Enoughwealth's Personal Finance Blog

The takeover of Mayne Pharma by Hospira was finalised last week and a cheque for $11,389.80 arrived in the post yesterday. I don't mind the price ($4.10 per share) as I made a decent profit on this stock, but compulsory takeovers are always a bit of a pain as they don't necessarily fit in with your ideal schedule for realising capital gains.

Anyhow, it could be a lot worse - a few years ago (before the commodity boom and oil price increases) I had a long-term view that commodities in general, and oil in particular, would go up in price over the medium to long term. To get maximum benefit for such a price rise I decided to buy some shares in an oil-share company (Southern Pacific Petroleum) that had a working test-scale oil shale plant in Queensland, and mining rights to a massive oil shale deposit. Unfortunately there were a few problems with the test plant (smelly emissions annoying the nearest townsfolk), and they ran out of money while trying to develop the pilot-plant stage of the project. The very low prices for oil at the time also didn't help. I'm still annoyed that they didn't try to raise further capital from the existing shareholders. Instead they simply sold off the entire company to a US investor who assumed their liabilities. The existing shareholders ended up with no return and no interest in the oil shale deposits. Now of course the company would be worth a fortune.

One lesson from that debacle is to not try to be too "smart" (aka. greedy) - rather than investing in a small, speculative oil-related mining company, I should have just invested the money in an established oil company, such as Woodside, or an oil refiner, such as Caltex Australia.

yet another case of "what might have been" - just like the time I invested in a pre-IPO internet company (called Global Entrepreneurs Network "GEN") in the late 90s, rather than in Amazon.com

Here's the latest round-up on how the various PF bloggers who post their Net Worth each month are progressing. I've updated this post to include a copy of newcomers. Leave a comment if I've missed yours out!
Monthly Net Worth of PF Bloggers for JAN 2007:

Blogger Age Net Worth $ Change % Change
Accumulating Money 2x $49,287.71 $3,582.55 7.8%
Binary Dollar 2x no Jan data no Jan data N/A
Blogging Away Debt 2x -$38,182.00 $509.00 1.3%
Blunt Money 2x $232,481.25 $4,246.93 1.9%
Consumerism Commentary 30 $75,173.52 $6,306.91 9.2%
Crazy Money 27 $247,301.00 $5,316.00 2.2%
Enough Wealth 45 $1,058,372.00 $25,589.00 2.5%
Financial Freedom 30 no Jan data no Jan data N/A
Financial ladder xx $140,597.24 $5,750.69 4.3%
Finance Journey 25 $153,284.00 $3,655.00 2.4%
It's Just Money 32 $157,013.01 $2,691.53 1.7%
Lazy Man and Money 2x $184,349.19 $2,561.58 1.4%
Make love, not debt 2x -$66,274.27 $4,513.67 6.4%
Making Our Way 37 $639,201.77 $34,000.00 5.6%
Mapgirl 3x $36,183.00 $2,183.00 6.4%
Money Blog Site 25 -$34,038.84 N/A N/A
My Money Blog 28 $123,489.00 $8,980.00 7.8%
My Money Path 29 no Jan data no Jan data N/A
My Open Wallet 37 no Jan data no Jan data N/A
New Age Personal Finance 31 no Jan data no Jan data N/A
Savvy Saver 27 no Jan data no Jan data N/A
Seeking Wealth xx no Jan data no Jan data N/A
Tired But Happy xx $133,712.00 N/A N/A

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.

Your Credit Advisor has a good listing of "top" personal finance blogs. Rather than just list them based on alexa ranking or similar, YCA has provided a summary of each blogs focus and grouped them into meaningful categories. This listing also gets my tick of approval because enoughwealth is listed as #45!

Gerad emailed me an interesting question in response to my post "It's Raining Credit":
I was wondering if you could do a post on how the credit system works
in Australia... i.e. do you need to have a credit card to get a good
interest rate for a car loan etc/if the situation is similar to the US.
I've been reading a lot of US literature but being in Sydney, I don't how
things work here...
I don't claim to be an expert, but I can summarise the main differences as I see them:
In the US you get a CREDIT RATING (FICO score) based on details of your credit history. In Australia your CREDIT REPORT doesn't provide an expliciti SCORE, it just records who has accessed your credit history, and will record details of late payments, defaults and so on.
In the US the interest rate you pay on home loans, credit cards etc. appears to be based largely on your FICO score. In Australia lenders will assess applications based on information provided (income, other debts etc) and use your credit report to check for bad debts and so forth. As your credit report doesn't include a specific score, the interest rate on home loans, credit cards etc. is generally standard for all borrowers - the lender just decides whether or not to extend credit to you.

The benefit of the Australian system is that it is probably much easier to get your first loan, credit card or whatever. As long as you have sufficient income, and a stable residential address, lenders will be happy to approve credit to a new borrower. The downside is that if you have an excellent credit history they will throw offers at you to increase your credit limit, but generally don't adjust the interest rate (one common exception is that home loan interest rates are generally a bit lower for "gold" customers - those with large loan balances and good credit history).

Recently GE Money has started to increase its presence in consumer lending in Australia, and I've seen ads with "interest rate FROM x.xx%" which indicates that they will be setting interest rates individually for each borrower, based on their credit history.

A new detailed report is out that gives an interesting summary of the results of a global survey on retirement plans, attitudes, and status. The survey covered topics such as:
Attitudes towards retirement.
Comparison of retirement perceptions with reality: from working and retired people.
Identifying perceptions of the working and the retired on various issues.
Identifying changes in perceptions of retirement between 2004 and 2005.The report is mainly in the form of charts, so its a quick read. I recommend that you check it out.

I remember back in the early days of the "mobile" telephone when the handset was the size of a brick and the battery pack was a separate, even larger brick that took all night to charge up and then only lasted a couple of hours on standby. In those days I was a volunteer for the State Emergency Service and the "duty officer" had the dubious honour of lugging this "mobile" phone around with him or her all weekend.

Times have sure changed since then, with current mobile phone models that fit in your pocket lasting a week between charges, and let you browse the web etc. The other thing that has changed a lot is the cost of using a mobile phone. It's common to get a current model phone for "free" when you sign up for a mobile phone contract - DW and I got two phones (of the same model so that we can exchange batteries, chargers etc) for free under a 12 month contract at $14 a month per phone, with $14 worth of included calls. The included call balance is shared between the two phones, so we can run up a combined phone bill of $28 in calls each month without paying anything above the basic plan rate. As we don't make that many calls, we haven't ever exceeded our included call limit in a month.

In comparison, our landline costs us $32 a month just for the line rental - any calls are extra. In the near future we will dump the landline and just use our mobile phones for all our calls.

If you're looking around for the best possible cell phone plans and phones, have a look at Wirefly. They even have some free cell phones available, and family plans from all major service providers including cingular, T-mobile, verizon, sprint and nextel. You can get two free phones with a family plan. Family cell phone plans (also known as shared plans) can be great value for a single household or family compared to using an individual cell phone plan. A family plans mean all your talk time minutes are pooled for common use, so you'll need to have an idea of the total talk time required for all members of your family.


PayPerPost

One of our myriad state taxes is land tax. It's not that I hate land taxes per se, it's just that the state government keeps changing the rules, making it impossible to budget or plan for this tax. For example, our past bills (with no change in the properties we own and pay land tax on) have been:
Year Tax Due Taxable Exempt * Tax Rate
Land Value Land Value Formula

2001 $695.00 $240,000.00 not provided $100
+ 1.7c per $1 over $205,000 threshold

2002 $848.00 $264,000.00 not provided $100
+ 1.7c per $1 over $220,000 threshold

2003 $814.00 $303,000.00 not provided $100
+ 1.7c per $1 over $261,000 threshold

2004 $372.00 $333,000.00 not provided $100
+ 1.7c per $1 over $317,000 threshold

2005 $1,332.00 $333,000.00 not provided 0.4c per $1 up to $400K,
0.6c per $1 on next $100K,
1.4c per $1 above $500K

2006 $0.00 $349,000.00 not provided $100
+ 1.7c per $1 over $352,000 threshold

2007 $451.30 $372,667.00 $407,000.00 $100
+ 1.7c per $1 over $353,000 threshold

* Land used for principal place of residence (ie. our home) is tax exempt

Apart from a short lived attempt to remove the tax threshold (which was repealed after one year due to all the "small" landholders who just had a tiny tax bill due on the land associated with a investment apartment), the rate has been fairly constant but the thresholds were adjusted based on average state property values, whereas land values in Sydney tend to change more erratically, and outpace the threshold increase over time. The government reintroduced the old tax rates and threshold for 2006, but didn't index the threshold in 2006, which has brought our one investment property back over the threshold.

Due to sudden jumps in land valuations under the old method of reviewing land values every 3-4 years, a new method has been introduced that provides a valuation each year, and averages the past three years valuations to smooth out any tax increases.

Year Property #1 Property #2
Valuation Valuation *
2005 $333,000.00 $387,000.00
2006 $349,000.00 $406,000.00
2007 $436,000.00 $428,000.00
Avg: $372,667.00 $407,000.00

At least this allows me to make a rough guess of what the land tax bill will be for the next two years, assuming
a) rates stay same and threshold goes up 5%pa
b) land valuation only goes up 5%pa for the next 2 years (due to the property slump)

Estimated Values and averages:

Year Property #1 Property #2
Valuation Valuation *
2006 $349,000.00 $406,000.00
2007 $436,000.00 $428,000.00
2008 $458,000.00 $449,000.00
Avg: $414,333.00 $427,667.00

2007 $436,000.00 $428,000.00
2008 $458,000.00 $449,000.00
2009 $481,000.00 $471,000.00
Avg: $458,333.00 $449,333.00



My estimates for 2008 and 2009 are therefore:
Year Tax Due Taxable Exempt * Tax Rate
Land Value Land Value Formula

2008 $836.67 $414,333.00 $427,667.00 $100
+ 1.7c per $1 over $371,000 threshold

2009 $1,261.67 $458,333.00 $449,333.00 $100
+ 1.7c per $1 over $390,000 threshold


We'll see if this comes anywhere close to the actual bills. As there is a state election due next year I wouldn't be surprised if the rules are changed again!

The past month provided more good gains in my stock portfolio and retirement account, offset only slightly by a small drop in the valuations of my real estate assets:
* Average property prices were slightly down, dropping my property equity by $4,146 or 0.58%. We also had to redraw $3,500 from our home loan prepayments to meet our repayments as DW is on maternity leave and not earning any income at the moment.
* My stock portfolio equity went up another $19,568 (5.50%) this month and my retirement account also increased significantly, although it was boosted a bit by some extra contributions being deposited by my employer this month - up by $12,561 to $324,598 (up 4.03%).

My Networth as at 31 Jan now totals $1,058,372 (AUD), an overall increase of 2.48% for the month.

As discussed in a previous post, I'm looking into either buying Index Put options to protect against significant losses if the market drops, or else selling off some of my stocks to repay my margin loans and eliminate my gearing while the market is at the current high level. I'm leaning towards the Put Options idea as I don't want to realise capital gains this financial year, and most of my margin loans have had the interest prepaid until 30th June, so I should keep my investments until then (and keep my fingers crossed that the market goes up a bit more until then).

Now that the holiday season is over everyone must be back at work over at the credit card companies - they've started sending out offers to increase my credit limits. Yesterday I received an offer to increase the credit limit on one of the CCs I used for a 0% balance transfer for the past 6 months, from $6500 to $9750. And then today I received an offer from Citibank to increase my line of credit limit from $35K to $45K. I'll accept both these credit limit increases as it doesn't hurt to have more credit available (except when applying for a home loan, where they count all the available credit limits as if you had borrowed that amount). But I won't be using any the CC as I have another one for my day-to-day purchases which I pay off in full each month. I may use the Citibank line of credit account at the end of the financial year to prepay a year's margin loan interest (to get an immediate tax deduction on the interest), and then pay off this balance over the following few months.

Although my preferred strategy is a "high-growth/high-risk, buy-and-hold, stick to your asset allocation" one, there comes a time when the market starts to look a bit too high to any dispationate observer. The pundits are still saying that the Australian stock market isn't cheap but isn't too expensive either, based on historic p/e ratios and company profitability outlook. Then again, they're saying that after three consecutive years of total returns of 20%+ the best they expect this year is around 10%, so the upside seems limited, while the downside risk has obviously increased from what it was four years ago. Looking at the chart for the All Ordinaries Accumulation Index since 1980 the current market rise looks a lot like 1987 - and we all know how that ended up!



Anyhow, the Superannuation (retirement) account for my son was invested with the following asset allocation:
80% Geared Australian Share Fund
20% International Shares Fund
This allocation has performed very well since I opened his account four years ago, with returns of:
FY 04/05 25.3%
FY 05/06 42.0%
I figure that having gotten off to such a good start DS1 can now afford to move to a more conservative, high-growth asset mix (even though at age 6 he has another half century before he reaches retirement age), so today I sent in the paperwork to change his investment mix to:
30% Australian Share Fund
10% Australian Small Co Share Fund
20% International Shares Fund
20% Property Securities Fund
20% Australian Bonds Fund
This is still a high-growth, high-risk allocation (with 60% in stocks) so it should provide a good rate of return over the next 50 years, but at lower volatility than the previous asset mix. If there's ever a significant (30%-50%) correction in the Australian Stock Market I'll think about moving some funds back into the geared Australian Share Fund again. I think this weak form of market timing is called "dynamic allocation" - but it's still just a guess no matter what you call it.
* * * *
The current market also has me a bit nervous about my Australian Share Portfolio. I have two margin lending accounts holding $540K of Australian Shares, with a loan balance of $263K, so a severe market correction would have a big impact on my Net Worth! I'm toying with the idea of buying some PUT options on the ASX200 Index as insurance against a major market correction occurring between now and the options expiry date (21 June 2007). For $12K I could buy enough Options to offset any losses where the market drops below 5500 (it's currently at about 5750). The simpler option (excuse the pun) would be to just sell off enough of my portfolio to pay off the margin loan balances - but the interest has been pre-paid until 30 June 2007, so I'd be throwing five months of interest payments down the drain if I paid off the loans now. I also have reasons for not wanting the realise a capital gain prior to 30 June.

I received a couple of dividend statements today for my investments in the Commonwealth Diversified Share Fund [ASX code: CDF] - a sort of ETF that aims to replicate the S&P/ASX200 Accumulation Index. I was interested to see how the Annualised Net Return (change in net asset value per unit after fees, taxes and expenses, assuming all distributions are reinvested) compared to the ASX200 Accumulation Index:

1 Year 3 Year 5 Year
Net Return 23.27% 24.31% 14.78%
S&P/ASX200 24.22% 25.00% 15.35%
Difference 0.95% 0.69% 0.57%

This shows that the effective "fee" for using this "Index" fund is around 0.57% - 0.95% (it varies as in some years they outperform or underperform the index by a slight amount - aka. "tracking error").

This compares favourably to investing in, say, Vanguard Australia's "High Yield Australian Shares" Index Fund, which invests in the S&P/ASX200 stocks (excluding LPTs) which has a management fee of 0.90% for the first $50,000 invested (0.60% for the next $50,000 and then 0.45% for the balance of your investment in this fund over $100,000).

The buy-sell spread of 0.30% for the Vanguard Fund is slightly higher than you'd pay in brokerage costs for buying a parcel of over $10,000 of CDF stock.

The only substantial difference between these two methods of investing in the ASX200 index that I can spot is that the CDF shares occasionally trade at a small discount to the ASX200 index (XJO), so you could save yourself the buy-sell spread and a couple of year's worth of management fees by timing your purchase carefully:

One of the things I've learnt is that if you want something you should ask for it (nicely). So.... as I obviously like people to read my posts, building traffic is one of my "goals" for this blog. If you like reading any of my posts, please consider helping me out by doing one of the following (no cost and little effort!):

Add me to your technorati favourites:


Subscribe to my feed:



Adding me to your link list (If you want to appear on my link list, just ask and I'll look at your blog)
Including a link to one of my interesting posts in one of your posts

Now, back to our normal programming...

The NY times has an article covering the contrarian view of some academics that Americans are saving too much for their retirement, and risk squandering their youth rather than their money. The theory being that a middle-income couple could trade off $400,000 less in retirement money for an extra $3,000 a year disposble income during prime working years to spend on education or home improvement.

On the other hand, I've seen advice that if you are "on track" to meet your retirement or investment target you should adjust your asset allocation to attain the amount of return required for the least possible risk.

I don't find either of these options terribly attractive - just because my retirement fund is on track to meet my retirement income needs doesn't mean that I want to start spending more or wish to adjust my asset allocations to a mix with lower "risk" and a lower expected rate of return. I'm happy with my current budget, so I intend to add any future pay rises (that exceed increases in my cost of living) to my savings plan. Similarly I'm quite content with the current risk level of my investment portfolio, so it is likely to achieve a higher rate of return than I really require to achieve a comfortable retirement. Even if I adjusted the risk level of my retirement account investments down in order to "guarantee" that I'd have enough money in retirement, I'd still aim for the same overall level of risk in my entire investment portfolio that I'm comfortable with, so I'd likely accept an increased level of risk with my non-retirement investments as my retirement account got load up with "safe" assets.

So, my preferred option for when you find yourself ahead of target for your investment goals is just to keep on accumulating "excess" wealth. You can always leave it to charity in your will if you're so inclined, or else leave a larger estate to your heirs.

Plus there's always the risk that advances in medical technology might mean that you live a lot longer than you currently expect. Or else the world could go to "hell in a handbasket" due to global warming, WMD terrorism, etc. etc. and you could find yourself "retired" earlier than you expect, or else needing a lot more income in your retirement than seems likely assuming "status quo".

I took a day of work last week to have a medical test done - a couple of hours of "day surgery" was involved. The bill for the procedure was around $500 for the specialist, with the medicare "scheduled fee" being $295.40 for this procedure. This would mean that without insurance I would have had to pay around 15% of the scheduled fee plus the difference between the scheduled fee and the actual amount invoiced. ie. around $250 plus an extra amount for the anaesthetist.

As it turned out my basic hospital insurance policy covered the entire amount, so it ended up costing nothing for this procedure (the test result also came back "normal" which was also a *good thing* . And how much does the insurance cost me? Well, the monthly fee charged to my CC is $148.40 (the amount is reduced by a federal government subsidy for private medical insurance) or $1780.80 pa for my family policy. However, the actual "out of pocket" cost is less than this as there is a medicare levy surcharge of an extra 1% of taxable income if an individual's taxable income is over $50K ($100K for a family). This tax year we wouldn't be liable for the surcharge as DW is on maternity leave an will have little taxable income, so our family income will be below the threshold. However, in most years our family income is high enough to be liable for the surcharge if we didn't have basic hospital cover, meaning that we'd be paying an extra $1250 in tax. So, the "real" cost of having the policy is only around $530 pa ($10 a week). Well worthwhile, especially if any of us ever need elective surgery in a private hospital, such as a hip replacement. (The waiting lists for elective surgery in public hospitals are very high to constrain costs, to private hospital insurance can be essential).

I've bitten the bullet and setup blogger to use my custom domain name "enoughwealth.com" - hopefully my blog will be accessible via this URL as well as still working using the old http://enoughwealth.blogspot.com ! I'll keep copying my posts to http://enoughwealth.savingadvice.com as a backup site - it seems to have attracted higher readership than the .blogspot.com version for some reason, although it has some limitations with what you can do to the blog template over there.

I've also taken the opportunity to change to a new, cleaner template for enoughwealth.com. Let me know what you think. Over the next couple of days I'll be adding in bits and pieces of html code from the old template, to reinsert the NetWorthIQ graph, link list, adsense etc. Hopefully I'll be able to put this all into the side bar without stuffing up the rest of the template (like last time).

Aside from the usual annual domain name rego fee for "enoughwealth.com" (US$14.95 with Dotster) I now have to pay an extra US$10 pa to get Dotster to provide "DNS management" so I could set the CNAME to the required value for automatic redirection to my blogger-hosted blog.

Hopefully using the custom domain will get better exposure than using a subdomain of blogspot.com - and help build readership over time.

Technorati Profile

An article on cnn.com reports that in UCLA's annual survey of college freshman 75% of those surveyed in 2006 thought it was essential or very important to be "very well-off financially.", compared with 62.5 percent who said the same in 1980 and only 42 percent in 1966. What I found most disturbing was that "wealth" was apparently seen as synonymous with the "trappings" of wealth. No wonder these people will leave college with student debt and immediately pile on more debt trying to acquire the "lifestyle of the rich and famous" before they actually have any net worth, let alone become wealthy.

Yesterday DW wanted to drive to the Aldi Supermarket to buy a couple of pakcets of their "cheap but good" nappies for DS2. A good idea in theory, although the petrol and wear on the car makes it doubtful how much we actually "save" by going out of our way to buy these. In practice, a total disaster (from the fiscal point of view).

While there I saw an "Digital Notepad" on sale - basically a clipboard with a 1000 lpi electronic pen/sensor built in so you can write up to 88 pages of notes and then download the images to my PC via USB. Basically I could already do that by simply scanning pages of notes using my flat-bed scanner! Anyhow, it looked cool, and I fancy the idea of wandering around the office taking notes on this high tech toy - so I forked out $140 for one (reduced from $160). Silly, silly, silly me.

I've been doing some research on Self-Managed Superannuation (Retirement) Funds with a view to setting one up for myself, DW, DS1 and DS2 (luckily the maximum number of members in a SMSF is a perfect fit to my "nuclear" family).

The potential benefits of a SMSF compared to my company-selected superannuation fund are:
* can invest in any "suitable" investment (eg. direct shares, index funds) rather than picking from the list of 20 or so managed funds available via my current Super Account.
* saving money on fees - although our employer has arranged for a "rebate" of part of the standard admin fee charged by the Super Fund (so it ends up being around 0.4% instead of 0.95%, plus the managed fund management fees of around 1-1.5%), this is still higher than the $500 pa "flat fee" available from eSuperFund.com.au for a SMSF (eg. on my current Super Account balance of $315K this equates to an admin fee of 0.16% pa)

There are some possible drawbacks though:
* I currently have life insurance via my Super Fund. If I changed funds I'd have to apply for cover again, and, for the amount of cover I currently have ($400K) I'd probably have to pass a medical exam
* As a member of a SMSF I'd have to be a trustee and be responsible for setting an investment policy and abiding by the rules regarding running a SMSF, otherwise the SMSF can lose it's tax-advantaged status. This shouldn't be too onerous though, as I previously acted as an employee-appointed Superannuation Fund trustee at my previous job.

The other thing I have to consider is shifting some of my assets that are currently held outside of Superannuation (ie. my geared investments in Australian shares) into a Superannuation account to save tax. Basically an undeducted contribution of up to $1M can be made before Sep 2007 (due to recent changes in the Superannuation rules) and there won't be any contribution tax. Once held by a Superannuation Fund, the assets income is only taxed at 15% (rather than my personal marginal tax rate of around 30%+) and capital gains are taxed at 10% (rather than half my personal marginal tax rate). Also, once I reach retirement age (65) all withdrawals from the Superannuation account are not taxable under the new rules.

The disadvantages of putting these assets into a SMSF are:
* Can't "borrow" for a Superannuation investment, so gearing is out. However, this isn't a big issue as I'm thinking of eliminating my gearing this year anyhow as the stock market has had a good run for 3 years and will eventually have a "correction" of 10%-30%, not a good time to be geared up. Also, Superannuation Funds can invest in "warrants" which give you similar effects as margin loans, but without the risk of margin calls (but the effective "interest rate" built into warrants is higher).
* You can't "roll" existing stock investments into a Superannuation account without triggering a CGT "event" - so I'd have to pay Capital Gains Tax on the currently unrealised gains in my stock portfolio. If I was just selling off enough of my stocks to pay off my margin loans I could probably offset a large part of the realised gains by selling off all the "losers" in my portfolio.
* I'll have to get all my CGT records up to date in Quicken so I can work out how much capital gains tax I'd be liable for (I have old records up to 1998 in my old Quicken backups, but need to trawl though the past 8 years of transactions to get my CGT records up to date! It's amazing how little time I've had "spare" to do my financial records in Quicken since I got married and started a family!). I wouldn't want to do the transfer till after the end of the Australian tax year (30 June) as DW is on maternity leave this FY and may get some family assistance money if our combined income is not too high this FY. So the "window of opportunity" to make a large (up to $1M) undeducted contribution into Super for me is between 1 Jul and Sep this year. After Sep the max undeducted contribution each FY is going to be $50K, so it would then take 6 years to shift my current Australia Share investment into Super.
* Once assets are in a Super Fund they can't be "released" until retirement (except in exceptional circumstances). Thus, I'll be keeping some other assets outside of Super to act as my "Emergency Fund".

I'm also looking into DirectPortfolio.com.au which offers a managed direct share service, which can be done within a SMSF. I like the fact that they run individual stock holdings for each account, so you avoid some of the unintended tax effects that can arise when investing in managed funds. But their admin/management fee is quite high (around 2%) and you have to pay a $1000 setup fee when open an account with them. The setup fee covers recording all your CGT history if you transfer existing stock holdings to them, so it would be reasonable if I transferred my existing stocks without triggering a CGT event. But if I transfer my shares into a SMSF CGT will have been paid on the date of transfer, so there's no CGT history data required - so the $1000 setup fee seems a bit high in that case. Looking at DirectPortfolios results for their various "mandates" they have achieved around 2.3% above the ASX200 accumulation index for this period, which means they "outperform" by slightly (0.35%) more than the fees are costing. But, they don't provide data on the "beta" of their "mandates" so it's hard to tell if their risk-adjusted return actually outperforms enough to offset the management fee. So, if I decide to move my stock assets into a SMSF I'll probably just sell them off and deposit cash into the SMSF, then use it to buy a Vanguard Index Fund (perhaps their "High Growth" Fund).

Lots to research and think about in the next 5-6 months!

As previously discussed, we bought an investment property in 1999, just when the "boom" in Sydney real estate took off. The property cost just over $400K, and we took out a standard 25-year variable rate mortgage. The property appreciated significantly until 2003, and is now valued over $700K, so we have significant equity in that property. As loan interest on your own home loan isn't tax deductible in Australia (but you don't pay any CGT when you sell it either), but loan interest on investment loans is, we recently converted the loan to a fixed rate 5-year mortgage, so we could maximise payments off our home loan instead. At the same time I also arranged to make use of the available equity via a Home Equity Loan and I'm investing the funds over a period of 18 months a portfolio of US stocks, selected from candidate companies listed on the magic formula investing website. This strategy allows you to put your home equity to work as an investment, but, of course, is fairly high risk so is not suitable for all investors. It will pay off handsomely though if my US stock portfolio performs as well as the long-term average for the S&P-500 and interest rates on my home equity loan average out less than this rate of return. As a bonus, the dividends from the US stocks are fairly low compared to the interest on the home equity loan, and the difference can be claimed as a deduction on my personal tax return. As long-term capital gains in Australia are taxed at half your normal marginal tax rate, this means that I am basically able to reduce the tax paid at marginal rates (up to 48%) on my wage income, and will instead pay CGT at half the marginal rates (ie. up to 24%), assuming I eventually sell the stocks at a profit.

Some recent figures on wealth and income in Australia and Worldwide:

Australia:
In 2003-4 14% of taxpayers earned $62,501 or more
Average Household wealth is $468,000 (median net worth is $295,000)
Wealthiest 20% of households had 59% of total household net worth (average NW of $1.4m)

Worldwide:
In 2000 the wealthiest 10% of the world's population held 85% of global household wealth.
The top 1% owned 40% of global assets, while the bottom 50% owned around 1% of global assets.
US had average wealth holding of US$210,319 per adult in 2000, Japan US$227,600 per adult, Australia US$94,712 per adult. Or, in percentage terms, US had 5.5% of the world's adult population owning around 33% of the world's wealth, Japan 2.7% of the world's adults owning 18.3%, and Australia 0.4% of the world's Adult's owning 1% of the world's wealth.

In the US the richest 10% of the population owns 70% of the wealth, for Japan the figure is the top 10% owing 40% of the wealth, and for Australia the top 10% own 45% of the wealth.

The latest figures show that Australia's wealth is now a record $354,000 per capita, up 93.4% in the past five years in real terms (inflation adjusted). By comparison my personal NW is up 107.4% in real terms over the past five years - so I'm doing slightly better than average. Like they say, a rising tide raises all boats, so it's important to realise that when property and stock markets have been booming improvements in your net worth are almost unavoidable. Don't get carried away and think that you're a great real estate tycoon or stock picker just becuase you've made a profit!

I find that these "wealth comparisons" generally seem to view wealth inequality as an obviously "bad thing", which I don't totally agree with. While it's good to assist the "deserving poor" - be they individuals or countries, I don't think universal wealth equality is a goal to strive for.

Consider ten people who start out with the same background, ability and opportunities. Assume they have similar jobs and earn the same amounts, so that by age 40 each of them has earned a total of $500,000. 1 of these ten people is by nature frugal and enjoys the "simple things" so manages to save 10% of their income each year, invested at 5% ROI. Another 4 out of the ten spend a bit more, so they only manage to save 2% of their income each year. The last five people in the group spend every cent that they earn, thus accumulating no wealth. Where would these ten people be at age 40?

Person Net Worth
1 $52,665
2 $16,533
3 $16,533
4 $16,533
5 $16,533
6 $0
7 $0
8 $0
9 $0
10 $0

So, how does this translate to "wealth distribution"?

Total wealth of this group is $148,797. Average NW is $14,879 (but median NW is $8,266)/
The wealthiest 10% of this group owns 56% of the wealth, while the bottom 50% only 0% of the wealth. Shock, horror - not! All this means is that if you defer consumption and accumulate capital, you'll end up with MUCH more wealth than if you spend everything you earn. This applies to individuals, families and countries. The only inequality that we should try to mitigate is that of opportunity, NOT of outcome.

What I find interesting is that this simplistic model of spending/saving behaviour is a pretty good match of most wealth distributions observed around the world. That is, in any group of people, around 1 in 10 will be very frugal and "save for a rainy day" (ie.PAWs), another 4 out of 10 will try to save and invest, with limited success, and around half the population spends as much as they can.

While I was feeling bored at lunchtime the other day I searched the 'net for info about how my old employer, Hi-com International, was going. It might seem odd that I care, since they retrenched me after more than ten years service, but I quite enjoyed working on the engineering research projects there and would like to see how they've progressed since I left them in 1998. Well, blow me down, if the company hadn't gone broke (put into "administration") and been bought out by a listed company (Ludowici) last September! I checked out this company and they seem to be doing quite well out of the commodity boom, and plan to expand cautiously overseas, so their prospects seem OK. I decided to buy a parcel of shares in Lucowici so I can watch what they do with Hi-com International now that they own it.

Just as it is important for your personal finances, when your running a small business it's vital to establish and monitor your business budget. As the old saying goes, "people don't plan to fail - they just fail to plan". IncParadise.com lists the four most important actions when monitoring your budget:

1. Set targets
2. Keep accurate books
3. Check how your tracking each month
4. Monitor your cash flow

The IncParadise.com Small business blog has lots of other interesting articles and news relevant to small business. Recent post topics include:
* Growing Popularity of Internet Fax
* Extended Deployments Hurting Small Businesses
* Common Branding Mistakes
* Testimonial for Robert Arnal from Citibank
* New Small Business Information Website
* Failure is NOT an Option
* Small Business Tax Help
* The Best Bank For Small Businesses
* Monitoring Your Budget
* Small business managers and owners working 24/7
* Small Business Hiring Up
* Keeping it Legal
* Using Your Workforce Effectively
* Tax Law Changes for Business in 2007
* It’s the little things tucked away

I found this interesting site by accident: Billionaire500 Magazine and must admit the website is very smoothly done and features some amazing "toys" that I imagine would be part of every billionaire's lifestyle.

Yet I somehow can't quite believe any billionaires actually sit down and browse this website - perhaps they get their personal secretary or butler to do it for them?

Easy Change wrote to me with a good question in response to my Asset Allocation post:
"I was wondering if you would be so kind as to talk more about when you started investing and/or what age range you are in at this point in your life. I am coming up on thirty soon myself and I find the whole concept of getting to 100k before then (which is what several pfbloggers are shooting for) to be a huge undertaking."
I think I've covered most of this before, in bits and pieces, but to summarise:

I'm 45, live and work in Sydney, Australia. I have a wife, two young sons, a mortgage and no pets. My personal net worth has just hit one million Aussie dollars. I come from a middle class background, have degrees in IT, industrial math and applied chemisty, and have only ever worked as a "wage slave" - first ten years as a scientist for a private R&D company, and then for ten years as for a market research company - working my way up from an entry level quality assurance role to a junior management position. My salary package is currently $8x,000, but until 2 years ago I'd never been on more than $60,000.

I started out investing by saving my pocket money and earnings (paper round, market gardening, and supermarket shelf packer) during high school into a bank account. When I worked during the Uni vacations (as a process worker in a pencil factory) I saved via my bank account and occasionally invested a lump sump ($1000) into government bonds or unsecured notes from a bank-owned customer credit company (AGC).

I first learned a bit about the stock market doing a Business Economics subject at Uni, which included doing "paper trades". As this course ran in the second half of 1987 it was quite interesting! Once I completed Uni and started working full-time I began investing in Individual stocks (using broker research to choose them), and eventually bought my first investment property.

Over time I learned more about stock selection, minimising brokerage fees and choosing Mutual Funds (for overseas stock exposure) that didn't have exhorbitant fees. Later on I began to use gearing (via margin loans) to offset dividend income with tax-deductible margin loan interest - effectively "converting" current, taxable income into tax-deferred capital gains (which, in recent years, are taxed at half the tax rates of current income).

I sold my original investment property (at a slight loss), as it was in a very poor suburb and tenants proved very unreliable. I swore off direct property investment, but then bought another property after I got married, as my wife wanted to reinvest the funds she had from selling her unit back into real estate.

Recently I've diversified my investmenting to include hedge funds, agribusiness investments (pine, sandlewood and teak plantations) and some wine, coins and bullion. I started direct investment into US stocks last year - trying out the "Magic Formula Investing" method outlined in the "Little Book that Beats the Market".

I'll probably reduce my level of gearing this year, as the stock market has had a very good run for several years and I'm ahead of my projections - no point risking reversion to the mean, especially when using margin loans. I'll also add any future wage rises straight into my superannuation (retirement) account, as by doing a "salary sacrifice" it gets taxed at 15% rather than my marginal personal tax rate. They've also recently changed the tax treatment of retirement income from superannuation accounts in Australia, so that they will be tax exempt. This makes superannuation more attractive than gearing shares or property investments for accumulating assets, although there are some limits to what you can invest in via superannuation, especially if I stick with the company-selected retirement fund, rather than opening a "self-managed" super fund.

I reached $100K net worth by age 30. That was worth more than $100K in today's money, as it was way back in 1991. But it was also easier for me than for most people, as I was living at home still (not paying rent or board), and I had no student debt outstanding when I graduated (I paid the HECS (Uni) fees as I went along. And HECS fees in Australia are only around 25% of the full cost).

My accumulation of net worth over time was covered in a previous post.

Worst investment decisions:

* Spending the money I saved up working during uni vacations on a 10" meade SC Telescope. You can buy one today for about the same price I paid back in 1982, and I've probably only used it for a total of ten hours in the last 20 years. Then again, I always wanted to be an astronaut when I was a kid, so it was worth every cent. I just wish I'd got around to building that observatory up at my parent's farm...

* Spending around $1000 on a Sinclair ZX80 computer and accessories in 1980 - I should have bought some Microsoft shares when they listed instead...

* Buying $2000 worth of an unlisted internet stock (GEN) in 1995, which went broke before it could list on the NASDAQ. If only I'd waited and bought Google or Amazon.com instead...

I continued to build up my "Little Book" portfolio of US stocks with my regular US$5,000 stock purchase of one of the stocks listed by the magic formula investing website. This month I chose Crytologic (CRYP) . Some of my previous picks have dropped considerably, especially OVTI, so my overall portfolio now has around 0% return after deducting buy/sell costs. Taking into account the interest on the money I've borrowed to make the stock purchases, I'm under water at this point. Not that it really means anything - I plan to stick to my investing plan for at least ten years before looking at the average return and volatility to decide if the risk-adjusted return is as expected.

I picked up my new pair of glasses today - $630. It had been four years since my last eye-test and also the nose-piece on the current trendy, frame-less, titanium pair had broken off (titanium is expensive, light-weight, but tends to fatigue and can't be easily repaired). So it was overdue to have a new frame and lenses. The new pair isn't quite as "cool" looking as the old pair, but appears to be more robust, so it may last 5-10 years if I'm lucky. The old pair actually got repaired at no extra cost by the optometrist, so I had a good "spare" pair now.

A minor part of my assets (which I don't even bother including in my Net Worth estimates) is a small wine collection. I don't drink much wine, but I enjoy reading up on the Australian wines that are "collectible" and have bought and stored a few bottles of Grange hermitage, De Bortoli "noble one" and some others. My biggest problem has been not having somewhere to store these wines. I initially did the usual "under the staircase" wine rack thing - but, especially in Summer, this is NOT a suitable location. Even with some insulation and air conditioning the humidity would not be optimum. I've now shipped the wines up to my parents farm, where they have a suitable underground wine cellar area, but I still not to set it up properly and monitor the conditions.

For information about the correct conditions for cellaring your wine collection, and information about available equipment, visit Wine Cellar Equipment.

Back in June I applied online for a $50,000 investment in Macquarie Equinox Select Opportunities Fund - a "fund of hedge funds". I used a Macquarie Structured Product Investment Loan for 100% of the investment amount so I'd be able to take a tax deduction for prepayment of the 06/07 interest. As it was near the end of the Australian tax year I had to do the application online, and I nominated my usual "no advice" Finacial Advisor Service as the financial advisor, so that I'd get a rebate for most of the Funds "entry fee".

Because I hadn't received a rebate cheque by October I contacted the Financial Advisor service to check that they'd received the fee from Macquarie - it turned out that Macquarie allegedly had no record of my advisor details (although I had a print out of my application so I knew I'd provided the correct info), but kindly would update the records and pay the advisor fee if I emailed them confirmation.

Well, today a rebate cheque for $1,200 finally arrived from the advisor, so it was well worth nominated an "advisor" on my application that rebates Fund entry fees! One funny thing about this whole business is that despite the entry fee being deducted from applications, the unit price listed for this Fund has never dropped much below the $1.00 per unit application price. Go figure.

I checked on all my accounts to determine my current overall asset allocation (if it was way off what I want I would think about rebalancing). The Net Worth figure is slightly higher than my usual monthly calculation as this one includes some items I don't normally bother with - bank accounts, coin collection/bullion, and agribusiness investments. The total still doesn't count miscellaneous household items or cars, boats, hovercraft, steam engines etc. (see previous post on "toys"):

Overall Asset Allocation
% $
Assets 100.0% $1,814,373.92
Debts $711,224.31

Asset Allocation:

Au Shares 38.3% $694,875.45
Int Shares 11.6% $210,337.08
Property 41.2% $747,988.85
Fixed Int 1.5% $28,071.17
Hedge Funds 5.0% $90,448.50
Agribusiness 1.2% $22,650.00
Coins/bullion 1.1% $20,000.00

Net Worth $1,103,149.61
LVR (D:A) 39.2%
Gearing (D:NW) 64.5%

Accounts:

Retirement $312,446.13
Direct Property $713,750.76
Margin/Broker $670,449.34
Agribusiness $22,650.00
Coins/bullion $20,000.00
Hedge Funds $50,000.00
Bank Accounts $25,077.69

This year I'll continue building up my "Little Book" portfolio of US stocks, which will increase my allocation to International shares to around 15%. I don't plan to invest any more in real estate, so my allocation to property should drop below 40% soon. In the longer term I'd expect my allocation to drift towards 35% Au stocks, 20% Int stocks, 35% property, and 10% "other". I aim to keep my use of gearing to around 40% LVR (67% gearing).