Australian Super’s Elephant Gun Problem

Back in 1987, Warren Buffet made the following statement in a letter to Berkshire Hathaway shareholders: ‘Our basic principle is that if you want to shoot rare, fast-moving elephants, you should always carry a loaded gun …’

Before you gasp in horror, the elephant he was referring to was a metaphor for the purchase of a large business, and the gun meant having the available cash to transact quickly when others cannot, or if there are concerns about the future due to economic uncertainty (such as a share market crash). Historically, Warren has been able to secure such purchases on very favourable terms and a large number of them have proven to be very profitable.

In his letter he went onto say: “If we find the right sort of business elephant within the next five years or so, the wait will have been worthwhile.”

More recently Warren has routinely explained to shareholders at Berkshire Hathaway’s annual general meetings and at media interviews that as a company gets larger, it becomes harder to outperform the market. The company’s 2018 annual report valued its portfolio at around US$172 billion. Yet one only has to look at Berkshire Hathaway’s share price to see it has underperformed on the S&P index by around 15.28% over the past five years. So it would be fair to wonder whether the company is starting to come under some pressure for its performance. It is unclear if this is a long-term trend, or simply that the market has not had a crash for a long time, to allow Warren to deploy his elephant gun.

In portfolio theory we talk about the law of large numbers, and the main reason fund managers that are providing “active management” understand their limitations with the size of assets they actively manage. In a lot of cases, the good ones simply close the fund to new investors at some point as the fund cannot handle unlimited amounts of capital.

There are a few reasons why this law persists in our industry. The first has to do with position size. Let’s take a portfolio worth around $1 million. If you purchase an investment option worth around $10,000 and it goes up by 30%, you might say ‘Hey, what a great return!’ Well, not really. You just gave yourself an administrative stomach-ache. The return, although good, only moved up the value of your fund by 0.3%. As the size of the portfolio gets larger – say $150 billion plus – your ability to buy a large enough stake to make a worthwhile return gets harder and harder.

Another aspect of this law has to do with being able to move capital around in the portfolio. With such massive position sizes it can sometimes take six to twelve months just to sell out, which creates some questions about being nimble in a quickly changing market.

The third reason has to do with inflows. Each year a huge amount flows into Berkshire Hathaway from dividends of listed companies that Berkshire Hathaway owns and all the profits from the private companies they own too. Warren’s company needs to allocate this into existing or new investment options. This growing cash pile can make the situation worse: when there is too much cash not being deployed effectively we call this ‘cash drag’ because it can create a drag on performance returns.

So, what does all this have to do with Australian Super? Well, as at 30 June 2018 this super fund provider reported that they had about A$140 billion or so in funds, which they manage on behalf of members. They also have a huge amount in super contributions coming in, which they need to allocate each year to investment options.

The larger the super funds become should mean some increase in economics with hopefully cheaper fees in the long term based on economics of scale. This would normally be one of the selling points of increasing its size. However, it appears Australia Super did not get this memo, as they had close to doubled their administration fees by 30 June 2019.

The reality is that as these super funds get larger, they start to push the limits of what they can do as an outperformance fund and may simply just track or underperform the respective indexes. It will be just a case of time to see if this plays out.

As you can see, if your money is being lumped into a large pool and yet you are looking for an active management approach, you start to see a clash with these two strategies in the longer term.

So the next time you are thinking about selecting your investment options or a superannuation fund, it is important that you seek quality advice from a practising financial planner and of course, I recommend AJ Financial Planning.

When does a brand lose authenticity?

For some time I have been thinking about the following equation and asking myself, does it hold true?

increase business size = lost authenticity

Recently Suzy attended the VidCon industry event, which is held in LA each year. Around 30,000 people attend and this is pretty much the largest industry YouTube event in the world. As a point of interest, YouTube is owned by Google, and the reasons Suzy was there on AJ Financial Planning’s behalf was to get some insights on the latest trends in media and marketing, market insights, and new investment ideas in areas of growth.

With YouTube attracting around two billion views per day, there are a lot of eyeballs interested in this streaming platform.

Whenever we get boots on the ground to track down new ideas and insights from time to time, I particularly like to look at side issues or missions that relate more to business, and where things are at and where they are headed in specific areas. In the past we haven’t reported on the information gathered, but this time I want to share some of the interesting aspects of our findings as something a little bit different from our normal market and finance information.

I told Suzy that my particular interest was in a business located in sunny LA in the coastal town of Costa Mesa, which is close to Huntington Beach. It’s a small jiujitsu academy called Art of Jui jitsu (AOJ). You might ask what does jiujitsu have to do with financial planning and taking care of my investments? Fair question. Well, for me it was more how AOJ is being run. The building where it’s located is classic 1950s architecture, which I have a soft spot for, and a unique selection for a business premises. The business’s branding is refreshing and clean, the studio fitout unique and simple, with wellselected artwork. In reality, this was no ordinary dojo. We were interested to see if these themes could be extended to other businesses, and how the elements had come together.

Now Suzy just made a simple call to the AOJ operation and indicated that she wanted to drop by just to see the place from an architectural and design perspective. She mentioned that she had come all the way from Australia and the person she spoke to sounded happy and surprised. They were also very welcoming. I refer to this as a test of the Aloha spirit of a business, a term from Hawaiian culture.

Upon Suzy’s arrival there was a small team of staff who warmly greeted her. Suzy noticed that the design of the dojo is influenced by feminine energy, with a white design that is unusual in what is generally a masculine environment. It was welcoming and had a unique twist, blending both feminine and masculine energy within the environment.

Now, a normal, oldschool type of entrepreneur would try to franchise this idea, or scale it up around the US and the rest of the world to make millions!

Thus comes the question: by doing so, would you lose the magic of this experience and would the authenticity be diluted with scale? Would this business’s Aloha spirit be lost each time it was duplicated?

We know that a copy of a copy is never as good as the original. If you have thousands of people running these facsimile businesses but with different agendas, at what point does it get too difficult to get everybody on the same page? After all, a great concept can only take you so far.

More importantly, though, is it okay for this business to just be as it is and not become a massive empire?

The authenticity of a company transcends not just the fluffy stuff people see in the media; it is the fabric of the company and at some point, I wonder if growth will cause cracks in its structure?

So for any budding entrepreneurs thinking about growing their business exponentially, I wonder at what point does the successful formula start to break down or does it ever break down?

As for Suzy and her experiences at VidCon, stay tuned! We will have more on her insights on this and possible investment opportunities too!

With interest rates close to zero, should you still invest in fixed interest?

In the past, portfolio theory was fairly simple. To work out how much you should allocate to growth-based assets, you simply used the following formula:

100 – your age

The result was the percentage you should have in growth-based assets, and the balance would go into fixed interest/defensive assets. So if you were 30, you’d have 70% growth-based assets, and 30% fixed interest/defensive assets. Simple!

These days things are a lot more sophisticated, with detailed behavioural finance profiling based on an investor’s unique attitude to money and investing, to maximise and optimise their asset allocations.

Most investors today are likely to have some exposure to fixed interest investments depending on their individual mix. But what happens when interest rates fall close to zero? In this case a fixed asset class is simply not going to provide a return, so in the longer term should they drop this exposure from their portfolio?

If we think about economics in simple terms, typically a central bank will increase interest rates when times are good, and drop them when times are bad or there are economic concerns that warrant movement.

So, what is happening right now? Well, as the RBA is continuing to drop the rate, it may be wise to be a little cautious: they could be expecting some drama in years to come. Then again, these cautionary measures might serve to nullify this potential drama.

With interest rates at ultra-low levels, investors might be tempted to simply move funds out of the fixed interest or defensive asset classes, and chase growth or higher yields in other areas of the market.

At the time of writing this article, we can see this happening right now: term deposit investors are dumping their safe investments, opening stockbroking accounts and flocking towards the household names that have historically yielded high dividends.

This is why we are currently seeing a ‘pop’ in prices in this high-yield space, as capital transitions towards these asset classes.

We think this is might end in tears.

At some point, we suspect this spike will normalise, and then reality will set in. Investors who have bought into this area will likely see a share price adjustments reversion, which will likely offset any high dividends they might have received.

One of the biggest risks you face as an investor is being tempted into moving into a higher category of risk to chase higher returns, during a period where you might be needing to be more conservative.

On the bright side, at the moment there are a few areas of the market that still provide a reasonable return on fixed interest and defensive assets, but I suspect this window will close within two years’ time as the market catches on.

The reality is, if you’re holding onto that term deposit thinking things will get better, looking at the 10-year bond yield, which is currently paying 1.28% p.a., unfortunately it’s pricing in only one interest rate rise within the next 10 years.

As we all know, a small piece of economic news can change things dramatically, but at this stage the market is not predicting higher interest rates anytime soon.

Like most things to do with finance, this is a fairly complex area to navigate. Deciding exactly where to head to maintain your asset allocation weighting and keep the protection levels at a suitable level can be tricky. And although everyone’s situation is different the portfolio theory, which is based on hundreds of years of positive interest rates, will be challenged. So we do need to be thinking about these issues today – before any opportunities are vaporised.

So before you jump in and try to work out for yourself which way to turn to capture the moment, we would recommend that you speak with a suitably qualified, practising financial planner and of course, I recommend AJ Financial Planning.

Are your super fund’s directors acting in your best interest?

Members of superannuation funds aren’t entitled to vote on who the directors are. In fact, as a member, do you have a say on anything to do with your superannuation company? Who runs it; how it is run; the direction in the organisation is headed?

The answer is no. The only option most of us have is to vote with our feet: either select another investment option, or select another superannuation fund.

So, does this mean that super funds and the way they are run is less like a democracy and more like a dictatorship?

This question is somewhat interesting. Let’s delve deeper.

The trustees and directors of your superannuation fund should be acting in your best interest and those of all its members. Yet surprisingly, many fund trustees have never asked their members to vote on issues that have a direct impact on them financially.

This month, AMP Superannuation Funds was in hot water with APRA, which subsequently imposed directions and conditions on AMP Super due to potential concerns about its conduct. Did they act in the best interest of fund members? At this stage, it is unclear what the findings will be.

Some super funds do conduct surveys to find out what members want. Media Super mentioned in their 2018 annual report that they had surveyed their members.

This raises yet another question: is a survey different to allowing a member to say, ‘Actually, I disagree and I vote that this board member should not be re-elected’?  A vote can be legally binding and has a lot more power than a ‘How are you feeling about us?’-type survey. Isn’t it about time members have a real voice via a vote?

You may wonder why this is important. It is. Let me explain further.

On 1 February 2019, the Australian Financial Review reported that Media Super had invested in a collectable 429-year-old violin (see our recent blog post https://www.ajfp.com.au/2019/02/15/how-can-i-tell-if-my-super-fund-provider-is-in-financial-difficulty/). As a result of this ‘unusual’ investment, I became interested in the directors of Media Super, and how are they handling the best interest of, and duty of care to, its members.

So, who are the directors or Media Super and why is it of concern? Reading their website, it calls itself the industry ‘super for creative people’ and is focused on the ‘print, media, entertainment and arts professionals’. Their annual report is full of colourful pictures depicting these professions.

It would make sense that the directors also have backgrounds in at least one of these industries, and to ensure the board is fairly balanced from the point of view of skills, capability to perform the role, and experience in different sectors of the industry.

Looking at page 49 of Media Super’s 2018 Annual Report, if my interpretation of this information is correct, it is interesting to note the following:

  1. In 2018, the fund had 12 directors with four alternate directors.
  1. It looks like the AMWU (Australian Manufacturing Workers Union) may have held three of these directorships and the union was paid directly $128,891 for these four seats on the board at $42,963 per person for six meetings per year, with the proceeds all going back to the AMWU.
  1. Of the 12 directors, only four of them were women.

You might ask why is this a problem?

Firstly, I am confused what a manufacturing union has to do with “… media, entertainment and arts sectors and works…” I can see a somewhat-vague link with the print industry, but that is just one small part of the industry as a whole. 

The questions this raises are: does the AMWU really need to have four people on the board to voice their opinions on this organisation; and is there an appropriate level of board diversity, both in terms of male/female ratio and also the range of backgrounds and expertise?

The annual report does not really go into any detail to explain this board composition, or how and why it is servicing its members.

Page 32 of the Annual Report displays the sectors represented and the stakeholders that Media Super has identified. There are 28 organisations from the media, entertainment and arts sector, but the majority of these groups seem to have no representatives on the board. Why is this so?

This throws up yet more questions, which could apply not just to Media Super, but to superannuation more broadly:

1. Is this board stacked?

2. What about gender equality on board positions?

3. Are the directors from a range of backgrounds, skills and experience?

3. When do I get to have a real vote about what is going on with the super fund and its directors?

4. Do I really want to put my life/retirement savings with this group and be a part of this fund?

For some people, the answer to this last question might be a resounding yes! For others, maybe not.

As I mentioned, on the back of the Royal Commission these are just some of the issues super fund boards are facing scrutiny over. A large number of super funds might find themselves having to take a long, hard look at themselves on these and other matters surrounding best interest duties.

If you own a self-managed super fund (SMSF), this is less of a problem and I guess this is why more people are thinking about this option. They are getting fed up with the present arrangements and looking to take control of their own super. Equally, other people are happy to go along with the current arrangements.

Like all things to do with super, it is important that you critically consider the fund you are in and what exactly is going on with your superannuation including fees, performance and ethics, too.

Keep in mind that SMSFs are not suitable for everybody. You need to meet a range of criteria before you can set one up and there are ongoing requirements.

Like all great investment ideas, it is important that you seek professional guidance from a practising and qualified financial planner, and of course I recommend AJ Financial Planning.

 

 

1 Media Super, Our Community, https://www.mediasuper.com.au/about-our-community/super-creative-people, accessed 24 June 2019

2 Media Super Annual Report 2017–2018, https://www.mediasuper.com.au/sites/mediasuper.com.au/files/msup_54061_yearbook18_web_final.pdf, accessed 24 June 2019

3 Ibid.

A new way to beat Centrelink’s Age Pension assets test limit?

Centrelink’s changes to the Age Pension assets test limit in January 2017 cut off access to the Age Pension for many retirees, when the maximum value of assets owned to obtain the age pension was reduced.

If you’re a retiree and this affected you, you are probably still seething about it. Or, if you are about to retire, you might have only recently discovered that you exceed the asset test limit.

Well, 1 July 2019 might just turn out to be the answer to your problem – provided you are smart with the structuring of your financial position.

Let’s recap quickly. Back in January 2017, the Australian Government decided to reduce the asset test limit that Centrelink uses to calculate eligibility for the Age Pension, from $1,175,000 to $823,000 for a couple who own property. For a property owner who is single, this went from $791,750 to $547,000. Note, however, this asset test limit excludes the value of your primary residence and since then, the asset test limit has been indexed, so today it’s sitting a little higher than these amounts.

For a lot of people who sat close to these limits, they lost access to the Age Pension. The government did provide some grandfathering relief, with a cut-back version to try to prevent Armageddon for retirees, but anyone else just turning the qualifying age for the Age Pension was left in the dark.

Let’s jump forward to 1 July 2019. What’s about to change? Well, the government has amended its superannuation and tax legislation, and part of the new measures that have been released include a range of options for retirees with retirement income streams.

Like most things, with changes to superannuation, old ideas have an uncanny habit of reincarnation. Here’s an example: The Transfer Balance Cap of $1.6 million introduced on 1 July 2018, was really just a new version of the old Reasonable Benefit Limits, which used to be in place back in the pre-Howard era – with a few variations.

Today, the asset test exemptions with the Age Pension, which back then applied to guaranteed lifetime annuities, is making a comeback with a fancy new name: ‘Pooled Lifetime Income Streams’. Welcome back, old friend, it is like it is the year 2000 all over again!

Now like any reincarnation, or as any great tech entrepreneur will try to convince you, this time is it is ‘new’, ‘improved’, and ‘different’. Not really. To be honest we liked the old version, but like any Apple or Microsoft upgrade, we learn to live with the new version, despite transition frustrations.

So, what does this all mean?

  1. If you sit close to the Age Pension asset test limit and you invest a portion in one of these new, bright shiny ‘income streams’, then this could allow you to claim a 60% reduction of the Age Pension assets test limit, depending on a range of factors that you need to meet.
  1. Will this income stream product ever expire? If you manage to hang around as long as one of my favourite sea creatures, the sea turtle, who lives up to 150 years, you will continue receiving an income stream that massively outweighs the money you spent on buying this product. The money just keeps coming in the door and never runs out. We might not be able to match the sea turtle in terms of life expectancy, but if you do have a history of longevity in the family and are likely to live longer than the average life expectancy age, this might be a worthwhile consideration.

So, what are the downsides? Any money you put into this product you may end up saying ‘Adios’ to; it is likely you will never have access to this capital again, and your estate will receive zip too. So there will likely be a need to balance these combined objectives.

The great news is, there are some solutions.

Like any great newfangled investment product or idea, it is really important you don’t dash out and try to do this yourself. This area of investment is incredibly complex and a massive amount of modelling and analysis needs to be done. So before you jump into a change in strategy, I recommend you dust off that Y2K era Motorola Razor mobile phone and give AJ Financial Planning a call.

How to beat Labor’s proposed changes to the franking policy and stick it to the man!

The media has been a flurry recently about Labor’s proposed changes to franking credits. There has been public outrage over this, and the sad reality is that this policy will have little impact on the uber-rich; those most affected will likely be the same group of people who lost their age pension a few years back when the asset test limit was changed. You can start to understand why retirees are fed up.

Australia’s franking policy is unique by global standards. Many Western countries simply don’t  have a franking credit policy. Consider the US, for example, where companies pay a set rate of company tax, then push out their dividend and the shareholder pays the full rate of tax again on any income they receive from the dividend, without any consideration to what the company has already paid. The US government holds out both hands and says thank you very much to the company and the shareholder for this double taxation.

To my mind, Australia’s franking credit policy is equitable, but it has resulted in the Australian market becoming distorted around a company’s dividend policy. This has resulted in Australian companies paying out much higher dividends than we might see in overseas markets.

Let’s look at an example: If you take the Australian iShares Core S&P/ASX 200 ETF, the historical dividend yield at the time this article was written was 4.31%. Compare this to the US share market, which says the iShares S&P 500 ETF is around 1.80%. You can start to see the difference resulting from the franking credit policy.

To be clear, Labor’s proposal is not to remove the franking credit system entirely, but appears to be considering removal of the refund aspect for people who are potentially ineligible for Centrelink benefits and earn less than $80k in taxable income.

Politicians think about borders and territories as a closed loop, the modern world however is a lot different. In Australia, capital sees no such barriers. Presently, Australian companies are taxed at around 27.5% – some less depending on which ones are doing the Irish loop and those marketing department wink-wink in Singapore. This is the potential franking credit which the rate of tax a company pay that might be tossed out the door into the political coffers if the changes come in for some people.

As they say, when one door closes another one opens – so what are the options available to Australian shareholders?

So, what to do? Well, any self-respecting capitalist would take their money and tell the government to stick it! You can simply say you know this is unfair, take your bat and ball, and until it changes go play elsewhere.

But go where? Well, the EU’s commission in their digital tax plan looked at global digital businesses such as Google, Amazon, Facebook, etc., and found that they pay an effective tax rate of around 9.5%. This is much lower than the 27.5% business tax in Australia …

I can hear you saying it already: “But the dividends paid here in Australia are deliciously high and overseas they are so low!”

Let’s “compare the pair” as the super industry funds famously suggested.

Imagine it’s early 2009 around the bottom of the GFC crash – that’s a fair starting point, when the mighty Commonwealth Bank of Australia shares fell as low as $28.98. Since then, it has increased to a whopping $71.66, an increase of 147%. Remember to also add all those luscious dividends that shareholders received along the way of 6%–8% p.a.

Now let’s compare this to a company that pays a 0% dividend. Instead, they plough the funds back into their company to grow it into the future at a particularly high rate of return, or to instigate buybacks of shares to reduce the number of shareholders when the share price dips below fair value of the company.

So, which company to choose? Let’s go with Amazon. It was battered by the retail crisis during the GFC. At that time, the share price was around USD61.70. Today, however, Amazon shares are worth USD1,627. This works out to be an increase of around 2,536% over the same period.

Instead of receiving a dividend, as a shareholder you could have simply just sold down a little bit of the shareholding along the way as you needed the income. If you are a retiree in the pension phase and under the $1.6 million cap limit, there’s no capital gains tax so this income would potentially be tax-free.

Yes, you gave away a little bit on lost income tax paid by the company, but on the bright side you received a better return with an organisation that might be going places.

Remember, often a high dividend-paying company really represents low growth opportunities. They decide they can’t use the money to grow, so they give it to their investors instead!

Naturally there are ethical considerations with this approach; some might be upset about becoming a shareholder in a company that pays a low tax rate and is therefore not paying its fair share. Others might have issue with the uneven playing field aspect – that larger companies have an advantage over the smaller players. There are always alternatives and other options for investment.

This is just one great investment idea that AJ Financial Planning has in mind to combat such a legislative change. We have many more up our sleeves if these changes go through.

It is important, however, that before jumping into the deep end to devise such a strategy, or even think about buying any of the shares mentioned in this article, you should speak with a professional, practising financial planner as there are a range of complexities to consider. Of course, I recommend you contact us at AJ Financial Planning.

How can I tell if my super fund provider is in financial difficulty?

I recently reviewed Media Super’s Annual Report after reading a media article that reported them purchasing a 429-year-old violin as an investment. I thought this was an odd investment for a regulated super fund. Was this a responsible decision given the opaque market of collectables and the high transactional costs associated with such investments? And, how did this get past APRA? It triggered me to investigate Media Super’s investment policy.

At AJ Financial Planning, we spend a lot of time digging around in annual reports so I decided Media Super’s might provide some insight in their investment strategy.  Despite being pretty heavy documents, annual reports traditionally follow a simple format for listed companies. However, I soon realised that Media Super’s report was particularly different to that of a normal listed company.

Whilst looking for the investment report, I noticed that all the financials for this company were crammed into page 78 of the 80-page document. The report also bundles members’ assets in with their financial positions, making evaluation of the fund’s business achievements and solvency even more difficult to accurately determine.

As I read the report, I could not help but wonder why this financial information wasn’t featured more prominent in the earlier pages of the document. After all, an annual report is supposed to provide peace of mind to members of the super fund that the business is solvent and operating in an appropriate manner.

So, where does Media Super’s business really sit? Here is an extract of the profit and loss statements from this report from their 2018 annual report.

As you can see, there is not a heap of detail, but I noticed that the fund, not the members, appears to have made a loss of $14,896,000 in 2018. I went back and looked at the 2017 report, and this recorded an even larger loss of $20,966,000. Looking at these numbers, I would have thought the directors would want to spend some time explaining these losses – if they have been perhaps misinterpreted in some way.

Media Super has reported however that they have $40,099,000 in net assets, in addition to the trustee operating account, reserves and operation risk reserve, so they are not about to run out of money tomorrow.

But it does raise a more serious question about the regulated format of the annual reports a super fund produces and the role ASIC and APRA have in evaluating if the reports provide members with enough necessary information about the solvency of the company and also the performance of the fund’s investment choices.

So next time you are considering switching or looking at your super fund provider, you might want to look beyond the investment returns of the fund and think about whether the provider is actually making a profit or loss. Equally, it might also be a concern if the fund appears to be too profitable, as this could be an early warning sign that they are gouging their members’ contributions.

Like all great investment ideas, it is important that you seek professional advice from a practising financial planner before making any changes to your superannuation fund and, of course, I recommend you contact us at AJ Financial Planning.

What next for Australian property?

There have recently been many articles in the media regarding changing property prices. Unlike shares, which can be accurately tracked day-to-day, property is historically an opaque market with less visibility on price movements. However, over the past few years computers with sophisticated programming have been able to track property markets more accurately and provide an increasing level of transparency. This has led to a range of property research reports providing up-to-date information on the markets and as a result, this information has flowed through to media publications reporting ‘booms’ and ‘busts’ that now rival the extremes previously associated with the share market.

Over the years I have often heard people say, ‘Oh, property always goes up’. So, when this recent downturn occurred it might have come as a surprise to some. In fact, these days we are reading or hearing about people who have purchased property, held onto it for five to 10 years, and seen little or no capital growth. And this isn’t just in one market; it’s in growth corridors, large high-rise developments, in different states and territories, metropolitan, regional … Clearly, the good old days of property being a ‘sure thing’ are now long behind us.

The graph below shows ‘Real Residential Property Prices for Australia’.

As you can see, we have experienced downturns in property for the following periods:

1. Q4 2003 – Q3 2005

2. Q4 2007 – Q1 2009

3. Q2 2010 – Q3 2012

4. Q2 2017 – ???

Interestingly, most of the pullbacks have lasted on average around two years. Historically, each pullback has ranged between –3% to –8%. And as household debt levels have slowly risen over time, so too have the more serious repercussions of the downturn for homeowners. It’s worth remembering that the most valuable lesson in leverage is that it can magnify the upside, but also the downside. Early drawdowns were around 3–4%, while more recent ones have been around 8% as household debt has spiralled upwards.

In recent times, we have been alerted to a reduction in borrowing capacities. This was first reported earlier this year by UBS analysts, as banks slowly changed their borrowing assessment methodology to consider individual spending patterns rather than applying a basic assumption of living expenditure. This has led to a potential reduction in borrowing capacities of around 20–40%, to around 80% of the mortgage market being serviced by the major banks.

So, what does all this mean? Well, a person on a gross income of $150K can now borrow around 34% less than before, and is effectively limited to a loan of around $538K.

Coupled with the impact of a slowing source of overseas buyers, we can see why recent moves in property prices have taken place.

How far will this drawdown go? Well, each state, city, region or suburb is unique in its own price movements; however, I would not be at all surprised if we find these overall figures continue to at least a 10% drawdown before this latest down-cycle is complete.

It’s important to realise that in property, as in all markets, a pullback doesn’t mean there won’t be opportunities. It is likely, however, that simply throwing money into the property market with a view to making a profit is going to be more challenging. We need to be a lot more selective in acquiring property and also the decisions we make around the timeframes for holding periods.

Like all great investment ideas, before you consider purchasing property, it is important that you seek out and obtain profession financial planning advice from a practising financial planner and, of course, I recommend AJ Financial Planning.

Does your retirement super need to be ‘Zengosaidan’?

I often like to read ‘peculiar’ books that give me some insights into different ways of thinking. I recently came across a book review in The Monocle Minute. It inspired me to buy the book: A Monk’s Guide to a Clean House and Mind by Shoukei Matsumoto (Penguin Books 2018). Now, I am not Buddhist, but I did find this little book an interesting read. In particular, it spoke about the concept of Zengosaidan, which is defined as ‘… a Zen expression meaning that we must put all our efforts into each day so we have no regrets, and that we must not grieve for the past or worry about the future … Don’t put it off till tomorrow …’

I found this idea thought-provoking – particularly when I consider my daily work, which is retirement planning. Because at some point, most people in Australia will stop working and retire. For a lot of them, they will need an asset base to fund this stage of their life. Best-case scenario, they will be 100 per cent reliant, or partially reliant, upon these funds.

However, despite this reality many people drift through life without placing much emphasis on, or at least paying attention to, the preparation required for saving for later life.

Now, I am not saying everybody needs to become an expert in retirement planning. I think the important distinction is we should become engaged with our impending retirement and ensure that when the day arrives, we have no regrets.

We often take a ‘no regrets’ approach to life experiences such as holidays, ticking off the bucket list or achieving other major lifetime goals. However, shouldn’t we be turning our attention towards what steps might need to be taken to ensure that our retirement savings are maximised during our career and particularly in the lead-up to retirement?

Today, the only discussion we often hear about retirement is having ‘no regrets’ about spending the kids’ inheritance and driving off into the distance.

It’s probably time this conversation matured.

I think this philosophy of ‘no regrets’, or Zengosaidan, needs to be front of mind as we approach retirement. For example, consider the following mental checklist:

  • Do you have enough to live on in retirement – for the whole of your retirement?
  • Have you maximised all possible options within your retirement strategy to ensure that you are well placed when you retire?
  • Looking at your retirement picture, what are the financial trade-offs if you make particular financial decisions today?

Believe it or not, virtual reality can make this process a lot easier. In a few years’ time I will be able to sit with a client, get them to put on a virtual reality headset, and then pull up a picture of what they might look like at retirement age. This might help them appreciate what they need to do to help the older-looking them in retirement. Potentially, we can create a real-live model of what retirement will look like if they do nothing, compared with what it will look like if they put into action the recommended steps to maximise their financial position opportunities.

Until this technology catches up with us, though, we will need to use our own imagination for the time being. I think, however, it is important that you keep in mind the following: When you stand at the threshold, about to take the leap from your working life into retirement, and reflect on what you have achieved, you want to be confident that you have optimised your financial situation, so the next chapter of your life can be everything you wished for and more.

Like all great ideas, it’s important that when you think about retirement planning, you don’t go it alone and seek advice from a practising and suitably qualified financial planner and, of course, I recommend AJ Financial Planning.