock portfolio (stock picking) into a professionally managed individual stock account (with Direct Portfolio) within a self-managed super fund (SMSF). But my preference over time has shifted towards low-cost index funds where available (I'm thinking of moving my retirement account from my employer's default fund (Westpac/BT Employer Super) into a SMSF where I can invest in Vanguard Index Funds or ETF such as the Commonwealth Diversified Share Fund (CDF)

One of the main reasons I've drifted towards a preference for Index Funds is that although I recognise that some actively managed funds outperform for extended periods (eg. Berskshire Hathaway), most funds that outperform for a while (up to a decade) can be simply put down to "luck" or random chance. Similary, techniques such as charting, while always able to explain stock movements in hindsight, don't appear to have any real predictive power. If you ever need reminding that a LARGE component of stock price variations (and market variations) is purely random, despite the appearance of clear patterns or "trends" in the charts, just do a simple random walk simulation in excel.

For example, just as a reminder to myself, I ran a simulation in excel to model the coming year in the ASX All Ords using a few basic parameters and a random number generator:

Simulation Period: Daily Index Value for next 250 days
Starting Value: 5800 (around the current Australian market level)
daily movement formula: new value=P+(10%/250)*P+RAND()*200-100
where P=previous cell's value (eg. B4, if calculating value for cell B5)
I picked an overall 10% pa ROI as a typical stock market trend and a daily random move of + or - up to 100 points as a fairly "typical" market movement.

It's amazing how realistic the "chart" for this simulated market is every time you press F9 to recalculate the random numbers. For example, just from random numbers, you can get a continuing "bull market", a sudden "crash", a "bear market", or a "correction":
Bear Market:

Bull Market:

Correction:

Crash: (just a little one)

Of course the market (and individual stock prices) isn't purely random - but key events that will shift the market in a particular direction by a significant amount aren't known in advance (otherwise the effect would already reflected in the price by other investors trades adjusting the price level).

Ultimately, I think the time spent trying to uncover "secret" techniques to predict the market would be better spent by a novice investor in a second job earning more funds to invest, and for a more seasoned investor with a significant amount already accumulated, just concentrate on diversification, asset allocation, tax-effective investment structures and try to avoid high fees, churning or other return-diminishing behaviours.

I remember when having a DayRunner or Filofax (preferably leather) was a status symbol for all the "executive types". Then it was a PDA, and now a BlackBerry is the cool executive toy (soon to be replaced by the iPhone ?).

Work was clearing out some old stationery items, so I grabbed half a dozen packets of DayRunner inserts they no longer used (receipt envelopes, finance pages, and calendar pages). The original prices marked on them totalled $45 -- goes to show how fast a trendy or fashionable item can depreciate! I noticed that they weren't giving away any rulers or pencils.

The QE2 Cruise Ship arrived in Sydney today. It's a magnificent ship which DW and I had the pleasure of sailing on from New York to Plymouth on our honeymoon back in 1999. However, it was positively dwarfed by it's "big sister" the QM2 which also happened to be in Sydney Harbour today!

Although even a short cruise or trans-atlantic crossing in one of the cheaper cabins is not "cheap" by any stretch of the imagination, it is definitely value-for-money for the unique experience.

The comics I had ordered from the Federal Reserve Bank of New York's educational website (available for free) arrived today. When I got home from work DS1 was busy reading the first one and after dinner he wanted me to read through it and discuss some of it with him. He thought some of the jokes were quite funny, so it seems these are pitched just right for an intelligent 6 year old. He'll probably take one to his "news" day at school on Thursday to tell the other kids.

The ones I got seem the most useful:
The Story of Money
Once Upon a Dime
A Penny Saved
They arrived via airmail from the US (and cost the Fed USD3.70 in postage!). I can recommend these to anyone with 5-10 year old kids.

Although it's always risky to make long term plans based on the assumption of status quo - especially where tax laws are concerned - the recent changes to the Australian Superannuation rules bring some interesting long term tax planning ideas to mind.

Basically the new Superannuation rules are that any withdrawals (lumpsum or pension payments) from a "tax paid" superannuation fund will be tax free after age 60. One possible side effect of this change will be to make it more tax-efficient to realise capital gains on investments held outside of super once you are retired, over 60, and getting most of your income as an untaxed superannuation pension. The ATO information about the new rules states that "Individuals will not need to include lump sum superannuation benefits and superannuation pensions from a taxed fund made after 30 June 2007 in their tax returns. Superannuation funds will not need to report benefit payments made after 30 June 2007 to the ATO for RBL purposes." Presumably this would mean that such amounts are not taken into consideration when calculating capital gains tax for your personal tax return during retirement.

I'm thinking that I'll be able to live off my tax-free superannuation benefits during retirement, make use of margin lending to offset any non-superannuation investment dividends with tax-deductible margin loan interest, and thus have almost no taxable income during retirement.

This should mean that I could sell off, say, $100,000 worth of my non-superannuation portfolio each year during my retirement and have a fairly low capital gains tax liability each year (as the CGT calculation is based on the normal personal marginal tax rates applied to 50% of the realised gain for assets held more than 12 months).

For example, selling $100,000 worth of my portfolio during a retirement tax year, with say 75% of the amount being a "capital gain" would result in a CGT bill of:
75% realised capital gain = $75,000
50% discount applied = $37,500 taxable CG
tax on $37,500 = $6,600 (using 2007 tax rates)

I'm trying to do a spreadsheet comparison of holding my current non-superannuation geared stock portfolio until retirement and liquidating it during retirement using this technique, vs. liquidating the geared stock portfolio now (and paying considerable capital gains tax due to my taxable salary income) and contributing the after-tax amount into my superannuation account where concessional tax rates would apply to the investments. Regardless of what the modelling tells me is the more tax-efficient plan, putting all my investments inside superannuation may not be a wise choice due to the restrictions on accessing any superannuation investments prior to "retirement age". Although I do have an adequate undeducted, non-preserved amount within my superannuation account that could be withdrawn in an emergency.

I'll let you know if my spreadsheet modelling comes up with any useful insights.

This month I selected VRGY from the MagicFormula listing to add to my "Little Book That Beats The Market" Portfolio of US Shares (100% geared). I bought 270 VRGY @ $18.29. My US Stock Portfolio currently stands as:
Symbol P/E Last Shrs Trade Date Paid Comm Value Gain
HRB 25.28 23.83 200 28-Jun-06 24.16 130 $6,074.43 -$ 214.12 - 3.40%
MOT 13.14 19.24 265 24-Jul-06 18.98 130 $6,498.34 -$ 42.18 - 0.64%
MSFT 25.13 29.46 200 21-Aug-06 24.64 130 $7,509.56 $1,098.65 +17.14%
ASEI 24.67 55.95 100 18-Sep-06 49.51 130 $7,131.02 $ 690.80 +10.73%
PWEI 4.11 33.10 150 13-Oct-06 33.29 130 $6,328.07 -$ 166.32 - 2.56%
OVTI 9.72 12.59 300 13-Nov-06 16.47 130 $4,813.92 -$1,613.56 -25.10%
EPIQ N/A 17.98 320 11-Dec-06 15.65 130 $7,333.16 $ 820.29 +12.59%
CRYP 12.23 24.91 200 10-Jan-07 23.92 130 $6,349.73 $ 122.36 + 1.96%
VRGY N/A 18.66 270 14-Feb-07 18.29 130 $6,421.36 -$ 2.67 - 0.04%
9 symbols Total(AUD): $58,459.61 $ 693.24 + 1.20%


As I intend to build up a portfolio of 18 stocks, and then start selling the oldest holding each month and replacing it with a new pick, I'm not doing much investigation of the individual stocks I pick each month. Basically I just run the MagicFormula filter and select half a dozen stocks that have the best looking stats. I exclude any stocks that I feel may have their performance temporarily boosted by the resources boom - ie. any railroad, oil or mining stocks. I then have a look at the 1-yr chart for each of the stocks on my short list, and exclude those that appear to be in a downtrend or starting to drop. With a total holding of 18 stocks I think I'll have enough diversification to basically just pick a random selection of the stocks thrown up by the MagicFormula search tool. After all, it's only supposed to list stocks that have met its "Value" criteria.

My US Stock Portfolio now has the following composition:

Industries:


Stocks:

Imagine a world in which every man, woman and child had their income increased 10-fold overnight. You'd think that while the rich would be even richer, the poor would also become quite well-off - having ten times their current income would let them pay off their debts, buy a new car, send their kids to college, and so on... But you'd be wrong. The poor would still be poor, and they'd be just as many poor people as there are now.

Don't believe me? Well, just consider this quote from an article today regarding a study by the United Nations Children's Fund on wellbeing in more than 20 countries :

"Nearly 12 per cent of Australian children fell below what the UNICEF report considered the poverty line - a household where the total income is less than half of the country's median."

The way UNICEF (and social welfare lobby groups) measure "poverty" is in purely relative terms. So it doesn't matter how high a household's income becomes, if their income is less than half the median household income then they're classed as "poor".

While I agree that poverty is relative to some degree (ie. a family in a developed country may have enough income for all the basics of life, yet still be considered "poor" if they cannot afford expenses that are normal for the society they live in, such as a colour TV), logic dictates that there must be some absolute level of income above which a family living in an affluent society is no longer really "poor" just because their income is considerably lower than the typical (median) income.

Otherwise there is no relationship between GDP, incomes and poverty - and the only way to "reduce" poverty is to have everyone on nearly the same income levels.

I currently have a total of $18,000 on two CCs (Virgin Money and Coles/GE) as 0% balance transfers, which has been invested in an online account earning around 6% pa. Both these cards mature soon ($6K next week and $12K in March), so it was very timely that one of my other CC accounts (from Bankwest, which I originally opened in order to get a free $100 credit on the account, but don't normally use) sent me an offer to do a balance transfer of up to 95% of my credit limit at 0% for 6 months. I'll take out a $13,500 balance transfer on this card and invest the funds at 6% for the next 6 months, earning $405 for about ten minutes "work".

I still haven't sent in the other new CC app that arrived from HSBC a few weeks ago - I need to complete the application form and send it in tomorrow. I only requested a $10K balance transfer on the application as I don't know what credit limit they'll give me.

Assuming the new card is approved I'll have a total of $23.5K invested at 6% for the next 6 months and I'll have earned around $1,250 interest on OPM in 12 months. Even after paying tax at my marginal rate it will have been worth the small amount of time and trouble involved in getting the cards, applying for the balance transfers, setting up automatic payments of the card minimum payments each month, and shifting funds around at the start and end of the balance transfer period. As I keep the balance transfer amounts invested in an online bank account available at call there's no significant risk involved.

My Link Page:

A Penny Saved
Credit Card Blog
Everybody Loves Your Money
Financial Page
Free Money Finance
Investor Geeks
It's Your Money!
Make Love, Not Debt
Money For Military
My 1st Million At 33
My Money Blog
My Open Wallet
NCN Network
OC Budget Living
Quarterlife Finance
The Frugal Duchess
The Internet Cashflow Guy

Well, I got very confused. According to the "opportunity" on PayPerPost, there is a new PPP Affiliate program the builds traffic and links called "Review My Post". Unfortunately when I followed the instructions provided (Click "Affiliate Tools" in your blogger interface then, select review my post for details. Let us know what you think about this new program that pays you and others to blog about your blog.) I couldn't for the life of me find anything in the blogger dashboard that looked like "Affiliate Tools". I even checked the help page in blogger and did a search on the terms "Affiliate Tools" and "Review My Posts". So, for an exciting new program that is supposed to build traffic it had gotten off to a rocky start.

It was only after wasting time searching my blogger account screens for a while that I went back to the PPP screen and noticed that there is a "Affiliate Tools" link there! D'Oh!

PPP call their interface the "Blogger Dashboard" - it goes to show how confusing it is having a google blogging service being called "blogger" at the same time other people use the term "blogger" in it's more generic sense.

Anyhow.... I eventually found the "Affiliate Tools" and followed the link to the "Review My Post" section. Apparently the way this will work is that by including a special link at the end of a post (the blurb says *EVERY* posts - but I assume putting this link at the end of each and every post is not actually a condition of this new process working) - if someone clicks on this link and joins PPP I'll get a referral fee. The new twist is that the new member will then also get a "personalised" opportunity to make a paid post ($7.50) about one of my posts - which should give me the added bonus of getting an extra link, and the new member an easy $7.50.

I'll start adding the new html link to my posts (see below) and see if it does anything spectacular... I'll let you know how it works out.

ps. I'm reasonably happy with PPP so far - I've been only doing around 1 PPP post per week as I only select opportunities that are relevant to this blog's theme. Plus there are getting to be more restrictions by advertisers around page rank of blogs that can do paid posts. Yet I've still managed to get paid nearly $200 so far, which covers off my hosting and pfblogs gold membership fee. It is also a lot more than I've generated via Amazon affiliate links or Blog Ads.

James recently asked:

Are there any online Australian share brokers that you recommend? Ones that you know of that have a wide range of both Australian and International shares? Ones with low overhead and low fees, while still being trustworthy?

While I don't know about all the online brokers, I have used a couple of Online Brokers for overseas trades that have provided statisfactory service at a reasonable cost.

For selling some HK shares (that used to be listed on the ASX but later delisted from the ASX and only traded in HK) I was originally going to use ComSec - but after opening up an account for OS trades (via their arrangement with Pershing in the US) I found out that they were unable to register my certificated HK shares (HK is moving to an electronic system similar to the Australian CHESS system, but lots of stock certificates are still in existence and need to be converted to electronic registration if you are going to trade them via the 'net).

Because of this difficulty I then opened up an Online Broker account with HSBC Australia. They processed by certificated HK shares without any problems and I was able to then trade them via my HSBC broking account on the 'net. However, HSBC has since got out of the Broking business in Australia, so my HSBC broking account is now with E*Trade Australia, which has improved its overseas trading system to cater for the HSBC clients and others.

I do use my ComSec pershing account to trade US stocks directly (see my posts about my "Little Book" Portfolio), and it generally works fine - I've had one occasion where a BUY order was cancelled overnight for no apparent reason, so I had to reenter the trade the next day. Having said that, I'm a long-term investor, and for my "Little Book" portfolio I buy US stocks in parcels of around US$5000 and hold them for 18 months before selling. So I can't say if the Comsec Pershing system would work well if you wanted to do day trading in the US market from Australia...

Overall I can recommend both E*Trade and Comsec for trading OS markets. Your choice would be influenced by whether you had an existing account with either of these for trading Australian stocks, and if you need to link the account to a margin loan. Comsec provides Margin Loans inhouse, and E*Trade allows you to link your account to a margin lender (but I'm not sure if you can still trade online using E*trade and settle using the margin loan).

I've finally bitten the bullet (gently) and bought my first real "derivatives" - I placed an order today to BUY 3 contracts for the S&P/ASX-200 index PUT option, 20-Dec-2007 expiry date. Each contract is for 1,000 'shares' (a strange terminology when you're buying index options) and the price range quoted when I placed the order was $1.44-$1.63. I started out telling the broker to set my buy price at $1.50 but he advised that this would take a long time to fill. I asked if the price varied more with time (ie. as we get closer to the expiry date the price should drop) or with the current value of the index (once you are "in the money" the contract is worth $10 per point at the expiration date). He wasn't terribly helpful, so I decided to bid $1.60 - so hopefully this order was filled.

The whole options trading thing is a bit of a pain - rather than just login and place an order with my normal online broking service, they have a special "power trader" application that provides live option pricing, charts etc. I looks really cool, but unfortunately I can't install it at work, and options trading is only available during market hours, so I can't use the software to trade options at home anyhow. So I have to phone the broker during business hours to trade options. Probably a good idea to start with, as I don't really know what I'm doing.

My geared stock portfolio is worth around $525,000 at the moment, with margin loans of $264,000. Hence my equity is around $261,000 at present. Although my portfolio doesn't exactly track the ASX-200 index, it does have a high correlation with the index. A change in the ASX index of 1 point is worth about $90 to my equity. Thus at my current gearing level a 2900 point drop in the index (just under 50%) would wipe out my equity entirely (but I'd be getting margin calls long before that!).

As each 1 pt decline below 5500 is worth $10 at the expiration date of an ASX200 5500 20-Dec-2007 PUT Option, I'd have to own around 9 of these PUT option contracts to offset the losses on my portfolio entirely below the 5500 level. I've started out by buying just 3 contracts today, as the market still seems to have upward momentum, and I might be able to buy additional contracts in future at a lower price (or ones with a higher strike price for the same cost). The three contracts will cost around 3*1,000*1.60 = $4,800 plus $100 brokerage. This equates to an "insurance premium" of 1.87% of my current equity. These contracts will reduce my losses below the 5500 level by around 1/3:

Full coverage for losses below 5500 up to 20-Dec would cost three times this amount (ie. 5.61%), so this strategy isn't sustainable indefinitely.

I'm only doing it now as the market seems to have reached dangerously high levels, plus the fact that I don't want to sell off significant holding and realise capital gains this tax year. I expect to start selling off some of my stock holdings after 1 July to reduce my gearing and start shifting my equity investments into a self-managed superannuation structure. This will mean that by the time the PUT options expire in December I won't have much of a geared exposure to shares (you can't directly use gearing within a superannuation account), and may have diversified some of this investment into other asset classes (eg. foreign stocks, commercial property, bond funds).

We'll see how this works out over the next 6-10 months.