Direct Advisers

Greece's second rescue is probably not the last

2012-02-22T14:35:00.000+11:00

Greece, after much bickering, will receive a second bailout after finance ministers from the European Union agreed on Tuesday to a rescue package that includes 130 billion euros (A$160 billion) in aid and a deal whereby private Greek bond investors accept a 53.5% write down on their holdings.

The agreement negotiated between Greece’s government and the “Troika” of the European Central Bank, IMF and the EU means Greece can meet a bond repayment of 14.5 billion euros due in March. But the sign-off from EU finance minsters failed to ignite global stocks or the euro on concerns that Greece’s problems are already insurmountable and that an uncontrolled default looms for the indebted country.

The bailout carries austerity measures that will add to political and social tension in Greece and further undermine Greece’s economy, which slumped 7% last year. These austerity measures, which include 3.6 billion in additional spending cuts and tax rises in 2012, another 15,000 public sector job cuts in 2012 and a 22% reduction in the minimum wage, lay behind the protests in Athens earlier this month when Greece’s parliament approved the deal.

Austerity measures have proved counterproductive all over Europe in arresting government deficits because slower or negative economic growth reduces tax revenues and boost welfare payments. Further contractions in output will only make it harder for Greece to reduce its ratio of government debt to GDP to 120% by 2020 as the bailout terms demand from about 160% now. Austerity measures tied to the first bailout in 2010 helped crush Greece’s economy and drive up the ratio of government debt to GDP from 110% then.

The time may well come when Greek authorities decide that defaulting and exiting the euro is a less painful alternative and one that offers a better chance of restoring the country’s long-term economic health.

Authorities are concerned that an uncontrolled default by Greece could raise the prospect that investors lose faith in debt-ridden Portugal, Spain and Italy and strain the European banking system.

Global investors appear to have gained faith in recent months that the ECB and other European authorities can contain the crisis to Greece. This confidence is based on the small size of Greece (about 2% of eurozone GDP) and the actions taken by the authorities to ensure that a Greek default does not have cascading negative effects akin to the Lehman Brothers collapse of September 2008.

The single most critical action has been the ECB’s announcement in December to offer European banks unlimited three-year money (subject to collateral) via repurchase agreements. Bank demand for this facility has been unexpectedly strong and this appears to have substantially reduced the risk of a bank liquidity crisis.

Quagmire

Tristan Cooper, Senior Sovereign Analyst at Fidelity, says it’s difficult to feel optimistic about the Greek bailout deal as a Greek exit from the euro area seems a likely outcome as there is scant evidence that the country will be able to escape its economic quagmire.

“The conundrum is how can a country that is three years into a devastating and ever-worsening recession turn itself around and start to grow,” Tristan says. “Without growth, debt sustainability is a mirage. Greece desperately needs to revive its economic competitiveness yet the required internal devaluation is politically and socially unacceptable."

This point is not lost on European policy makers, particularly in those countries that are paying for the rescue, Tristan says. “They despair over the Greek situation but are pushed into further assistance by their fear of the unknown – the contagion effects of pushing Greece out of the euro.”

Attention will now focus on Portugal and Ireland to see if they can twist out more concessions from their programs, Tristan says. “In our view, this is likely given the Greek lesson that rapid fiscal contraction does not work,” he says. “The Troika is under immense pressure to show that its economic prescriptions can succeed in Ireland and Portugal, when they have manifestly failed in Greece.”

What can be said in favour of the second rescue package is that it buys more time for European authorities to build better defences to protect the rest of Europe in case of a Greek default.

Source: Fidelity and Bloomberg

We would like your opinion. Do you think that Greece will default?

What's happening with residential property?

2012-02-15T12:37:00.000+11:00

Residential property has enjoyed an amazing run over the past 10 years, with prices for established houses in Australian capitals increasing by an average of 91%, equivalent to a 6.8% compound annual growth rate. This level of price appreciation has significantly outstripped the corresponding growth in earnings of 55.2%, leaving Australian housing as some of the least affordable in the world. This is reinforced by Demographia International’s recent 8th Housing Affordability Survey, where Sydney and Melbourne ranked as the third and fourth least affordable cities in the world after Hong Kong and Vancouver, and Adelaide, Perth and Brisbane were only just behind, ranked 6th, 10th and 11th respectively.

Setting aside the low level of land releases and Australians slightly irrational love affair with owning their own home, logic tells us Australian house prices are significantly overvalued, and potentially in bubble territory. We are seeing clear signs the spectacular rise in prices over the past 10 years is slowly starting to unwind, with Melbourne, Brisbane and Adelaide prices all declining by in excess of 6% in the year to December 2011. We would not be surprised to see further softness in residential property, with declines of up to 10% over the coming two years a distinct possibility. But, we believe there are some fundamentals preventing the full scale capitulation in property values that occurred in the US and Ireland. These fundamentals comprise Australia’s low unemployment rate, rising rents, supply shortage and an increasing demand backlog. This demand backlog is evident in the low level of building approvals, which due to lead times in completion is unlikely to materially add to housing stock in the in the coming two years.

The two Reserve Bank rate cuts in late 2011 have to date not been enough to halt the decline in residential property prices and the impact of any further monetary easing is likely to be watered down by the banks not passing on rate cuts in full. With building approvals at relatively low levels, demand pressures will continue to build, however we look for evidence of improving affordability before upgrading our near-term earnings outlook for the residential developers.

Direct Advisers Scores 99.07% In Council Evaluation

2012-02-09T12:27:00.000+11:00

Who pays what in rental properties?

2012-02-02T11:36:00.000+11:00

When it comes to paying for utilities in a rented property, it’s important both the landlord and tenant have a clear understanding as to who pays for what.

Explained here are the different circumstances and obligations for landlords and tenants, as determined by the Residential Tenancies Act.

Initial Connection Fees

Initial connection fees are charged when a service is connected to a brand new property for the very first time. For all initial connection charges, the landlord is responsible for payment, including electricity, water, and gas services.

Separate & Shared Meters

Depending on what type of property you live in, and how the property or apartment block is set up, will determine if you have a separate meter or a shared meter.
A separate meter measures the utility supply and usage for an individual property only, whereas a shared meter takes into account the consumption of utilities for more than one property, such is the case in some apartment blocks.

It’s important to note not all apartment blocks have shared meters. To find out if you have a separate or shared meter, you can contact the distribution company directly, your Property Manager or the Owners Corporation for your property.

Separate Meters

If a property is separately metered, the tenant is responsible for paying:

all charges for the supply or use of electricity and gas (including supply charges and reconnection fees)
all charges based on the amount of water consumed (with the exception of service charges and/or reconnection fees)
all sewerage disposal charges

Where a property is separately metered, the vendor is responsible for paying:

service charges and/or reconnection fees for water supply (with the exception of water consumption charges)

Shared Meters

If a property has a shared meter, the vendor is responsible for all service charges, reconnection fees and consumption for that property. This can include water, electricity or gas. As per the Residential Tenancies Act, the tenant is not liable for any costs in this regard.

Telephones

Tenants are responsible for all charges relating to the supply and use of a telephone at any rented property. This includes all service fees, call charges, equipment, rental charges and connection fees, including the initial connection fee to set up the telephone line.
If the property has been newly built, or where there has not been a connection for some time, it may be necessary for the line to be laid or re-installed. This is payable by the tenant and costs cannot be recovered from the landlord.

Tenants Moving In

When tenants move into a rental property, it is their responsibility to have the utility services reconnected into their name. Tenants should give the utility providers 48 hours notice before they require use of the utilities. The utility provider then arranges for the service to be connected and for the meter to be read.

Tenants Moving Out

There are no disconnection fees when a tenant moves out of a property. However, tenants must tell the utility providers when they are moving out so they can arrange for a final meter reading and disconnection of utilities, including the telephone. Tenants should give 48 hours notice before they wish for the utilities to be disconnected.

What are the benefits of making your own super contributions?

2011-11-03T13:21:00.000+11:00

If you make personal super contributions (generally the after tax contributions you make to a super fund) you may be eligible for the super co-contribution. This is an amount paid by the government in addition to what you or your employer contribute.

You may be eligible for a super co-contribution if you:

are either an employee or self-employed
earn less than a specified amount a year
make after-tax contributions to your super fund before 30 June.

Don't forget to make sure your super fund has your TFN (Tax file number), otherwise your fund can't accept your personal contributions. If you are unable to make personal contributions to your fund you won't be eligible for the super co-contribution.

Super contribution caps

There are limits on the amount of money you can put into super each financial year before you have to pay extra tax. These limits are called super contributions caps. If you contribute more than the cap amount, you will pay extra tax. Make sure you review your super contributions regularly. You should check and, if necessary, adjust your current super contributions to ensure you don't exceed the contributions caps.

Salary sacrificing

Salary sacrificing is an arrangement with your employer in which you can sacrifice your pre-tax income into a variety of benefits, including super.
When you salary sacrifice into super you can increase your super account whilst reducing your taxable income, which means you pay less tax.
Make sure that you are aware of all of the terms of your salary sacrificing agreement and that they are fully outlined and clearly documented.

Please contact us to discuss your salary sacrifice options.

Don't lose control

2011-10-06T12:47:00.000+11:00

There are plenty of frustrating aspects about investing and saving for retirement.

Understandably, many investors may feel frustrated by a feeling they can do little to cushion their portfolios from the fallout from, say, Europe's sovereign debt problems and the political debate over the ceiling on US debt.

And many individuals on the eve of retirement would feel frustrated that it may seem too late to save more to improve their standard of living in retirement.

There are however some simple steps that retirees can take to potentially improve their financial positions as you do have more control over your future than you think.

It's all too easy for investors to focus on the threats they can't control. But investors, including retirees, can control certain things, including careful budgeting, debt reduction and efficient management of taxation.

Informed investors would add such things to this list as ensuring an investment portfolio is adequately diversified, gaining quality financial planning advice when required, and keeping investment costs to a minimum.

Another factor clearly under an investor's control is a decision to take a disciplined approach to the regular rebalancing of a portfolio back to its appropriate long-term, target asset allocation.

Advice on real estate

2011-09-01T14:51:00.002+10:00

We are a couple in our mid thirties with two young children wanting to become financially independent. Recently we had a discussion with a local real estate agent who told us that now is a good time to borrow money to invest in real estate. He advised us to use the $40,000 that we have saved and borrow another $360,000 to buy a unit off the plan in a new development. He said we would be guaranteed a rental income of about $300 a week and could look forward to capital gains in the future. Should we take his advice?

Mr and Mrs S

First of all consider whether you are getting advice or just being sold a property so that the agent can earn a commission.

Let's look at a few numbers here:

At the moment you can easily earn $40 per week interest on your $40,000 with many reputable banks
If you borrow $360,000 you will probably be paying around $500 a week in interest
Lets say you get rent of $300 a week - by the way how good is the guarantee and how long is it for? I certainly hope it is not being provided by the property developer or an associated company!
If we do the sums at this point you are $240 a week worse off buying the property and we haven't taken into account costs such as rates, insurances, maintenance, agent's fees and strata levies, all of which will make you even worse off.
On top of this you will have to pay stamp duty when you buy the property (about $13,000) and agent's commission when you sell (about 3%), plus if you make a profit when you sell there will be capital gains tax to pay)
Over ten years this will cost you the best part of $200,000

What happens if property prices stay flat or go down? It can happen you know!

The information in this article is of a general nature only and should not be acted upon without first seeking personal financial planning advice. This article was provided by independently owned AFS Licensee (No. 236855) Direct Advisers Pty. Limited. They may be contacted on 02 6583 7588 or enquiries@directadvisers.com.au for a free consultation or further information.

Peter Lynch’s 20 Golden Investing Rules

2011-08-04T11:53:00.000+10:00

Peter Lynch is one of the greatest fund managers of all time, returning a mind blowing 29% per annum average return during his thirteen years as the manager of Fidelity’s Magellan fund.

Every $10,000 invested in Lynch’s Magellan fund was worth $280,000 13 years later.

Peter Lynch didn’t just beat the Street … he absolutely destroyed it.

Fortunately for us, Lynch was willing to share his secrets. In his books, One Up on Wall St and Beating the Street, Lynch shows how to achieve his stunning track record.

Lynch’s 20 Golden Rules

Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.
Over the past three decades, the stock market has come to be dominated by by a herd of professional investors. Contrary to popular belief, this makes it easier for the amateur investor. You can beat the market by ignoring the herd.
Often, there is no correlation between success of a company’s operations and the success of its stock over a few months or even years. In the long term, there is 100% correlation between the success of the company and the success of the stock. This disparity is the key to making money; it pays to be patient, and to own successful companies.
You have to know what you own, and why you own it. “This baby is a clinch to go up!” doesn’t count.
Long shots almost always miss the mark.
Owning stock is like having children – don’t get involved with more than you can handle. The part time stock picker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don’t have to be more than 5 companies in the portfolio at any one time.
If you can’t find any companies that you think are attractive, put your money in the bank until you discover some.
Never invest in a company without understanding its finances. The biggest losses in stocks come from companies with poor balance sheets.
Avoid hot stocks in hot companies. Great companies in cold, non-growth industries are consistent big winners.
With small companies, you’re better off to wait until they turn a profit before you invest.
If you invest $1,000 in a stock, all you can lose is $1,000, but you stand to gain $10,000 or even $50,000 over the time you’re patient. You need to find few good stocks to make a lifetime of investing worthwhile.
In every industry and every region, the observant amateur can find great growth companies long before the professionals have discovered them
A stock-market decline is as routine as a January blizzard in Colorado. If you’re prepared , it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.
Everyone has the brain power to make money in stocks. Not every one has the stomach. If you are susceptible of selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.
There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.
Nobody can predict the interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what‘s actually happening to the companies in which you’ve invested.
If you study 10 companies, you’ll find 1 for which the story is better than expected. If you study 50, you’ll find 5 . There are always pleasant surprises to be found in the stock market – companies whose achievements are being overlooked on Wall Street.
If you don’t study any companies you have the same chance of success buying stocks as you do in a poker game if you bet without looking at your cards.
Time is on your side when you own shares of superior companies. You can afford to be patient –even if you missed Wal-Mart in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.
In the long run, a portfolio of well-chosen stocks will always outperform a portfolio of bonds or a money market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.

The above 20 Golden Rules can be found at the back of Beating the Street.

Source: The Motley Fool

Beware The Rules of Super And Property

2011-07-21T14:51:00.002+10:00

In the new financial year, many DIY super funds will try to expand the diversity of their investment strategies. Including a residential property in a fund’s portfolio is beginning to be a popular choice. However there are a number of rules and dangers that potential investors should be aware of.
Most importantly, a fund cannot buy a property owned by a fund member or someone related to that member. Although a fund can acquire investments from a related party, such as shares, commercial property or units in certain managed investment trusts, it cannot purchase a residential property from a related party.

Some funds might wish to strategise and get around this prohibition by creating a unit trust. A unit trust is an arrangement whereby money from different investors is pooled to buy an investment. The value of the investment is converted into units which are issued to investors in proportion to the money they invested.

A family home, or residential property owned by a fund member, could be invested in by a unit trust. The fund will run into problems however, if it is entitled to more than half the units. Under super rules, where an asset is an in-house asset, no more than 5% of the market value of the super fund’s assets can be committed to the investment.

There are severe penalties if it is established that a unit trust was used to circumvent the prohibition on acquiring assets from related parties.

Investing in property might still be a good super fund strategy and it is worth considering the range of properties available. If a fund is going to diversify in the new financial year, be sure to get professional advice and ensure that the property investment does not break super rules.

Tax refund scams

2011-07-06T10:34:00.002+10:00

There are a number of refund scam emails currently circulating. These emails claim to come from the ATO and offer a tax refund. Generally, they link to a bogus ATO website asking for personal and credit card details. These emails can differ in their appearance and level of sophistication but will generally state that you are eligible for a refund and instruct you to click on a link to submit a form to receive it. The ATO will never email you asking for personal or credit card details and you should never provide this information.

One version of this scam contains an attachment infected with a virus. This email purports to be from the ATO and asks for the recipient to complete the attached form to receive a tax refund. There is zip file attached to the message that contains a malicious program. If you receive an email like this, do not open the attachment.

Under no circumstances should you give personal information including credit card or banking details. Anyone who has received a suspicious phone call or email should contact us immediately.
Key indicators of this scam include:

the email asks you to provide personal details. You should always be suspicious of this
it is poorly worded with spelling and grammatical mistakes (though this is not always the case)
includes an attachment (form) or link to a webpage to lodge a form
comes from an email address which is not a valid ATO email address
asks for credit card and PIN numbers.

To see some examples of refund scam emails and the forms that they link to click here:

Source: www.ato.gov.au

Who knows about your will?

2011-06-30T09:14:00.000+10:00

Will Location and Knowledge of Contents

Believe it or not many spouses have no idea what is in their partner's will. As such they aren't aware of their partner's preferred burial arrangements, beneficiaries and/or asset distributions. This makes dealing with that person's estate much harder once the individual dies.

As a matter of course, both partners should sit down together, take out their respective wills and talk about funeral arrangements and preferred asset distributions. Doing so will ensure they are both on the same page, and are prepared should a serious illness or death occur suddenly. In fact, both partners should sit down at least once a year to discuss any changes in preference or changes in circumstances that might have occurred since the last talk.

In addition to knowing and understanding the contents of the will, it is also important to be aware of its physical location. If a death occurs, an original copy of the document will be needed in order to disburse assets and/or to probate the estate.

As a tip, when wills are drafted there are usually three or four originals. A good way to file these originals is to keep one at home, one in a safety deposit box, one with a trustworthy relative, and one at your solicitor's office. That way, you'll have quick access to this document, no matter what the emergency.

Debts

Every once in a while you'll read about a spouse that has to sell his or her home in order to pay off the deceased partner's debts, tax penalties, and more. Both partners should be fully aware of any outstanding debts as well of possible solutions for satisfying them if the debtor partner dies. These solutions include life insurance, the sale of personal items, and more. Also, if possible consider including your financial planner, an accountant and/or other professionals in these discussions.

Account Access

It's not uncommon to hear about a family member who has passed away unexpectedly and left a surviving spouse with a bank account that is in the deceased's name only. In this case, the money may be held until the estate is settled. The bank's hands are tied in these situations, and it can take months to get this frozen account thawed. The surviving partner will have no access to his or her money and may have to rely on other people's goodwill or assets until the estate is settled. To avoid this scenario, make sure that all accounts are titled in both partners' names and held in joint tenancy. Another option is to make certain that the account is marked "payable on death" (or POD for short). This will allow the surviving partner access to the funds. Check with your bank or lending institution for more details before opening and titling any account.

Leave Letters

While it is in no way legally compulsory to do so, both spouses should leave letters or documentation to each other detailing what to do if the other dies. The letters should contain all relevant financial information (credit cards, bank and brokerage account numbers, etc.). It should also contain passwords and suggestions for resolving problems as well as a list of trusted advisers who might be of help during tough times. Finally, preferred burial arrangements should be listed as well.

In short, try to spell out all of your preferences in painstaking detail so that your distraught spouse is able to make rational decisions upon your death. He or she will be in a better position because of this, allowing the spouse the time to mourn instead of using the time to find old tax files or names of lawyers.

Establish an Emergency Fund

When the surviving spouse is the financially unsavvy spouse, he or she might not know which assets should be sold or which accounts should be tapped to cover funeral expenses, attorney's fees or other bills. For this reason, it makes sense to set some money aside (preferably a few months of living expenses - so that the spouse can survive and pay for incidentals). Consider keeping this money with a friend, or in a fireproof safe in your home, or even in a joint account (again marked "POD") at the local bank.

If nothing else, this step will help reduce the worry of where funds will come from in the confusing days and weeks after the death of a spouse.

Don't Put Off Learning

While the less financially savvy partner in a relationship might never be able to match the capabilities of his or her spouse, everyone can (and should) learn to balance a cheque book, pay bills, read financial statements and invest. To that end, both partners should sit down together and share their knowledge while they are alive and well. Couples should also consider honing their financial acumen with books, courses and or lectures on general investing.

The goal of this work is to make certain that both spouses are financially literate. If nothing else, this will help to ensure the proper handling of the joint estate after the first spouse passes on.

Bottom Line

In order to make certain that your spouse and/or partner is able to carry on after your death, you must plan while you are alive. That is, you must educate your spouse about the nature of all of your assets and debts. In addition, you must make them more aware of your preferences for burial, as well provide them suggestions so that they may cover expenses in case of emergency.

Please feel free to talk to us about your estate planning issues.

Source: Investopedia.com

Shares or cash?

2011-06-23T15:59:00.000+10:00

My older brother and I are both investors and from time to time we compare notes. I was a bit more aggressive in my investment approach and up until the Global Financial Crisis I did much better than my brother as I was and still am very heavily invested in Australian shares, while my brother only had about half his money in shares. He kept telling me to be more careful and to take some of my money out, but I had the view that I just couldn’t go wrong with the shares that I have. Was my brother right after all? By the way he has sold all of his shares and now has all his money in the bank.

Mr. F

Up until the Global Financial Crisis you were well rewarded from being heavily invested in Australian shares, and if you own good quality shares such as the Big Four Banks your average return over the last five years would have been about 5% per year. On top of that you would also have received imputation credits.

Your brother, who you say had about half his money in shares would also have done well, but not as well as you. If he sold his shares at the peak of the market in December 2007 he obviously would have done better than if he sold at the bottom of the market in March 2009. It is also likely that he will have had to pay capital gains tax on his profits – and the more profit, the more tax! Now of course his money is safe in the bank and as interest rates have picked up he may be feeling quite comfortable at the moment. Of course he will probably have income tax to pay on the interest he earns. Interestingly, over the last three years the returns from the Big Four Banks has exceeded 10% per year before imputation credits, which is more than double the cash rate over the same period.

Then there is inflation, also on the way up. Historically, interest on bank deposits after tax have struggled to keep pace with inflation. This means that over time, your brother may find that though his money is safe in the bank, it has actually lost value after taking inflation and tax into account.

So who is right? At the end of the day the “sleep test” is pretty important. If you still sleep soundly at night with your money in shares, then you have the right approach for you. If your brother sleeps better now that his money is in the bank, then he has made the right decision for himself.

Personally, I am in favour of more balanced investment portfolios, which are exposed to interest producing investments as well as shares. Because of the lower exposure to shares that these portfolios have, they do not suffer nearly as much when markets fall and continue to pay a reliable level of income irrespective of share market conditions. Yet they still benefit from capital growth when share markets rise; in addition dividends from Australian shares are very tax effective.

Six Keys To Successful Investing

2011-06-16T12:12:00.000+10:00

A successful investor maximizes gain and minimizes loss. Here are six basic principles that may help you invest successfully.

Long-term compounding: your nest egg may get bigger, and bigger, and bigger...

It's the "rolling snowball" effect. Put simply, compounding pays you earnings on your reinvested earnings. The longer you leave your money at work for you, the more exciting the numbers get. For example, imagine an investment of $10,000 at an annual rate of return of 8 percent. In 20 years, assuming no withdrawals, your $10,000 investment would grow to $46,610. In 25 years, it would grow to $68,485, a 47 percent gain over the 20-year figure. After 30 years, your account would total $100,627. (Of course, this is a hypothetical example that does not reflect the performance of any specific investment.)

While you should review your portfolio on a regular basis, the point is that money left alone in an investment offers the potential of a significant return over time. With time on your side, you don't have to go for investment "home runs" in order to be successful.

Endure short-term pain for long-tern gain: ride out market volatility.

It sounds simple, doesn't it? There's no denying it--the marketplace can be volatile. Still, it's important to remember two things. First, the longer you stay with a diversified portfolio of investments, the more likely you are to reduce your risk and improve your opportunities for gain.

Second, during any given period of market or economic turmoil, some asset categories and some individual investments historically have been less volatile than others. Although past performance cannot predict future results, you can minimize your risk somewhat by diversifying individual assets within each class.

Asset allocation: spreading the wealth.

Asset allocation is the process by which you spread your investment dollars over several categories of assets, usually referred to as asset classes.

There are two main reasons why asset allocation is important. First, the mix of asset classes you own is a large factor--some say the biggest by far--in determining your overall investment portfolio performance.

Second, by dividing your investment dollars among asset classes that do not respond to the same market forces in the same way at the same time, you can minimize the effects of market volatility while maximizing your chances of return in the long term. Ideally, if your investments in one class are performing poorly, you will have assets in another class doing well. The gains in the latter will offset the losses in the former, minimizing the overall effect on your portfolio.

Consider liquidity in your investment choices.

Liquidity refers to how quickly you can convert an investment into cash without loss of principal. Generally speaking, the sooner you'll need your money, the wiser it is to keep it in investments with comparatively less volatile price movements. Therefore, your liquidity needs should affect your investment choices.

Dollar cost averaging: doing it consistently and often.

Dollar cost averaging is a method of accumulating a portfolio by purchasing an investment at scheduled intervals over an extended time.

Remember that, just as with any investment strategy, dollar cost averaging can't guarantee you a profit or protect you against a loss if the market is declining. To maximize the potential effects of dollar cost averaging, you should also assess your ability to keep investing even when the market is down.

An alternative to dollar cost averaging would be trying to "time the market," in an effort to predict how the price of real estate will fluctuate in the months ahead so you can make your full investment at the absolute lowest point. However, market timing is generally unprofitable guesswork. The discipline of regular saving is a much more beneficial strategy, and it takes no mental effort or study.

Review your portfolio and game plan: buy and hold, don't buy and forget.

Unless you plan to rely on luck, your portfolio's long-term success will depend on periodically reviewing it. Even if nothing bad at all happens, your investments will appreciate at differing rates, so after a while, your asset allocation mix will change.

Rebalancing involves restoring your original asset allocation decisions by shifting your funds among investment classes to restore the ratios you decided on in first designing your portfolio.

Top 5 tax strategies

2011-05-18T09:31:00.000+10:00

One should not invest solely to obtain a tax benefit. Tax should never be the driver of investment decisions, however, there are tax strategies to consider as part of wealth creation planning.

1. Pre-pay interest and small asset write-offs

Individuals not in business are able to prepay interest on loans used to purchase income-generating properties or dividend-paying shares.
This gives the investor an opportunity to bring forward a sizeable tax deduction to reduce taxable income
Useful if one has extra income in the relevant year due to inclusion of a large capital gain
Individuals can also write off expenditure on small asset acquisitions costing less than $300 outright that relate to income-earning activities

2. Superannuation

Superannuation still represents a wonderful tax planning opportunity for most investors.

If you are lucky enough to have your own self-managed superannuation fund (SMSF), which is invested predominantly in listed shares paying fully franked dividends, then the super fund may not even be paying any tax or even better, receiving a tax refund
The government intends to reduce concessional contributions for those over 50 years old to $25,000 who have a super balance over $500,000, so it is important for those over 50 to maximise their concessional super before the new rule kicks in
Low-income earners are encouraged to make an after-tax contribution to super as they may be eligible for a tax-free co-contribution benefit of up to $1,000. The only downside for the co-contribution is that the tax-free contribution made on your behalf by the government is locked away until retirement
Invest one dollar and receive one extra dollar tax free, which has to be the best risk-free investment available. This strategy works well when you have both a high and low-income earner within the family unit
Opportunity to claim a spouse rebate for super contributions made on behalf of a low-income spouse. The spouse rebate is worth up to $540

3. Salary packaging

Some employers (not-for-profit sector) receive special fringe benefits tax (FBT) concessions, so it is important to maximise any such opportunities
There are benefits that are exempt from FBT and then there are ones that receive concessional treatment, such as motor cars. Both these types of benefits should be looked at for inclusion into salary-sacrifice arrangements
Employers can also benefit from salary-packaging opportunities as labour on-cost (work cover/payroll tax) can be lower under such arrangements

4. CGT discount/investment in Listed Investment Companies

Hold onto investments for more than 12 months before you sell to take advantage of the capital gains tax (CGT) discount
Investors often forget their CGT bill will be halved if they wait a little longer than 12 months before they get the temptation to sell
Ability to claim an extra tax deduction in listed investment companies (LIC). LICs are not entitled to claim a 50 per cent CGT discount when they sell shares, but can transfer this benefit to shareholders. The entitlement appears as a notation on the investor's dividend distribution statement

5. Entity holding investment assets

Probably one of the most significant tax planning strategies is to look at which entity within the family group holds the investment assets. You need to take into account what is the most important driver for your circumstances - asset protection, income-splitting flexibility, succession and estate planning. It can be as complex as setting up a discretionary trust or as simple as putting assets in the name of a low-income spouse
Discretionary trusts are particularly useful as they tick most of the boxes when it comes to income splitting, asset protection, access to CGT concessions and succession planning. Advice from a suitably qualified adviser is recommended to help you sort through the maze

Source | Tony Greco, National Institute of Accountants, senior

Strategy View

2011-05-05T12:51:00.002+10:00

We have been giving considerable thought to the cash and fixed interest components of portfolios. We compared fixed term deposits with corporate and sovereign bonds. Our view is that while corporate and sovereign bonds offer higher returns than fixed interest, the risk associated with possible default (failure) from bonds does not justify recommending them to our clients. We also compared cash and term deposit returns and as term deposit rates are likely to remain higher than cash rates over the next year, we have decreased our weightings to cash and increased the weighting to term deposits.

We continue to have faith in sharemarkets, particularly the Australian sharemarket, which we believe will reward our (and your) patience over the medium and longer term. We have somewhat less confidence in listed property, particularly international and have therefore reduced exposure compared to shares.

As the above changes are of a minor nature, they will be implemented progressively at forthcoming portfolio reviews.

This means that level 3 Prudent portfolio stay at 48% defensive assets (cash and term deposits) and 52% growth assets (shares and property).

We have recently reviewed the asset allocations for portfolios with a higher risk level than 3. Level 4 and 5 portfolios will now have an increased exposure to secure assets and a correspondingly lower exposure to shares. We have also added a sixth level called “high risk”.

Our view is that financial market instability will remain with us for the foreseeable future due to the excessive levels of personal, corporate and government debt that have built up worldwide over recent decades in the developed world. We continue to have particular concerns regarding the significant levels of government debt in a number of European countries and the USA.

We have recently purchased portfolio optimisation software, which will enable us to fine tune our portfolio asset allocations resulting in a modest increase in returns without increasing risk and in some cases enabling risk to be further reduced.

We are now have available a wider variety of term deposit options aiming for higher interest rates and more efficient rollover when term deposits mature.

We are also continuing the process of where-ever possible, moving clients to lower cost investment platforms.

Essentially we continue to maintain a cautious and conservative strategy for client portfolios.

Investing my superannuation

2011-04-27T15:10:00.000+10:00

I will soon be retiring and will have a considerable amount of money to invest from my superannuation. I would like to have investments that are both secure and give me a good income. How can I tell whether an investment is good or bad?

Mr. L

Unfortunately all investments carry risks in one way or another. Some of these risks are that your investments may lose value either temporarily or permanently, that they won’t give you the income that you expect, that you won’t be able to withdraw your money when you want to or that inflation will eat away at the value of your investments.

It is also true that the amount of investment return that is available varies widely. In fact even similar types of investments have significant variations in their returns.

For example some interest producing investments such as some bank deposits offer very low rates of interest, while much higher rates of interest are available from some financiers and property developers. Even though some high interest paying investments may appear to be secure by including words such as property backed, mortgage, debenture, guaranteed, etc in their promotional material, you must never forget the basic fact that the higher the interest rate the higher the risk.

We only have to look back at names such Cambridge Credits, Estate Mortgage, Pyramid Building Society and most recently Westpoint Corporation, Basis Capital and Great Southern to see how many people lost large amounts of money investing in something that they thought was safe but in fact was very risky.

Because investment risk is a fact of life, the best approach is not to put all of your investment eggs in the one basket. Ideally this means having a mix of property, share, interest and cash investments and using a number of different companies and financial institutions for your investments.

As it can be difficult obtaining and understanding research associated with the many different investments that are available, it is often beneficial to use the services of a financial planner. However make sure that the financial planner you see is licensed by the Australian Securities and Investments Commission (ASIC), understands your needs and objectives and is able to offer you a range of investment alternatives.

Too much of a good thing?

2011-04-13T10:28:00.001+10:00

Last year approximately 40,000 people contributed too much to their superannuation, with these excess contributions attracting up to 46.5% tax. While the Government encourages us to top up our super by offering a favourable tax environment for super contributions and earnings, it also sets a limit on the amount of contributions that can be made to your super. So it appears that too much of a good thing can be bad for you.

Don't get caught out by contributing too much to super – you might lose more than you gain. Here are some ways to optimise your contributions.

Concessional Contributions

· Which include the 9% super guarantee, salary sacrificed amounts, other employer contributions

· Contributions over the limit attract a 31.5% penalty tax in addition to the 15% tax rate that applies to all concessional contributions

· By going over the limit you miss out on most of the tax benefits of making those contributions in the first place

· Most common mistake that investors make is not being aware of exactly what contributions count towards the cap or forgetting about the caps completely

· An investor on a substantial salary - the contributions comprised the 9% superannuation guarantee, salary sacrifice contributions and additional contributions made on his behalf by his employer to cover insurance premiums

· All these concessional contributions combined resulted in considerable excess contributions

· 'Set and forget' mentality – where you set up salary sacrifice arrangements and leave them in place for years – can also be dangerous

· For the 2009–10 financial year, the caps are half what they used to be

· The Australian Taxation Office (ATO) checked 2008–09 financial year information and wrote to around 300,000 people warning them

It also pays to be aware that any excess concessional contributions are counted towards your non-concessional cap.

· It's not unknown for people to exceed both the concessional and non-concessional caps

· Could result in an effective 93% total tax on the contribution

There is scope to appeal to the ATO if you exceed your contribution caps, it's a challenging process to go through

Contribution caps for 2010 - 2011
Type of contribution	Age (in the financial year)	Limit for 2010-11
Concessional (before tax) 8	Under 50	$25,000 pa (was $50,000) indexed annually to AWOTE in $5,000 increments
Concessional (before tax) 8	50 and over	$50,000 pa until 30 June 2012 (was $100,000). From 1 July 2012, the indexed cap for under age 50s will apply to everyone
Non-concessional (after tax) contributions	Under 65	$450,000 over a three year period, using the ‘bring forward’ rule
Non-concessional (after tax) contributions	65 and over	$150,000 pa

People under age 65 at any time in a financial year may effectively bring forward two years’ worth of entitlements of non-concessional contributions for that income year, allowing them to contribute a greater amount without exceeding their non-concessional cap.

Avoid the traps

Check contributions made to all of your super funds
It is common to have a personal super fund and a work super fund, so it's important to check the contributions for all funds. You may like to consider consolidating your super funds to make it easier to keep track of all your contributions.

Different ages for different contributions
Depending on your age and the type of contribution you are making, different limits apply.

Don't forget super guarantee contributions
Any contribution made to a super fund before tax counts as a concessional contribution. This includes the super guarantee payments made by your employer and any salary sacrifice contributions you have made.

Take note of the date of contributions
If your salary sacrifice contribution was noted on your June payslip, it may not have actually gone into your super fund until July. Call your super fund to check.

Make sure the paperwork is right
If you make a personal deductible contribution to your super, make sure you include your deduction in your tax return, and that the figure you include matches the figure in the deduction notice submitted to your super fund.

Another way to boost your super
If you want to boost your super but are wary of the contribution caps, you should speak with your financial adviser.

Find out more
We recommend you speak to us about your personal financial situation.

Giving to charity

2011-04-07T15:22:00.000+10:00

If you have an interest in giving to the community, it’s sometimes hard to know where to start. While you may not consider yourself a ‘philanthropist’, these days there are a number of ways to give that can be rewarding for you and the community. As charitable giving can have a big impact on your tax position and your overall financial plan, it’s worthwhile seeking advice from us about this.

What should I consider first?

There are a number of ways to give to the community, but how you do this will depend on a number of factors.

Your reasons for giving – Do you want to help the community in general, help a specific cause, establish an award or scholarship, claim a tax deduction or get your family involved in giving?
The level of money you have to give – Do you have $20,000, $200,000 or $2million?
The level of involvement you want – Do you want control over how funds are used or who will receive your donation?
Your timeframe – Do you want to give during your lifetime, through your will or both?

Your answers to these questions will help you and your adviser decide on the best approach and whether planned giving is appropriate.

What’s planned giving?

Planned giving is planning when, how and to whom you give for maximum personal, family and community impact.

Establishing a charitable trust during your life or through your will is one way to plan your giving. It gives you control and flexibility to give in a way that suits you and importantly, the ability to generate a sustainable income to the community. It also allows you to get your family or business involved or leave a legacy in your name.

How a charitable trust works

When you set up a charitable trust, your initial and any ongoing donations into the trust are generally tax-deductible. These are invested and the income earned is distributed to charitable causes of your choice. Even if you decide not to make ongoing contributions, your capital has the chance to keep growing and produce income. This means that the trust can keep giving independently of you and long after you are gone.

If you want to provide a sustainable community gift, but don’t need a high level of involvement, setting up a sub-account within a larger charitable trust (a public foundation) is also an option.

Money for Life: You and your credit card

2011-04-05T17:17:00.000+10:00

Money for Life: You and your credit card: "Here's an interesting situation:You owe $3,500 on your credit card - this is the average Australian credit card balance You spend $1,000 on ..."

Should we sell our new investments?

2011-03-31T11:33:00.000+11:00

We retired at the end of the last financial year and made some investments in several managed funds. We are quite concerned that our returns over the last six months have been all over the place and we are considering withdrawing from our investments and putting the money in the bank. Do you think that this would be the right thing for us to do?

Mr. & Mrs W.

You may be tempted to take matters into your own hands by withdrawing from your investments, however you should not react to short-term moves in the financial markets and keep your long term investment strategy firmly in mind.

Prevailing economic conditions will result in individual investment classes such as shares to over or under perform other classes such as fixed interest for example. Trying to pick the best investment is fraught with danger and therefore having a balanced portfolio that is structured upon the expertise of a professional adviser or fund manager is a lower risk approach to take.

It is critical that you take a long term approach to your investments, remembering that the average 60 year old will need to fund at least 20 years of retirement. This means that your money must be able to provide you with investment returns that will sustain your capital and provide you with a rising level of income over a long period of time. You simply will not be able to achieve this basic objective by putting your money in the bank - you must invest for capital growth as well as for income.

Investing for capital growth means that from time to time you will experience disappointing investment returns in the short term, but history shows that quality investments always recover and go on to ever higher valuation levels over the long term.

You have been unfortunate in that stock markets experienced some negative returns recently and this can be quite unsettling, especially when you are new to investing. I strongly recommend that you retain your investments provided that they are basically sound and are of good quality. You should seek professional financial planning advice and establish a relationship with a financial planner to ensure that your investments continue to be appropriate to your needs.

The information in this article is of a general nature only and should not be acted upon without first seeking personal financial planning advice. This article was provided by independently owned AFS Licensee (No. 236855) Direct Advisers Pty. Limited. They may be contacted on 02 6583 7588 begin_of_the_skype_highlighting 02 6583 7588 end_of_the_skype_highlighting or enquiries@directadvisers.com.au for a free consultation or further information.

What to do with my income when I go back to work?

2011-03-17T10:55:00.000+11:00

We have two children, and next year the youngest will also be at school, allowing me to go back to work. Up until now, my husband has been the breadwinner and so next year for the first time since the children were born, we will have some surplus income. We are presently paying about $1,300 a month on our home loan, which is down to $145,000 and we think our home is worth about $500,000. We also owe about $40,000 on our car and some personal loans on which we pay over $1,100 a month. When I go back to work, I should be able to earn about $600 a week. What is the best thing to do with my income when I go back to work?

Ms J

You have several alternatives open to you: You could increase the repayments on your mortgage and possibly on your car and personal loans. You could consolidate all of your other loans into your home loan. You could begin a savings and investment program. Or you could use a combination of all of these.

As a first step, I suggest that you use some of the equity in your home to set up an interest only line of credit in order to cut down on the interest payments associated with your car and personal loans. This means that you would borrow another $40,000 against your home and use this money to pay out all of your loans, provided there are no or low penalties for early termination of your loan.

The next step is to set up a program to repay this $40,000 over the next four years. This will cost you about $930 a month, which will save you about $180 a month. This extra $180 a month should be added to your home mortgage repayments. This alone will cut about two years off your loan and save you about $11,000 in interest.

The third step is to begin a saving and investment program. If you earn $600 a week, that leaves you with about $520 after tax or about $2,250 a month, which provides you with a wonderful opportunity to save. One reason that you need to save is that it is likely to cost you around $420,000 to look after your two children up to the age of 20.

Just to give you an idea of the power of compounding. If you saved $2,250 each month, which earned 6% per year, over the next 20 years you would accumulate a bit over $1,000,000.

Should I sell my property by auction?

2011-03-09T20:36:00.001+11:00

Auctions are popular across Australia because the process takes price out of the equation for the pre-auction period, leaving buyers to evaluate the property independent of price. The auction process then provides buyers and sellers with a good idea of what the market is prepared to pay. With a private sale, vendors run the risk that buyers will turn their back on a property they are interested in because the initial asking price is too high. This is why a spot-on asking price is crucial when selling by private sale. Like any sales method, there are pros and cons to selling or buying a property via auction – and issues that you should be aware of.

Upsides of selling via auction

With some property markets still slowing and showing lower than previous clearance rates, it is natural that vendors are questioning the advantage of selling through auction. While auctions are not ideal for all properties, a slow market is no reason to shun the system.

Many high-quality, inner-city properties are still sold by public auction today. Consider also that properties passed in at auction should not be viewed as failures; auction clearance rates are not necessarily accurate reflections of sales success. This is because the auction process does not stop when the hammer comes down – even when a property is passed-in, it will usually have generated enough interest throughout its campaign to attract offers afterwards.

Again, the auction process highlights current market value and buyers and sellers can come to an agreement in a faster period of time than through a private sale. The deadline of a four-week auction campaign tends to force buyers into make a decision in a tighter timeframe than a private sale situation: an auction creates an unconditional sale where there is no cooling-off period applicable and no terms and/or special conditions can be negotiated. You are also likely to sell your property faster through the auction process, as property sold this way typically has fewer ‘days on market’ than other private treaty methods of sale.

Downsides of selling via auction

In general, auctions have a more expensive advertising campaign than private sales, with a $5,000 to $10,000 average minimum budget. If the property does not sell, the vendor is still responsible for paying these costs from their own pocket. Agents can also pressure vendors to dramatically reduce their reserve price during the high-pressure environment of an auction: the vendor may or not be pleased with their decision in a more ‘rational’ moment. The auction process may not suit private people, who are uncomfortable having their home publicised across the internet and other advertising media, or hosting public ‘open for inspections’ that can also raise security as well as privacy issues.

Pros for buying via auction

Auction clearance rates are generally still lower in all capital cities compared with a year ago – which means there is now a greater opportunity to negotiate after auction below the vendor’s reserve price. The continuing uncertainties in the global and local economy have also dampened demand for property. This means fewer bidders (or competition) at auctions. Vendors’ prices have typically had to be lowered. This means that overpriced properties will linger and the longer the property is on the market, the more advertising expenses the seller will incur, not to mention an increased pressure to reduce the price.

Cons for buying via auction

As the market recovers, good quality properties are in high demand. They can create intense competition and sell at auction for high prices – especially in well-located properties in blue chip, inner suburban areas of most capital cities. Buyers can waste money commissioning building reports and having contracts reviewed professionally and then find the property sells well above their budget anyway. Vendor bids are unlimited in a number of states so that the auctioneer can push the price up towards the vendor’s reserve.

Source: RPData

Australian housing market trends

2011-03-03T15:02:00.001+11:00

The housing finance data released by the ABS for the December quarter highlights some interesting trends in the Australian housing market.

The ‘broad brush’ overview is that owner occupier loans are showing a small improvement due to increasing non-first home buyer activity, first home buyers are remaining on the sidelines and the value of investor finance has remained fairly flat.

It is very clear that the surge in first home buyers during 2009, due to low interest rates, improving affordability due to property value falls during 2008 and the First Home Owner’s Grant Boost pulled forward the majority of first home buyer demand for 2010 into 2009.

2010’s volume of first home buyers was 50% lower than it was during 2009. Between 1993 and 2010 there has been an average of 116,284 first home buyer finance commitments annually. Given this, 2010 recorded first home buyer activity which was -17% below the long-term average.

An interesting point to note is that over the last 10 years first home buyers have become much more active at times when the market has been recording superior levels of value growth. A good example of this was during 2001 when capital city home values increased by 18.7% for the year. At this time there were 145,000 finance commitments to first home buyers. 2009 was the busiest year for first home buyers, with more than 190,000 housing finance commitment. At the same time property values increased by 12.1% that year. In most instances over the past decade, when there has been periods of strong property value growth these have been accompanied by an above average volume of first home buyers.

In other news, the Reserve Bank released the minutes of its February monthly board meeting where it decided to keep official interest rates on hold.

Of specific interest to the housing market were the following comments. ‘The housing market remained steady; with nationwide measures of dwelling prices broadly flat since the June quarter 2010. Housing credit outstanding had continued to increase at around ½ per cent per month, which was a little below growth in household income. Loan approvals, including for new construction, had increased in recent months. Building approvals data showed a solid recovery for apartments, reflecting particular strength in Victoria.’

5 essential mortgage management tips

2011-02-07T17:36:00.001+11:00

This year, continued rises in food prices, utility bills, interest rates and other living costs will have a considerable impact on the budgeting efforts of property owners repaying a home loan.

The start of the year is an ideal time to re-evaluate your mortgage choices and prepare a new, forward-thinking budget to help mitigate stress caused by concerns about living costs such as utilities, clothing, food costs and interest rates.

The reality of the ‘Great Australian Dream’ is that repaying a mortgage can be challenging at times. A financial review can lessen the burden and put you in good stead for the year.

Remember, you’re not alone. We can assist with budgeting, revising your repayment strategy and determining how you can make the most of your home loan and other debt commitments.

Consider these five essential mortgage management tips:

Step 1: What are you getting for your dollar?

Financial circumstances and lifestyles change, as do your needs. Consider how competitive your lender’s interest rate is, what features you are paying for and aren’t using or don’t have and need, the fees you’re payingand the cost vs. benefit equation for switching loans and/or lender.

Step 2: Can your mortgage work better for you?

Are you throwing lump sums into the loan account when possible e.g. your tax return, bonus or leftover wage? Every cent counts in helping to reduce the interest owed and the loan term. Plus, contributing more when you can helps build a financial buffer for times of need.

Step 3: Are you repaying at a higher rate?

Consider repaying your mortgage as though its interest rate was at least two percentage points higher, thus preparing yourself for rate rises and unexpected financial changes. This will encourage a good savings habit and make adjusting to increased living costs and interest rates less difficult.

Step 4: Still struggling with repayments?

Consider repayment reduction strategies such as extending your loan term or debt consolidation. Keep in mind this will stretch your debt over a longer period, attracting interest with every extra month. You’ll need to weigh up the financial and emotional advantages and disadvantages beforehand.

Step 5: What are you actually spending on?

Are you spending more money than necessary on transport, entertainment, takeaway food and other luxuries? Regularly list your expenses to discover where savings can be made. Once you’ve revisited all of the above steps, re-do your budget so you really are beginning the year confidently ahead.