Author archives: Alex Jamieson

2014 Australian Federal Budget – important changes that affect your finances

Temporary Budget Repair Levy There was a lot of speculation before the budget was announced about the Government’s plan to have a short term levy to help fund some of the budget deficit. The levy has been announced as a 2% charge on taxable income over $180,000. While this will only affect a minority of Australians, it could affect some people who sell investment properties and have a once off significant capital gain and assessable income. If the capital gain puts your assessable income above $180,000, you will face the 2% levy also. Superannuation Guarantee Charge will increase to 9.5% Employers will need to increase the mandatory superannuation contributions to employees to 9.5%, which is an increase of 0.25%. The previous Government’s proposal was that the SGC rate would increase by 0.5% each year afterwards until reaching 12%. The new proposal is that the SGC rate will be frozen at 9.5% until 30 June 2018, and will then increase by 0.5% each financial year thereafter until reaching 12% on 1 July 2022. Choice to withdraw excess non-concessional contributions from superannuation funds This is a positive and what we feel is a common sense budget proposal. In the past, if you contributed too much to your super fund as a non-concessional contribution (after tax) you would be taxed at the top marginal rate on the extra funds. The new proposal is that from 1 July 2013 you will simply be able to withdraw the extra contributions and you will be taxed on the investment earnings on the extra funds at your marginal rate. Increase in Age Pension eligibility age There have been a few changes in the area of the age pensions and social security. The one which received significant press coverage before the budget night was the increase in the age pension eligibility age to age 70 by 2035. The table below outlines the new changes: People born between –

  • 1 July 1952 and 31 December 1953: eligible at age 65.5
  • 1 January 1954 and 30 June 1955: eligible at age 66
  • 1 July 1955 and 31 December 1956: eligible at age 66.5
  • 1 January 1957 and 30 June 1958: eligible at age 67
  • 1 July 1958 and 31 December 1959: eligible at age 67.5
  • 1 January 1960 and 30 June 1961: eligible at age 68
  • 1 July 1961 and 31 December 1962: eligible at age 68.5
  • 1 January 1963 and 30 June 1964: eligible at age 69
  • 1 July 1964 and 31 December 1965: eligible at age 69.5
  • 1 January 1966 and later: eligible at age 70

  Cancellation of the First Home Saver Accounts These accounts had some benefits with Government co-contributions to boost the savings towards the purchase of a house. This is a tough move as the funds must be invested in cash and can only be withdrawn to purchase a house or contributed to super. If you have opened one of these accounts, most of the benefits to contribute to these have now disappeared.   Paid Parental Leave This was one of the Government’s principal policies from the 2013 election and this scheme will come into place from 1 July 2015. The scheme will allow mothers that earn up to $100,000 to receive up to 26 weeks of salary, effectively allowing a maximum payment of $50,000 in total for the half year.   Other changes There have been many other changes, however we have tried to pick a few of the significant changes that could affect your situation. If you have heard other news about budget changes and you would like to know how the changes may affect your financial situation and goals, please contact our office on 03 9077 0277 to arrange a free initial consultation.
 

GARP….. Excuse me did I GARP…..what is it all about?

Last week I spent a week at the University of Nebraska attending an Executive MBA Course on understanding innovative methodologies to evaluate management and value companies. Omaha is the home town of Warren Buffett and the University of Nebraska provides some amazing degrees to study in this field of investing and security analysis.

One of the most interesting parts of the course was where each day we were presented with a challenge to evaluate a particular company with limited facts to determine fair value valuations.  Our results were then compared to what Warren Buffett had paid for the same company.  Interestingly, some of these acquisitions dated back as far as the 1970’s so it provided some fascinating insights.

Over the years, there has been a lot written about the concept of value investing which was made famous by Buffett.  The main idea of this philosophy and approach is to to acquire a share at a discount, or as if the share was on sale! In some cases, one could acquire a share at as much as 20, 30 or even 40% discount to what would be considered its fair market normal price.  This difference largely exists due to efficiencies on the market and human behaviour sometimes being erratic. The traditional value investing methodology really looks to discover companies which are predicable in nature and are steady in nature.  They generally have a reasonable rate of return on capital and are companies which are reliable today and also tomorrow. If you think about the clydesdale horse that pulls the beer cart, it is strong and continues to put one foot in front of the other.  The horse is reliable and each day consistently moves along at the same pace with high levels of certainty so that supply won’t be disrupted by the chosen source of transport.  Generally, the deep value investing approach focuses on traditional industries or areas of business.

The only short fall with this approach is that the companies in a lot of cases are surprisingly in lack of  inspiration and general rates of returns are also representative of these industry.  These industries might be food and beverage products, manufacturing, specialty clothing, banking, insurance etc. The other side of the value coin is knows as GARP which stands for “Growth at a Reasonable Price.”  Essentially it thinks about the similar notion of acquiring a company at either a discount or fair market price that make fundamental sense.

The major difference is that this approach however is seeking out companies which have a higher than normal return on equity or historical higher earnings growth projectors which one can easily forecast into the future. If I contrast this to the clydesdale horse example, this is like a team of dog sled huskies which race across a snow plain.   The most amazing thing with these animals is that they can run all day at a steady state of 20 km per hour.  They also have the ability to carry reasonable loads.  Unlike the clydesdales which plod along, the huskies run with great excitement and enthusiasm. In reviewing both analogies, both forms of transport allow you to get to your end point and both can have varying loads which are specific to their fields of expertise. The difference is that the husky’s rate of pace is in some cases double that of the Clydesdale’s. I think the essence of GARP investing as opposed to deep value investing, really explores some of these industries and companies which are in exceptional areas.  They also have wonderful long term sector tail winds.  If selected correctly, they can also have tremendous rates of returns which in some case double what might be provided from a traditional industry.

Although a GARP company may not be discounted as heavily in the initial purchase, as with the traditional value approach, if the organisation is growing at a significant rate of return over the next 10 years, the final destination point and rate of projection with the impact of compounding can be quite incredible! If you would like assistance in selecting a GARP company or to discuss this methodology further, please speak to AJ Financial Planning in a FREE no obligation consultation.

How Centrelink treat Income Streams from Superannuation

Are you receiving a pension from your superannuation?  Are you planning to apply for the age pension or are already receiving the age pension? If so, there are some important changes that are taking place from 1 January 2015 that may affect you. The current Centrelink assessment works as follows: Presently, when Centrelink looks at your personal situation, they look at your personal assets and the income you receive to determine how much age pension you can get. If you have assets or income above the minimum thresholds your age pension will be reduced by a set amount, until at a certain level (depending on a variety of factors) you will have too many assets or too much income to receive the age pension. Some assets have exemptions, such as your home, which isn’t counted for the asset test. Some income also has exemptions, or different ways that it is counted, for example:

  • Financial assets outside of super such as cash and shares are ‘deemed’ to receive a certain income, rather than you actually recording the income that you physically get.
  • Pensions from income streams have a certain level called the deductible amount (similar to the tax free threshold) where only income above this deductible amount is counted for the income test.

So what will change? Pensions and income streams from superannuation that start after 1 January 2015 will no longer have a deductible amount, and instead, will instead have the income deemed in the same way as other financial assets. Pensions started before 1 January 2015 will be ‘grandfathered’ and treated by the current legislation. What does this mean in practice? With the current legislation many pensioners have only a small amount of their superannuation pension counted for the income test, or even no income counted at all if they draw a smaller income than the deductible amount. Lets put this in an example. Barry is a 67 year old man who has $300,000 in super and he starts an account based pension from super today. Based on his age his deductible amount is $17,657 so only the account based pension income that he draws above this amount will be counted for the Centrelink income test. Under the new legislation Barry’s $300,000 will be deemed to receive income according to the current deeming rules. With the current legislation, if Barry is married the first $77,400 of his financial assets are deemed to receive 2% income, and the assets above this amount are deemed to receive 3.5%. Financial assets include cash, term deposits, shares, managed funds and – with the new legislation – your superannuation funds. So if we simplify things, and say that Barry has more than $77,400 of assets elsewhere then his $300,000 in superannuation will be deemed to receive 3.5% income i.e. $10,500. So how is Barry affected? If Barry draws more than $10,500 + $17,657 = $28,157 from his super fund as a pension he will be better off under the new legislation as he will have less income counted via the Centrelink income test. If Barry draws less than $28,157 from his super fund he will be better off under the current legislation. Every situation will be different, but in many if not most cases, the new legislation will be disadvantageous for pensioners and will result in a higher amount calculated under the Centrelink income test, and a lower age pension received. What can you do now? If you are looking to apply for the age pension in a few year’s time, or if you are currently receiving the age pension, you should consider the benefits of the following strategies:

  • Move assets held outside of superannuation into superannuation if you are eligible to make contributions
  • Look at the possibility of moving some superannuation assets from one spouse to another if this will give a beneficial result under the Centrelink income test
  • Reset your superannuation income stream or be sure to start it on 1 July 2014 or at least before 1 January 2015

Given the complex nature of these Centrelink calculations, we would recommend speaking to a financial adviser before making any decision that could significantly affect your retirement income. We invite you to contact our office on 03 9077 0277 for a free initial consultation with one of our financial advisers to discuss how the new Centrelink rules will affect you.   

What age is the correct age to retire?

Two weeks ago, I attended a medicate specialist appointment with a neurologist to discuss a CT scan of my brain and check everything was ok.
 
Despite his enormous IQ, his bedside manner certainly needed some improving. Lets just say my 4 year old son had better social skills than this medical genius! As I walked into his consulting suite, his opening remarks were a smart statement and question around why was I not retired if I was a financial planner? I looked at him a little surprised as I was there to speak to him about my health rather than discuss financial planning matters. However, I pushed aside my urge for normal pleasantries, as I could tell quickly that he was wanting to engage in some type of banter. So I replied…. …..If I was to retire at my current age, then I would look to sit on the couch for the next 49 years based on my current life expectancy…..that’s a lot of TV watching don’t you think?….I think I might get bored! Thankfully the neurologist didn’t have another smart comment to reply, but it certainly raised an interesting question when it is time to retire?
 
In a couple of weeks time I head off to the annual general meeting at Berkshire Hathaway to hear Warren Buffet speak and provide some valuable insights about the economy and the markets etc. The interesting thing about Warren Buffet’s board of directors is that of the 13 board members Warren is 83, Charlie is 90, David Gotesman is 87, Donald Keough is 87, Thomas Murphy is 88, Ronald Olson is 72, Walther Scott is 82, and the rest are aged between 50 and 60 years of age. Even if I look at the next generation of successful entrepreneurs like Eton Musk who is aged 43 and has a net worth of $8.2 billion, why does he not throw it all away and sit on a couch and watch TV for the next 44 years? The names I have listed above in the eyes of this medical specialist would each have sufficient resources to buy any island in the south pacific and live out their remaining years basking in the sun….so what really causes these people to work when financially they don’t need to?
 
The answer is simple – they enjoy their work! Buffet often remarks that he feels 20 years younger than what is stamped on his drivers license and he skips to work each day!  In other words one could say that he truly enjoys his life’s purpose and has so much more to give! If you are not into the high powered executive life, you only need to travel 10 hours to Japan for another example.
 
The community called the Okinawans are a rare group of Japanese people with more people aged over 100 years than anywhere else in the world. The fascinating finding here is that most of the Okinawans work well into their 90’s doing traditional work like fishing and faring etc. Retirement can be defined (yes I actually looked it up) as to ‘remove’ or ‘withdraw’. As such, is it possible that one might just not want to remove or withdraw from what they do? What if one was enjoying the ride of life and work and didn’t want to get off? Similarly, what if we put this in the perspective of a musician that never wants to stop playing their music and the thought of never playing agin would bring them great sorrow. Are musicians meant to stop once they are at a certain point or certain age? No, its a part of them. Equally for those listed above, working is exactly the same as it is their passion.
 
So next time you are thinking about retirement, you may start to think differently now to the opinion of my neurologist as its only time to retire when you feel its time to withdraw from what you are doing. If you need help too in defining what the next phase of your life might look like, feel free to contact AJ Financial Planning. Oh….by the way, my results came back all clear  – just a false alarm!
 

Go…. no stop… no go, no I mean let me get out!

There has been a saying when it comes to investing, a lot of people expect to do exceptionally well when they first start investing.  The reality with most early newbies can often be a mixed experience and a mixed result, if proper preparation or guidance is not provided.

When it comes to investing in shares, it is always easy to enter with very few barriers.  You can open a basic share trading account and trade for as little as $1 in brokerage.  When a newbie starts investing they think about the millions they are going to make, but few think about the exit strategy and what that might look like when things don’t go according to plan.  The major obstacles in most cases in the psychology of crystallising a loss or potentially being wrong.

A long time ago before kids, when time was plentiful and in no shortage, I used to play golf.  I often found that the game was a great equaliser.  You might hit a perfect round one week and leave the course believing that you had finally mastered the game.  Then, the very next week, you would turn up expecting to replicate the similar magic, only to have a horror round.  As such, the game quickly brought you back to reality.

Investing, if you are not careful, can have a similar impact, particularly if early on you have a wonderful result in a speculative investment.  Immediately you feel that you have the “midas touch” – the ability to turn everything you touch into gold.  I believe it is at this point in time that you need to be most careful with your mental and psychological approach to the market.

We have often seen people take unnecessary and extreme risks with investments, as they have taken a double or nothing approach.

So when it comes to investing, it is particularly important to look not at only your ‘attack strategy’ -how to capitalise on a particular investment, market or sector, but it is equally as important to think about your ‘defensive strategy’ – how will you behave when things don’t go to plan and what should you do.

Sometimes the best defensive play is to simply just remove the biggest inhabitant to minimising loss.  This might be a little hard to take but in some cases it might just be the you, the investor.  When one loses money the investor’s psychology can run wild.  To date, I have not met anybody who is over the moon with excitement when they have made a loss on their investment.  Crystallising this can sometimes be even harder for some.

The easiest way to sometimes combat this is to simply insert a trailing stop loss each time you invest in the share market.  This does two things from an investing perspective.  The first, and most important, is that it automatically removes decision making around if you should or should not get out.  The second is it provides a reset button on your strategy to review and revisit the approach.

A trailing stop loss simply follows behind a share.  If you imagine a dog walking along, the leash is the share price and the dog racing along in front of you.  The stop loss continues to follow along and enjoy the ride.

If the share price turns and then starts to drop you have the ability to exit the position at a pre-agreed percentage.  The other advantage is that you have protected your profit.

Now like most great ideas there are some elements to consider with this strategy.  For example if you have held a stock forever and sitting on a significant capital gain this could trigger a nasty capital gains tax bill, and you might think twice about this strategy.

Alternatively, if you set your trailing stop loss too tight then you may be bounced out only for the position to turn around and head back up.  It is amazing how many people set their stop loss positions at even number such as $1 or $2.

Like all great investment ideas, if in doubt you, might want to speak with AJ Financial Planning to find out a little more of how to implement such a strategy into your portfolio.

 

 

 

 

 

Warren Buffet’s Biggest Lesson

smoke stake

This week I was driving back from visiting a number of clients who live in country Victoria’s Gippsland area.  On my way back to the office, I passed a large brown coal power plant and I started thinking about this sector…….. and in particular…..  if it is a growing or declining industry?

I realised too that there is a lot of parallels between this industry and Warren Buffet’s textile investment. Let me explain….

Warren Buffet’s company “Berkshire Hathaway” started originally as a US textile mill.  He has been quoted as saying that this was possibly one of his worst investments.  The reason being, is that the textile industry whilst cheap at the time of acquisition, was also in a declining industry in the US. Buffet has also famously said “If you get into a lousy business, get out of it….if you are wanted to be known as a good manager, buy a good business…”

Not surprisingly, Warren Buffet eventually closed the textile mill, however kept the name as a constant reminder of his lesson.

There are a number of lessons one can learn from this experience.  The first might be to act very cautiously around a cheap investment or asset.  It is important that the investment has a future and a prospect for growth in the future – otherwise you may find that although the asset is cheap ,it might also be a “value trap” similar to Warren Buffet’s textile mill.

In many ways, this brown coal power factory I was passing by is in my opinion similar, to the textile industry for Buffett.  At some point the alternative power sources will prove more efficient and more cost effective.  In this industry it is not a matter if it will be replaced, but more a case of when will it occur. In other words it is a declining industry.

It does however raise a larger question about the investments which you might hold.  Are they too in a declining sector?  Most people might quickly respond stating “not mine!”,  however since 1900 in the US there are only 3 companies which remain today.  So I believe it is not a case of if your investments will decline, but more a case of when.  Understanding the date stamp on your investments and the future prospects for growth are very important when managing your investments.