Archive for the ‘Investment’ Category

Want Affordable Housing? A Super Idea Is Limiting Negative Gearing.

Tuesday, April 11th, 2017

Incredibly expensive housing in Australia is nothing new. For several years now we have had record or near record house prices across the country, combined with very low inflation. It means that the ratio of average income to average house price is such that I can’t work out how people are able to convince their lender that they can repay a mortgage.

The lack of affordability is something that has been discussed, but not addressed, by state and federal governments and is now hitting the headlines again. The latest harebrained idea is to allow first homebuyers to access their super to use as a deposit, and the average gen Y would think that would be great. Until they retire and realise that they had missed out on 30 or 40 years of their super compounding. Or perhaps they would twig when they see house prices continuing to increase as a result of all their peers having more money at the auctions. After all, increasing demand pushes up prices.

So what’s the answer?

This is where I get controversial. Firstly, abolish the First Home Owner Grants. They are a smokescreen designed to think that they’re helping young people when in actual fact all they do is push up prices. (How?! Go back and read that paragraph above).

Secondly, introduce an incentive to encourage first homebuyers to save as large a deposit as possible in the form of a grant for people who have at least a 20% deposit. Grant amounts could be for a maximum of 10% of the saved deposits, up to a maximum of, say, $150,000 (so that’d be a $15,000 grant). 20% deposits mean lower mortgages due to not having to pay Lender’s Mortgage Insurance, which in turn lead to reduced repayment times.

This would lower mortgage amounts and encourage buyers to look for cheaper first homes as well as providing a reason for builders to make smaller homes of 2-3 bedrooms rather than the 4-5 bed monsters you see in display villages.

And lastly (drum roll please because this is the really contentious bit), negative gearing must be limited to amounts over around $3 million. I’m not saying that people can’t own more than $3 million worth of property, just that you couldn’t claim a tax deduction for amounts greater than this.

The average Mum and Dad investor would not be affected but the few who exploit the system by claiming a tax deduction on 10, 20, 100 properties or more would likely be forced to sell their portfolios, freeing up housing stock at lower prices for first homebuyers.

For every winner there’s got to be a loser, right? Yes, and in this case it would be investors with more than 3-5 properties as well as banks and companies selling Lender’s Mortgage Insurance.

Yes there is every likelihood that this idea, if implemented, would lead to a housing market crash that would impact many more people than just those in the aforementioned groups, but this housing bubble is going to burst either way.

We just don’t know when.

The Great Education Rip-off

Friday, April 11th, 2014

Claudia graduated university this week. After a long, hard slog involving countless late nights, juggling family life with lectures and tutorials, writing assignments, preparing for exams and giving up so much for those coveted letters after her name, she was able to finally receive her degree. It’s the same crap that everyone who’s been to uni will be able to relate to, but with a couple of differences.

 

Claudia studied while having children. Combine all the above with a screaming toddler while you’re pregnant with number two and it’s amazing she was able to graduate at all. The other thing that sets Claudia’s years of study apart from the average student is that she only recently became an Aussie. That means she was ineligible for FEE-HELP (HECS).

 

Although she was not a full fee paying student like many at Australian universities are, not being eligible for FEE-HELP meant that we had to pay each semester’s fees up front in full. Where Aussie students get a discount for up front payment, overseas citizens who are permanent residents on non-student visas don’t. So it was a costly experience for us as well.

 

The costs of getting a degree these days seem to be ever on the increase, and many young people start their careers with a sizable FEE-HELP debt. Especially those who decide on postgraduate qualifications. In fact, the costs of getting a university education are so high that many people are put off from thinking they can ever attend uni while others prepare for the costs years in advance. Some parents start saving well before the argument over what the baby’s name will be has started.

 

One place people decide to pour their cash into is Australian Scholarships Group. Before you sign up to many years of monthly payments with ASG, I strongly urge you to seek out the experiences of people who have gone before you. Even the quickest look at ASG’s Facebook page will show you how angry many of their clients are and how they wished they’d never put their money with ASG in the first place. Google “Australian Scholarships Group complaints” and it goes downhill from there.

 

It is kind of ironic that in an age when information delivered formally is so expensive, the entirety of human knowledge is accessible via the internet virtually for free. That’s how you can find out about groups like ASG. It’s also how you can find out about alternative was of investing for a university education, like a bank account, index funds or, probably the best savings vehicle for parents with young kids – an investment bond.

 

Inflation: Explained So Simply Even A Carny Would Understand.

Saturday, February 22nd, 2014

This morning Claudia, the girls and I went to the show. If there is one thing that 95% of the Australian population have in common, it’s gotta be the experience of going to the show. No matter how large or small your local show is, whether it has the word ‘royal’ in the title or if it is held at the dustbowl that is your town’s showground, they all have a number of things in common. They are family events, catering for the needs of the very young with the petting zoos right up to the knitting displays for nana and her friends.

 

Every kid remembers going to the show when they were young only to be stopped from going on certain rides with minimum height allowances, or not being able to go in the dodgem cars without an adult sitting beside them. Then the next year comes around and you’ve grown enough to experience rides with g-forces that would challenge a NASA astronaut.

 

Looking back to my childhood, I can recall the rides in sideshow alley costing about 50 cents, and I remember being quite shocked when one year they were all $2 a go. This morning the cheapest rides were for children aged up to about six years and cost $5. These were for things like the jumping castle and teacups, while the big rides (you know, the ones that make you want to chunder just by looking at them) cost up to $15. It’s a great example of inflation. It’s complicated by the fact that the fanciest ride when I was a kid was the comparatively lame Cha Cha and the insurance premiums for the owners of these rides would be much more now that everybody knows about their right to sue. But I know these rides are not rising in price due to the operators suddenly increasing their spending on items like soap and toothbrushes. Because the show only comes around once a year, the effect of inflation on the rides is much more noticeable than it is for stuff you purchase more often.

 

So how do you counter the general increase in prices over time? You must ensure your income rises at least in line with the inflation rate, preferably by a little more than inflation so that by the time your income is taxed you can still keep up with those increased costs. For employees this means negotiating an annual increase in your pay. For those who are self-employed you will have to either increase the cost of your goods/services or find ways to be more efficient in producing them.

 

Inflation also needs to be considered when it comes to your savings and investments. If you keep savings stashed away under your mattress or in a jar in the cupboard, inflation will slowly erode the purchasing power of this money. The same thing will happen if you whack those savings in a bank account that pays little or no interest. With inflation currently at 2.7%, you want to make sure any return your money is earning is keeping ahead of this amount.

 

Growth assets like property and shares will produce returns well above inflation over the long term, but the ups and downs of the property and share markets can be so large as to make a vomit inducing roller coaster look as lame as the kids’ teacups ride.

 

The Ups And Downs Of The Holiday Season

Saturday, December 29th, 2012

As I write this, it’s half past four in the afternoon and almost completely dark outside. No, I’m not experiencing an eclipse, Claudia and I are in Germany. Yes, we brought the kids with us. You’d be surprised how many people asked me if we were going on holidays with our girls as if there was the option of some sort of boarding kennels for infants available that we were not considering. Mind you, after going through the hell that was the flight over here, we may not bring them home with us.

Germany is a country that’s renowned for leading the world in all sorts of areas with brands like Mercedes Benz, Miele, BMW and Bosch just to name a few. They don’t lead the world in share ownership on a per capita basis though.

Thanks to floats of big Aussie companies like Telstra, the Commonwealth Bank and AMP, the level of share ownership in Australia remains among the highest per capita of any country in the world. We also have a much higher percentage of our super invested in shares than most other countries have invested in their equivalent retirement vehicles. And yet, when it comes to information about share prices, there’s one area we fall behind the Germans.

Watch any TV news bulletin and you will see that the finance report focuses on how much the share market went up or down by since its last close. There is rarely info telling you how much it’s risen or fallen by in the last week, fortnight or month, which I find annoying as the day to day price changes mean bugger all in the long term. They only serve to make people shit themselves if they’ve just seen a 1-2% fall in the value of their investment.

A much better approach is the one the Germans take. Have a good look at the graph below and the first thing you’ll notice is that it’s in German. Allow me to translate.

Graph from Sächsische Zeitung 20/12/12

The DAX is the German stock exchange (the equivalent of the ASX – the Australian Stock Exchange). The single black line is how much shares are jumping around by on a daily basis. Tage Durchschnitt means days average, so the double black line shows an average over 38 days, the grey line is an average over 200 days. That grey line is the bit I find most helpful as it really shows a trend over a longer time period, cutting out the noise of all the jagged daily spikes. As shares are an investment that should only ever be held over the long term, it’s the information that should carry the most weight with shareholders and potential shareholders.

Ideally, graphs like these would show even longer trends – over one, two, three, five and seven years, and the people who own these share would only be concerned with how these companies perform over the long term. Until that day comes, just remember that there’s more to German ingenuity than autobahns and great beer.

Gesundes neues Jahr! (You’ll need to Google that for a translation.)

The Property Investment

Friday, October 26th, 2012

Regular readers of these blogs would not be surprised to know that I’ve spent a bit of time with our pest inspector, Greg, over the last 12 months. On his most recent visit he told me about the situation his brother-in-law has found himself in.

The brother-in-law has an investment property in Brisbane and, not one to trust a local pest inspector with such a large asset, he contacted Greg to get him to check over the property. Greg lives in Queanbeyan, NSW, just next to the ACT border – a bloody long way from Queensland’s capital city. Nevertheless, Greg really knows his stuff so his brother-in-law figured it was worth having to reimburse Greg for the return trip in petrol money.

Before Greg arrived at the property he sent a courtesy text message to the tenant to give her the heads up on when he’d be there. He received a very curt reply. Things went from bad to worse when he arrived and quickly realised that the tenant was quite obviously on drugs. Her partner arrived a short time later and a decent sized barney ensued, making concentrating on the job at hand difficult. However, even with these distractions, finding termites was not hard. They were everywhere.

A quick call to his brother-in-law and Greg was able to pass on two pieces of bad news in one go – “Sorry mate, but your tenant’s on drugs and the house is being eaten.”

The tenant was given her marching orders, but not before she (or her partner) left their mark on the property, literally. Greg had another visit after she’d been evicted to discover a bunch of fresh holes in the walls, and that the places where the furniture had been were hiding even more evidence of termite infestation.

So not only has this poor landlord been hit with the triple whammy of bills for treating the termites, fixing the damage from them and also the damage from the previous tenants, but the bills have arrived at the same time as the property is no longer making any income.

If you think I’m telling you not to invest in property, I’m not. Property is a good asset class to have your money invested in, if you go about it the right way. Having several hundred thousand dollars in one property leaves you open to a huge amount of risk. There is a lot of evidence to show that investing in property trusts is a much better way of spreading your money, avoiding the high entrance and exit costs associated with direct property investment and getting a better potential return.

And trusts don’t get eaten by termites.

Pay Day

Saturday, October 6th, 2012

Last weekend Claudia and I had family stay with us a few nights in the form of my sister, her 17 year old son and 15 year old daughter. Whenever we catch up there are invariably a few card and board games played, and as my niece and nephew get older their enthusiasm for playing is not waning. If anything, they’re more and more keen every time.

This visit we had a game of Rummy (which Claudia is a wiz at), Canasta (which I am normally good at but I must’ve been having an off day, or the temperature wasn’t quite right, or the walls were the wrong colour, or perhaps the cards were the wrong size or something) and Pay Day.

If you’re not familiar with it, Pay Day is a board game that’s been around a few years where once around the board is a month. Each month you get mail (mostly bills and advertisements) you can buy insurance, play the lottery (receiving a free ticket), gamble against the bank or your opponents, go into debt, save your money in the bank or take up the opportunity to invest in various products. At the end of every month you are paid $375 (minus the amount of your bills) and may have to pay 20% interest on your debts or receive 10% interest on your savings.

The game we played involved myself, my favourite nephew (yes, I only have one) and my favourite teenage niece (you guessed it, none of the other six nieces are in their teens). We played for about an hour and a half with myself and my niece going into debt and my nephew slowly accumulating cash, mainly from taking up the offer of investing.

The approach the siblings took to the game was quite different. While my nephew was willing to invest large amounts and wait ‘til he landed on the square that allowed him to cash them in, his sister considered it to be too risky. She was more willing to gamble her money in a way that saw the odds of her winning big bucks to be 1 in 3 (and the chances of blowing her dough to be 2 in 3). After 90 minutes she threw the towel in and headed for bed, leaving my nephew and I to go head to head.

As the savings we accumulated grew it meant more interest was being paid at the end of each month which in turn led to a conversation about the money my nephew has in the bank. I explained to him that if he were to seek a savings account with a higher rate of interest, then the money he is saving for his first car would accumulate faster. I told him that real life worked just like the board game.

And it clicked. I actually saw in his face the moment when he got it – when he grasped the concept of saving, investing and compounding, and how much easier the game is to play when you can afford to pay your bills. It was great, not just to be able to play with loved ones, but to pass on an ever so important message.

Now I just have to play the game again with all those nieces. (Oh, and for the record, he beat me convincingly.)

How I Invest My Money

Friday, August 31st, 2012

I have often heard people complain about the bad treatment they receive from their bank and I completely understand why so many people hate theirs. I hate mine. I also encourage people to move their banking services away from the big banks and towards mutuals (credit unions, building societies and mutual banks – you know, the ones that give a rat’s about their customers). Sometimes it’s not viable to take your business elsewhere, leaving you in the situation where you have to stay with a bank you hate.

Some people have the attitude that if you don’t like being screwed over by a company like a big bank, become a shareholder and share in the profits every time they do something like fail to pass on interest rate cuts. I don’t encourage this behaviour and I don’t have any money invested in the shares of big companies who put profit before people. It means I sleep well at night (well, I would if I wasn’t being woken up by one screaming daughter demanding a breastfeed and the other screaming daughter wanting a cuddle, but hey, I do enjoy those middle of the night hugs).

For more than 10 years I have invested my money in places most mainstream investors don’t now much about. I don’t hold money in mining companies, I don’t receive a cut of the profits from poker machines, and I don’t make money from companies that produce weapons. The money I invest doesn’t go into areas where children are forced to work rather than attend school, and it doesn’t go into the pockets of greedy bankers.

My money goes into healthcare, education, recycling and renewable energy, companies with labour force standards that see their workers paid fair wages, companies that actively support the participation of women in the workforce. My money is invested in ethical investments.

Photo of a man surrounded by pv solar giving the camera the thumbs up.There are two very good reasons for this. The first is that I strongly believe those companies who look to the future are the ones that will have long term sustainable profits. They are the companies that will be the leaders of tomorrow, rather than the ones who dread what the future of plain packaged cigarettes means for their bottom line. And the returns for ethical investing are consistently showing that they are outperforming their mainstream rivals.

The second reason I go for ethical investments is because I want to leave this life knowing that the world will be a place my children, their children and even their children’s children will want to live. A world where more money is going into research to fight disease and less going into research to fight wars. A world where more kids have the opportunity to get educated, and ignorance and prejudice is rapidly confined to the history books.

Ethical investment may not be everyone’s cup of tea, but it’s sure worth considering.

Gold, Gold, Gold!

Friday, August 3rd, 2012

It’s a cry we love to hear every leap year around this time, even if it’s for an athlete we’ve never heard of before and in a sport we didn’t realise was part of the games. I always find it amusing to see how many commentators on the telly who normally don’t cover any sport but football suddenly become expert enough to call Olympic events.

Australia’s fascination with gold goes further than whether we will end up in the top seven in the medal tally. There are plenty of experts around who will only be too happy to tell you when you should be buying the precious metal itself.

Gold tends to come in two forms – gold that has a function and gold that doesn’t. Functional gold is not just jewelry but also the stuff that you find in computer boards and that dodgy person’s smile. Gold that has had its purity lowered to 18 Karat or 9 Karat will obviously not have the same value as its 24K pure counterpart. And any premium paid for jewelry designs like the ol’ love heart may have value for you but doesn’t add anything to the worth of the metal itself. Anyone who has wanted to get rid of that ring or necklace from their former lover knows that the price you are offered at the pawnbroker is only about 10% of what it cost. As if you needed another reason to hate that person even more.

You may be fortunate enough to have in your possession some gold jewelry that has value because of its age or the significance of the previous owner, or coins that were pulled up from the ocean floor many years after the pirate ship they were aboard sank. But the problems surrounding the value of these items and the security issues of holding them are similar to those for the gold that doesn’t have a function.

When you see the gold price on the news, it refers to the price of 24K gold per ounce in US dollars. Most investors know it as bullion and there are plenty of people who talk it up when the price is high. When you think about it logically, this is really weird. Why buy something that is really expensive if you want it to go up in price? Wouldn’t it make much more sense to buy that item when it was cheap, especially if, like gold, the price goes up and down so much?

Gold’s greatest problems are that not only does it have no income flowing from it (like the income you can get from shares, property and savings accounts), and not only do you have to rely on someone paying more for it than you did to make a profit, but that you have to store it somewhere. I guess you don’t have to store it somewhere secure, but it kind of makes sense to do so. If you are anything like me, the only safe you ever see is that little one in the wardrobe of the hotel you stayed in on your honeymoon.

So next time you hear someone talking up the merits of gold as an investment, just remember that the gold worth getting is the one draped around your neck before the national anthem is played. If you have as much chance of getting that as I have, aim for a ring from a loved one and leave the bullion to the mugs.

The Negative of Gearing

Sunday, April 29th, 2012

Negative gearing is great – just ask anyone who knows anything about money, or anyone who thinks they know. Negative gearing is also not properly understood by the general public.

Basically it’s a situation with investing where you borrow money to purchase an asset (like a house) and have to pay more to the bank in interest than the money you are receiving in income (like rent from your tenants). Australian tax laws allow you to effectively claim a tax deduction for the difference, and as every Aussie knows, tax deduction = good. But what’s good for an individual might not be good for society.

Leaving aside the fact that negative gearing can totally ruin you financially if you don’t have the right income to support it, negative gearing has been blamed for helping to push up the cost of housing and creating a larger gap between rich and poor. One reason for this is because there is no limit to the amount an individual can negatively gear. Why not?

I reckon if the federal government had the balls, they would take a look at the negative gearing sacred cow and change it, gradually, over a number of years to make the system fairer. Currently there is no limit to the number of properties you can have negatively geared and claiming tax deductions on in your annual tax return. I reckon there should be a maximum introduced of, say, 18 properties (yeah, a few individuals have an enormous number of properties under their belt). The next year the number should drop by one and keep falling by one per year over 15 years so the maximum number of properties that can be negatively geared by anyone is three.

I’m not saying you should not be allowed to own more than three investment properties, just that you can’t claim tax deductions on the interest of the loans of more than three. Introducing a change over a long time period would not adversely affect the property market or the average Joe. The super rich would hate it, especially if the system was widened to take into account negative gearing on shares and managed funds as well.

If the average Aussie property is deemed to be worth $475,000, that’s a good place to start for the equivalent amount of shares or managed funds that can be negatively geared (multiplied by 18 for the first year, 17 for the second, etc.). Lowering the amount that really wealthy high income earners can claim on their tax makes the whole tax system fairer for all of us.

Another way of bringing house prices down to more sustainable levels is to increase supply by encouraging new houses to be built. Allowing negative gearing only on new houses, or properties which have been vacant for 12 months or more, would see more properties available for renters without pushing up the prices of existing dwellings. But introducing a sudden shock like that into the tax system would spell the end of the political party that did it.

Sam or Greg?

Saturday, February 4th, 2012

In recent weeks The Wiggles announced that the yellow Wiggle was changing. Wiggles management said that the original yellow Wiggle, Greg would be rejoining (unlike the way that Pippa from Home and Away changed where we just had to accept a new person playing the role without a press conference – I’m still getting over one).

If media reports are true, Greg’s return has less to do with wanting to don the skivvy again and more to do with a bad investment. When Greg left the group 6 years ago he received a payout of around $20 million. This in turn was allegedly invested into a property development that went belly up. If this is the case it would seem that Greg broke one of the fundamental rules of investing – don’t put all your eggs in the one basket. This decision led, in part or full, to Sam leaving the group after having been recognised as bringing a new energy to an aging outfit.

There have been the inevitable suggestions from the public regarding whacking Sam in a green top and adding him as a fifth Wiggle, but they’ve been there before.  The original Wiggles album was recorded by five cast members, albeit without their famous colours (and if you have a copy on CD, signed by all five, I reckon it’d be worth a bit.) The fifth Wiggle, Phillip Wilcher, wrote most of the first album, which was re-released years later with all of Wilcher’s work removed.

For a group described as Australia’s richest entertainers, there would seem to be little generosity extended to Sam. He allegedly earned a salary of $200,000 a year for his time as lead singer and was offered just $60,000 when he left. It might seem like a lot of money to you and I, but it’s a tiny fraction of the $27 million they earned last year. In recent days, Wiggles management have released accounting figures to show that despite earning many millions, the outfit made a $2.5 million loss last year and that the five owners are propping the company up with a $7.2 million loan via another Wiggles company. Talk about complicated accounting.

It seems that money, and in this instance big money, changes things. I met The Wiggles 15 odd years ago and was thoroughly impressed with them – they were genuinely nice guys who adored their fans. I don’t know if and to what extent they may have changed since then.

Whether you are on team Sam or team Greg, one thing can’t be denied – Sam’s departure is a blow to the chances of The Wiggles implementing a succession plan to hand over the performance to four new Aussie faces. High Five managed to keep their brand alive after the original cast left but there is concern that The Wiggles won’t pull off the same stunt when the time comes. If they can’t then it’s the kids who will suffer (and their parents who will have to rely on aging DVDs and/or a US based group to see them through every morning).

All this may or may not be accurate. The truth, as they say, might lie somewhere in the middle. But I can’t help thinking that the fresh young face of Sam would still be there if it were not for that investment gone wrong.

Think about that next time someone says you should put all your money into a single asset.