Author archives: Alex Jamieson

Do you have to be a “propellor head” to be a successful investor?

When it comes to investing, throughout my career I have been particularly interested in the equation of whether an

Increase in IQ  = An increase in wealth?

When I have spoken to people within the industry about it, I have found that most of them may initially state a resounding “YES”.   When I think about this equation however, I normally place one exclusion on the data set whereby if the wealth was created primarily from entrepreneurial activities, such as your own business, then this person or data would be excluded.   An example of this would be Elon Musk the founder of Tesla.  He is clearly a genius from an IQ perspective and what I would classify as a “propeller head”.  However in terms of the above equation, I would probably not include him in the assessment, as most of the wealth was generated from from his business activities as opposed to his genius investing activities.   As a side note, you may already be aware of research which confirms that as you increase your education levels there is generally an increase in income.  These are broad assessments and broad statements, because we all know the world is full of high school drop-outs who have created multi-million and billion dollar businesses.  However, if you are wanting to play the the safe option with the odds stacked in your favour, then increasing your education is something to keep in mind.   This data set however does cap out, and the basic level of education that we receive in Australia is often taken for granted from a global scale.   Getting back to the above equation however, I was particularly interested to see if when it comes to investing if you have a higher IQ does this result in better investment decisions?   The data set I believe is inconclusive and the we can only look at incidental examples such as the ones below:   Warren Buffett, a famous investor, was once quoted stating “that if an investor had an IQ of 150 points they they should sell 30 points to someone else, as anything above 120 is unnecessary.”  Interestingly Warren scored only C for English and Maths in his high school report card.   The founders of Long Term Capital Management, were hedge fund managers and winners of the Noble Peace Prize in Economic Science for their company to only later fail in 1997 and require financial intervention of the US Federal Reserve whereby the company then went into liquidation.   Today this question still goes unanswered in my mind, but I think the short coming in the equation is that it misses one key element of common sense – something that should be applied to every decision making process.   The realities are, when it comes to investing, regardless to whether or not you are a propellor head, you can leverage from the expertise of experienced professionals.   Here at AJ Financial Planning, we have over a decade of experience in Financial Planning and believe we balance our IQ with a common sense approach to investing. So why not chat to us about your ideas and dreams, and together we can work to achieve them?  

Should you rent or buy a house?

The Reserve Bank of Australia has recently released a report where they have done an analysis of average property growths and rental yields since 1955. The report is called “Is Housing Overvalued?” You can find it here (http://www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-06.pdf) or you can search the name using Google and it should appear. Some of the main points to come out of the report are the following:

  • Property prices have risen in Australia by an average of 2.4% above inflation since 1955.
  • The average rental yield for a property over this time period was 4.2%.
  • The main conclusion is that house prices would need to rise by around 2.9% above inflation for buying a home to be the better financial option.

This is an interesting and thought provoking conclusion but we feel that some important considerations have been neglected that may affect the outcome. Average prices – the report looked at property prices from all over the country. Some cities have growth levels above the average such as Sydney and Melbourne, and properties in rural non-mining areas traditionally have lower growth rates. Forced saving – at least in the early years of buying a home, the mortgage payments will be higher than the rent you would have to pay. In a perfect world you would invest the difference in a portfolio of investments that would ideally achieve investment returns higher than property returns. In reality, very few people have this financial discipline, and most people will fritter away the difference on other lifestyle expenses. Improving the value – you can improve the value of your home by more than the cost by painting and making superficial changes. Stress of renting – the nature of renting means that your landlord can decide that they want to sell the property or move into the property at any time. This will usually mean moving house a lot more often than someone who buys their home, and this can mean greater stress due to not having a sense of permanency. Limited rental options – you can only rent the type of property that is available on the market. Many people buy houses that aren’t exactly as they like and then they renovate to make their desired changes. With a rented house you don’t have this freedom and you are stuck with the property in the state it comes in. So what are our thoughts? We feel that if you would buy a similar property to what you would rent then in the long run you will be better off by actually buying a home. You will have a forced saving plan when you make the mortgage payments, as many people retire with their home being their only significant asset outside of superannuation. You will also benefit from the capital growth and there is a certain satisfaction from owning your own home. Some situations where we feel that renting would be better however, are the following:

  • If you purchased an investment property and you rented. This would be beneficial as you could claim the tax benefits of negative gearing and you won’t miss out on the capital growth of the property market.
  • If you don’t plan to be too long in the one place. The buying and selling costs associated with properties are expensive and if you move around a lot these can add up to a significant amount.
  • If you would rent a smaller home than if you bought your own home. This is especially true for younger people who may live in shared accommodation and pay a relatively low rent, but if they bought a home they may share with fewer people or live alone.
  • If property prices are overvalued. This will ofter be difficult to know, but in some situations such as in the USA around 2005-2006 many people purchased homes only to find the values plummet in the following years.

If you are facing this conundrum of whether to buy or rent and would like to discuss this further with a team of experienced financial planners, please contact us for a FREE no obligation consolation.

BrandZ measures great companies….. but can it also measure great investments?

Which is the most valuable brand in 2014?  BrandZ report each year provides us the answer to this question.   Sometimes when it comes to investing, we forget that the stock price which goes up and down each day is linked to an actual company.  We forget that these companies operates in the real world, and they sell goods or services to people every day.   There are a bunch of groups which release these types of reports, but what I find interesting, is that the companies where people love their product or service, are sometimes the ones which are preforming financially well. The trick I think to some degree, is linking these types of reports, such as the BrandZ report, to investment ideas.   I am always constantly on the search for new investment ideas and I often find some of them come from the most surprising places. For example, when I go out shopping and I come across a store which packed full of people and a buzz of activity, whilst my family goes off looking around the store, I am frantically looking up the company to see if it is listed and what are the investment fundamentals of the company are on my smart phone. Sometimes it might be brands that I am familiar with, and sometimes it might be companies which are new to the Australian market but have been around for years abroad.  I have found these types of experiences always great places to find new and emerging trends – particularly in the retail space.   If I may be looking for a more mature business, then I might also look at the BrandZ report which I have found a great source of insight in a range of dimensions.  Lets look at an example…. In 2014 Google was listed in the top as the most valuable brand and interestingly the stock is up 31% year to date. Not surprisingly, we have had a love affair with this company for a long time.   Now it is important that you don’t get caught up in fads or fly-by-night companies.  Sometimes I am also interested in changes in these reports.  By looking at the historical reports you can see if a brand as moved up the ladder or down.  These changes can also give great insights too.   Like most things with investing it is important to look at a range of variables and not just one in isolation.  Some companies which rank well on the report, might be too expensive or difficult to value.  If they are in the “too hard basket”, I would just cast them aside and then look for the next.  I find the best ones are often the most simple to understand and simple to forecast.   But keep in mind next time you are out shopping and you see a store packed to the rafters with people and excitement. It might cause you to, instead of grabbing for your plastic credit card (whereby incidentally Mastercard is ranked 18 on the BrandZ report), instead grab your smart phone and punch in the company to see if it is listed and whether this might be the start of an exciting investigation into a potential new company for investment.   Like most great ideas, it is important to get professional advice. So if you want to run past your latest great investment ideas with an experienced company who shares your enthusiasm, feel free to contact our office to chat further about your thoughts, dreams and investment aspirations.  
 

Australia’s Retirement Age is headed higher

Australia is set to claim the mantle as the nation with the oldest retirement age in the developed world following Joe Hockey’s federal budget announcement on 13th May 2014. The new plan will see the retirement age for Australians born after 1966 increase from age 65 to 70 and is set to ensure that by 2035 our age pension age will have reached 70. Retirement Pic1 Australia first introduced the age pension in 1909 which was for males aged 65 years and over. At the time, the life expectancy of a male was 55.2 years making the likelihood of receiving a pension quite small. Interestingly 1909 also marked the advent of corporate income tax in Australia so where there’s a benefit payment there’s also a tax!   The qualifying age for the pension today for both men and women is 65 and the life expectancy for men is 80.6 and 84.8 for women. We are living on average 25 years longer than our ancestors of 100 years ago but the system in place & eligibility criteria is very different. Today it is possible for a couple aged 65 years and over to have assets of up $1,126,500 (excluding their family home) and be eligible to receive a part age pension.   There is a key demographic shift taking place in our economy as the baby boom generation closes in on retirement. The ratio of working-age Australians to people aged over 65 currently stands at 5:1. This ratio is expected to decline to under 3:1 by 2050 as the baby boomers reach their retirement years. To give give this some global context, in Japan, a nation widely recognised for it’s ageing population, they currently has a ratio of just under 3:1. The economic reality for Australia is a lack of tax-paying workers to support the social security needs of our baby boom generation.   In addition to our immigration policies to grow the working population, the key strategy of government has been the promotion of a semi or fully self-funded retirement using superannuation as the primary retirement funding vehicle. The tax concessions available for people accumulating wealth inside super and people drawing an income from their super (both pre & post retirement) are very attractive. The maximum rate of tax on investment earnings on assets held within the super is 15% falling to 0% when a person is aged over 60 and drawing an income.   It’s important to note the key difference between the age pension age and the age at which people can access their superannuation for retirement funding. The table below illustrates that most people can access their superannuation benefits from age which is sooner than age pension age 65 (increasing to 70) Retirement Pic 2 Your AJ Financial Planning adviser will be able to assist you to not only maximise the tax advantages of your super assets, but also structure your affairs to provide maximum lifestyle & income flexibility both while building wealth & when drawing an income in retirement.                 

How to know if a Self Managed Super Fund is right for you?

The Self Managed Super Fund (SMSF) sector is the fastest growing part of the superannuation industry as many Australians are choosing the ‘do-it-yourself’ route of an SMSF rather than your more traditional personal superannuation accounts and platforms. If you are considering a SMSF there are a few things to consider…. Is my balance high enough? Technically there is no real minimum for starting a SMSF, but in saying that, the ongoing costs make it an uneconomical option for lower balances. So what should my minimum balance be to start a SMSF? This question really depends a lot on what your accountant charges. Every year your SMSF needs to pay a $321 fee to the ATO which is a fixed cost. You will also need to pay for an external audit (that your accountant will usually organise) and your accountant will need to complete the annual reports and tax returns. These can cost anywhere from as low as $1,000 for a very simple SMSF to as much as $5,000 for more complex SMSFs with high charging accountants. Things that affect the accounting cost for an SMSF include:

  • Number of transactions in the SMSF, both in the cash account and in relation to purchases and sales
  • Number of different investments
  • If your accountant is able to automate transactions and reporting by having managed fund platforms or dividend recording software
  • If you are drawing a pension form the account
  • If you are contributing to the account
  • Type of investments e.g. property investments can be more complicated

So back to the question of how much do you need to justify the accounting costs?  Fees on superannuation funds typically range from 0.5% – 2.5% per year. To keep the numbers simple, if your current super fund charges 1% in fees and your accountant will charge you $1,000 to do the SMSF accounting then you could justify an SMSF with a balance of $100,000 or more. If your accountant will charge $3,000 and your current fund charges 1% then you probably want to have around $300,000 in super before the SMSF will be a cheaper fee option. Are you prepared for the responsibilities? With a SMSF you will be responsible for the decisions relating to your investments and for the ongoing compliance of the fund. If you are the type of person that just wants to let their super sit there and not look at the investments more than once a year, then a SMSF may not be for you – unless of course you use a financial adviser to manage your SMSF for you! So if you like to take control and take an active part of managing your money (with or without the assistance of a financial adviser) then a SMSF can provide this for you. Will an SMSF give me something that my current super fund can’t? If there are specific investments that you want to access, a SMSF is often the only realistic option for you. If you want to use funds in your superannuation to purchase direct property, direct international shares, precious metals and other non-traditional investments, you will usually find that you need to set up a SMSF. If you are happy only investing in managed funds with perhaps a few direct Australian shares, then you can often achieve the same result with a personal superannuation fund that has these options. For larger balances there may be a cost saving even if you are going to invest in managed funds and Australian shares, but you will have to do the sums. Still not sure if an SMSF is for you? If you would like one of the financial advisers from AJ Financial Planning to assess your personal situation and discuss whether an SMSF is appropriate for you, please email info@ajfp.com.au or give us a call on 03 9077 0277 and we can organise an initial meeting for no cost to you!
 

Just do it….Buy it now pay for it later…There are some things money can’t buy, for everything else there is a credit card…

The above terms are classic marketing tag lines which have been hammered away at people for decades now.  The interesting part is that from a consumption and consumer point of view, it has structurally changed the way we spend. The thoughts of patience, perseverance and sacrifice/trade offs in today’s world are mostly considered negative terms.  In some regards, these might be considered traits possibly of the past or conjure up thoughts of frugality which for some maybe uninviting ideals. What is of particular interest, is that the instantaneous consumption patterns now seem to have also been filtering into the investment world as the approach people take with day-to-day investing. Let’s look at one example which is the average holding period for an investor when they acquire a share.

  • In around 1960 it was around 8 years the average holding period
  • In around 1970 the hold period reduced and was around 5 years.
  • In around 1980 it was around 3 years
  • In around 1990 it was just over 2 years
  • In 2000 it was around 14 months

–  Today the current holding period of a share is around 6 months The above figures I find particularly interesting on so many levels. One of the most valuable pieces of insight from this data could be potentially the inefficiencies that this might create in the share market. John Templeton, a famous investor, statistically believed that on average you needed to hold a company/share for around 5 years to allow a missed priced investment to come to full realisation. We often too find that some of our greatest ideas may percolate for 8- 9 months doing very little and then break out upwards in a wild rush of excitement when the market realised they had misplaced this company.  In some cases the time period can be even longer stretching out years, and yet the price adjustments sometimes leaves me scratching my head thinking “why did they not see this earlier?” In reality, most investing in growth-based assets, whether it be a share or property, tend not to operate like a bank account which credits interest each day.  Most growth assets move in surges and periods of rest.  I guess somewhat similar to life and how a human operates in that we move then we sleep. With investing, sometimes it comes back to also thinking differently to the general herd.  This unfortunately requires patience and perseverance and sometimes sacrifice with a savings plan or retain capital in an investment that is building for tomorrow, as opposed to spending the capital or cash today. Like most great ideas, holdings periods need to be considered with the greater global framework and market place.  Sometimes shorter holding periods may be appropriate if there is upcoming drama or uncertainty.  A well structure approach however gives consideration to balancing these elements. If you would like assistance in creating your investment portfolio, we would like to help with a free no obligation consultation.