Reed Financial Blogs

5 tips for money using the marshmallow test

2011-03-14T15:25:00.000+11:00

A recent documentary on the ABC called 'Life at 5' examined children as they grow older and it offers an insight into traits that predict their character later in life.

One of the interesting tests was based upon a 1960's study by Stanford University named 'The Marshmallow Test'. This involved the placing of a marshmallow in front of the child, and then telling them that they can eat that one now, or if they can wait a few minutes, upon the adult's return to the room they can 3 instead of one. Not easy huh!

The really interesting part is that the psychologist on the ABC series outlined that in past tests, they found about 2/3rd's of kids ate the marshmallow straight away. 1/3rd of kids waited til the adult returned so as to get more.

When the children were interviewed as young adults, those that shown self discipline by not eating the marshmallow were much more successful in life. The US results showed similar results with the 'disciplined' children growing up to be more self-assertive, dependable, socially competent and averaging higher on exam results.

While this is very interesting as a parent, there is a strong parable to be taken for wealth management.

A key success factor of wealthy individuals can often lead us to believe that they have a high income or a great business, but rather they usually display a strong self discipline to delay gratification.

Here are our 5 tips for disciplined wealth accumulation:

1. Avoid temptation - stay away from the shops when you're bored.

2. Saving is a habit - the magic of money lies in compound interest and time. Ensure that you keep saving regularly for a wealthy retirement.

3. Use imagination - use your mind to imagine that you have what what you want, but wait until you have the cash to actually purchase it. Avoid credit.

4. Know your goals - manage your risks by knowing what you want, and then adjusting your allocation of money to more conservative assets when you reach your goal to enjoy a smoother investment experience.

5. Teach your kids - give your children the opportunity to manage money. Provide an allowance and educate them about saving, charity and spending.

If you'd like to see parts of the Life at 5 program, including the Marshmallow Test <>

And here's an amusing video of the marshmallow test with kids filmed in the USA <>

Generational Wealth

2011-01-13T16:11:00.000+11:00

Many of us have the ideal goal of providing a financial legacy to our family.

Starting this process however can sometimes be a complex task, so let's address a few common questions we receive.

The solutions below typically have one key message, start early!

The magic of compound interest and disciplined investing provides you with the opportunity to contribute small amounts now, rather than attempting to find large chunks of money later on.

Below, we have briefly commented upon frequently asked issues that clients have with raising children. But if you'd like to know more detail, please feel welcome to give me a call.

Schooling

There are a variety of methods to fund education expenses. These can include:-

* Redraw from the mortgage - Some couples prefer to plow money into the mortgage, thereby saving interest on the home loan, then redraw the money later when it's needed for schooling. My only concern with this strategy is that we can sometimes forget this money being attributable for this purpose.

Others prefer to allocate funds for their purpose in seperate account. This keeps money siloed away and savings can be disciplined to meet the goal.

* Bank accounts & Managed Fund Savings - With a rising interest rate environment, there are options to save for kids educations via bank accounts, or even managed funds as a long term outlook is likely to be rewarded given where we are in the stockmarket cycle.

The primary downside for this form of saving is that the ownership structure could cause tax implications, which reduces the net returns.

* Education Funds - These type of funds have been around for many years. The significant benefit is that they are typically established as a type of bond with 30% tax on earnings. However, they also offer additional tax savings where tax on any earnings have the potential to be used so as to pay out education related expenses.

The downside in the past has been that you would have poor investment choices available, as well as strict criteria for when you could access the money, ie. if a child didn't go to university, you may get your capital back, but with no earnings.

Fortunately, there have been new products enter the marketplace that still offer high tax efficiencies, but also offer greater investment choice, as well as flexibility for you to use the education expenses at your own discretion.

Lifestyle Funding

Some parents take the view that the kids should do it the hard way, and earn their own money to fund things such as a deposit for a house, buying their own car, etc.

That makes a lot of sense, and certainly some of the richest men in the world (eg. Bill Gates, Warren Buffett) subscribe to the same theory.

Nevertheless, we do receive queries from parents and grandparents that would like to consider options so as to help them out for when the kids are young adults.

Based upon the size of money needed nowadays for a deposit, it is beneficial to either start when the kids are very young, or update your Will to look after them.

But if you're willing to look at a long term investment, ie.10-20 years, then you do have a wide range of instruments worthy of consideration that may be of interest.

Rather than speculating and dropping $5,000 plus on the wing and a prayer of some 5 cent mining stock becoming the next BHP, you could consider the use of market returns with a combination of leverage to potentially build over time to a significant amount.

For example, let's say you invested $5,000 initially then added $1,000 per year. Over a 21 year period, with 10% returns, this would amount to over $107,000. The use of leverage on a self funding basis, eg. ETF Index Instalment Warrants, could assist either the amount of money you contribute each year, or to potentially boost the return.

Retirement

Parents, and grandparents, typically don't even think of superannuation for their young kids. But it's definitely an attractive component of creating generational wealth.

In fact, this is something of a hobby horse of mine for some time. In a nutshell, if the government decided that they were going to put the Baby Bonus ($5,294) into a newborns super fund, then the next generation could be very close to substantially reducing the need for an aged pension.

Here's an example, a $5,294 super fund invested at birth with funding from the Government. After 21 years, assuming 8% returns and no new contributions are made at all, the fund would be valued at $26,649 ($14,326 in today's dollars @ 3% inflation).

If the 22 year old then worked at a job earning say $45,000 to $50,000 per year, and their employer made $4,000 per year contributions rising with inflation, then by the time they are aged 65, they'd have $2.6 million in their super fund (or $724,000 in today's dollars).

In today's money, this could produce $40,000 to $50,000 in retirement, tax free. It'd ensure a comfortable retirement and don't forget these assumptions didn't include any contributions from them personally.

Unfortunately, this is hardly the policies of election winning governments as newborns can't vote, so it's unlikely we're going to see incentives such as these for the future.

Nevertheless it is worth considering superannuation strategies for families considering long term wealth vehicles for their children.

If a super fund can be commenced while they are young, and even minor amounts contributed every now and then, this is likely to set them up for financial peace of mind when they themselves are parents.

10 factors of happiness

2011-01-13T15:58:00.000+11:00

On a regular basis, the National Centre for Social and Economic Modelling explores life satisfaction trends in Australia, examining how different aspects of people's lives impact on happiness.

Their most recent report had some ten interesting key findings:

1. Having children may increase happiness and people from bigger families tend to be happier than those with fewer children.

2. Satisfaction increases as the family unit grows - 40% of people aged 30 and above with 4 or more children are very satisfied with their life overall compared to 28% with one child, and 27% with no children.

3. The high incidence of divorce is taking it's toll on some family relationships. Around 30% of parents report being dissatisfied or not so satisfied with their step children, compared to about 10% of parents with their own children.

4. Australian workers are happy with their security, flexibility and the nature of their jobs, but less satisfied with their working hours and pay. The share of people working longer hours has increased over time, with around 17% working more than 50 hours per week, while at the other end of the spectrum more and more people (30%) are working part time.

5. Unemployed Australians are the least likely to report being satisfied (42%) and the most likely to report being not so satisfied (23%) or dissatisfied (3%) with life.

6. Men are more satisfied than women with it comes to their relationships with partners, share of housework and level of free time. But women are slightly happier than men with their own relationships with their own children.

7. Spending money wisely can boost happiness and particular types of wealth, such as the family home, superannuation and savings in the bank are linked to greater happiness than others.

Non home owners for example, report lower satisfaction (7.7 out of 10) than those who own a home valued above $500,000 (above 8 out of 10).

8. Some debts like those associated with credit cards and overdue bills can lead to lower levels of happiness but larger debts above $100,000 like mortgages linked to more valuable assets can positively influence happiness.

9. Satisfaction with life is high when in the earlier twenties and have fewer responsibilities (above 8%), decreasing in the late thirties and forties (around 7.6%) as the pressure of balancing family life with work responsibilities grows and increasing slowly again to reach similar levels of their youth as they move into retirement.

10. Other factors like relationships with friends and family, health and work are important to overall happiness.

These findings are probably common sense to many readers. It also is in alignment to many overseas studies.

A 2010 study at Princeton University actually went a step further with their link between income and happiness.

They found that a $75,000 salary was an ideal figure.

Researchers indicated that the lower a persons salary falls below this benchmark, the unhappier he or she feels. But no matter how much more they earn above that level, they don't report any greater degree of happiness.

Getting ahead

2010-08-05T20:34:00.001+10:00

Many people believe that they'll be happy with more 'things'. Quite often it's what is the cause of making them unhappy. This is a good article that is a common concern: http://www.mercedsunstar.com/2010/08/04/1517853/getting-ahead.html

Work less, live longer

2010-08-05T20:25:00.000+10:00

People who work more than 10 hours a day are about 60 percent more likely to develop heart disease or have a heart attack than people who clock just seven hours a day.

The ATO is watching

2010-06-30T13:46:00.000+10:00

ATO targetting Engineers, Teachers and Mechanics:-
http://www.smh.com.au/money/tax/ato-joins-the-data-dots-20100609-xupg.html

Fund Managers warned over window dressing

2010-06-29T19:12:00.000+10:00

Active fund managers warned about 'window dressing' their end of financial year portfolio returns. http://news.smh.com.au/breaking-news-business/funds-warned-over-window-dressing-20100629-ziss.html

Give the Sutherland Shire a miss for investing?

2010-06-29T19:04:00.002+10:00

Terry Ryder isn't keen on the Sutherland Shire for investment property. Interesting article:
http://au.ibtimes.com/articles/27513/20100609/sydney-shire-real-estate-no-go-zones-investors-rba-nsw-queensland-victoria-western-australia-tasmani.htm

Medic!

2010-06-22T19:29:00.002+10:00

If you have been putting off that expensive medical or dental procedure, schedule it before June 30 if you want to maximise the amount you can claim back through the tax system.

At present, if your medical expenses (after deduction of private health insurance and Medicare), amount to more than $1,500 in any one financial year, then you can claim 20% of the amount above the $1,500 benchmark.

Unfortunately, as announced in the recent Federal Budget, this $1,500 benchmark is increasing to $2,000 from 1 July, 2010.

There is no upper limit to what you can claim, and it's always difficult to know if you're going to claiming so much with unexpected medical visits during the year, so the tip is to 'save everything' in a box and then revisit the receipts prior to seeing the accountant at the end of the year. If the expenses are over $1,500 (for this year) then submit the receipts for your tax return.

Note that these receipts include you, your spouse and dependants.

For example, if you spent $5000 on family medical expenses (net of Medicare and private health rebates), subtract the $1500 threshold from your net expenses and you are left with $3500 out-of-pocket expenses. This would mean that you are eligible for a rebate of $700 (20 per cent of $3500).

You can claim for expenses relating to an illness or operation paid to a doctor, nurse, chemist or hospital.
If you haven't kept receipts, all is not lost. You can go to your pharmacist at the end of the tax year and ask for a printout of all the medications you purchased that year.

You can also ask for an itemised statement from Medicare or your private health insurer.

It may be beneficial for couples to combine medical expenses and make a claim in the name of the person on the higher marginal tax rate.

For what you can and can't claim go to the Tax Office website: ato.gov.au. Search "medical expenses".

Last Minute Tax Planning

2010-06-22T19:27:00.001+10:00

With only a matter of days away until the end of the financial year, a quick revision of tax planning items may assist in minimising tax this year.

Superannuation has retained its appeal as a key strategy while gearing, effective tax structuring and maximising timing opportunities should also be considered.

TIMING

* Deferring income until July 1 (eg. delay any year end bonus when tax rates are lower.)
* Bringing forward tax-deductible expenditure.
* If you're retiring and may receive an unused leave payment or ETP, then delaying until next year may also be beneficial.
* Delay maturing fixed interest deposits to 1 July
* Defer capital gains where possible
* Forego salary pre-payment if taking annual leave now
* Pre-pay interest on tax deductible investment loans
* Pre-pay income protection premiums in advance
* Bring forward deductible expenses such as equipment, subscriptions, financial planning fees, school fees covered by the tax rebate, donations and medical expenses

INVESTMENTS

* If you've sold an asset and realised a capital gain, perhaps assets with capital losses can be sold to offset some gains.
* Can income producing assets be transferred into the name of a lower earning spouse, a trust or super fund (eg. self managed super fund).

SUPERANNUATION

* Government co-contributions are a priority if you are eligible. To be eligible for the full benefit, you need an income of less than $31,920, although taxpayers earning up to $61,920 can receive a partial payment of up to $1,000 (full benefit amount).
* Up to $25,000 can be contributed as concessional superannuation contributions (eg. salary sacrifice) and up to $50,000 if over the age of 50.
* Consider salary sacrificing bonuses into superannuation if expected pre June 30.
* High income earners with a part time working spouse may consider the spouse contribution rebate. Contribute up to $3000 on behalf of a spouse earning less than $10,800 and claim an 18 per cent rebate - or $540.
* If you have turned 65 during the financial year, you should consider whether to use the $450,000 "bring forward" limit for non-concessional contributions. While there is a $150,000-a-year cap on after-tax super contributions, the rules allow up to $450,000 to be contributed for the next three years for those under 65. So if you have turned 65 this year and don't use that provision, you will be limited to $150,000 a year from now on.
* If you are eligible to start a transition to retirement pension, this should also be considered as it's a tax-effective way to build your retirement savings.

GEARING

* You may consider setting up facilities such as margin loans before June 30 (with pre-paid interest to generate a tax deduction now),
* Pre-pay next year's income protection insurance, the costs of which can also be claimed as a tax deduction up to a year in advance.
* Consider the use of a capital-protected loan for equities, which also received a tax boost in last month's budget, with the benchmark interest rate (the interest you can deduct each year) being lifted from the Reserve Bank's standard variable home loan indicator rate to that rate plus 1 per cent.

OTHER TIPS AND TRAPS
* For pre and post retirees, another consideration is gifting rules: retirees receiving the age pension can give away up to $10,000 a year ($30,000 over five years) without the money being included in means tests.

GOOD NEWS - Less Tax From Next Month

From July 1, the last round of election tax cuts will deliver further savings to the average taxpayer. You will have to earn more than $37,000 to pay the most common tax rate of 31.5 per cent (including the Medicare levy) while those earning between $80,001 and $180,000 will have their marginal rate cut from 39.5 per cent to 38.5 per cent. Only those earning more than $180,000 will have to pay the top marginal rate of 46.5 per cent.

Pensioners look out

2010-06-22T15:21:00.002+10:00

Did you know? Pensioners who fix solar panels to their home and sell excess electricity back to the power company will have any credit or rebate counted as income and their pension payments cut.

How long have you left to live?

2010-02-11T11:00:00.000+11:00

Want to know your life expectancy? http:www.mylongevity.com.au
Excellent website - free service, tailored to you.

Tax system to be reviewed

2009-11-02T21:00:00.000+11:00

"The times, they are a changing" Never a more apt description could be quoted for the Australian financial system.

Names such as Henry, Ripoll, Cooper are probably not that familiar to you right now. But in coming months, the media will be touting their names daily.

Ripoll is examining the financial service system as a whole. There is likely to be a number of recommendations that effect the financial industry profoundly in the near future.

The Cooper review has been charged with examining and analysing the structure and operation of Australia's superannuation system. The Review is focused on achieving an outcome that is in the best interests of members and which maximises retirement incomes for Australians.

Superannuation has been tinkered so much over recent years, we would hope that a softly-softy approach is recommended from the Cooper review.

The bell-ringer for December 2009 is likely to be the Ken Henry Review. Henry speaks about the review as a once-in-a-generation game changer.

He will examine, and likely overhaul, our taxation system.

There has already been media speculation this week that the tax return system will basically be 'automated' for PAYG employees, thus freeing them from seeing their accountant unless they have more complex tax issues such as investment properties, etc.

In a recent Sydney Morning Herald article, the following points were speculated as being touched upon in the Henry Review as their recommendations to the government:-

Cheaper insurance - possible lowering/removal of stamp duty/levies
Alcohol taxation - a review of the bias in the taxation levels
Housing stamp duties - likely to remain
Payroll tax - likely to remain
Company tax - likely to fall from 30% down to 25%
Capital gains tax - possible removal of the 50% discount
Superannuation access - possible lifting to age 67
Lifetime annuities - examining a potential government role for lifetime income
Road use - possible recommendation of a road user-pay model

More surprises are tipped on top of these leaked items.

So over Christmas, you can expect to read plenty on these three enquiries as they unfold.

Good time to check how much you're putting into super

2009-10-27T18:56:00.000+11:00

With the new financial year 1/4 of the way through, it's good timing to double check how much super you're contributing.

As announced in the 2009 Federal Budget, the government has cut the superannuation concessional contributions (pre-tax contributions) cap from $50,000 to $25,000 per year from 2009/10 for those individuals under 50 years of age. This includes both employer contributions, and any salary sacrifice amounts you may be adding.

For those aged 50 to 74 the concessional contributions cap has been reduced from $100,000 to $50,000 per year (non-indexed) up to 30 June 2012.

In light of the changes it is important that you consider these limits, as an excess contributions tax of 31.5% will be levied on the amounts contributed over the new caps. This is on top of the 15% tax paid by your super fund on the concessional contributions.

The amounts contributed that are in excess of this will also count towards your non-concessional contributions cap (ie. after-tax money) of $150,000 per year.

If this limit is breached, then a further 46.5% tax will be levied. The total tax paid on the excess contributions would amount to a whopping 93%.

If you are uncertain as to the amount of super you're contributing, or believe that you may exceed the limit this year, please contact me to discuss further.

$150 rebate on new washing machines

2009-10-08T14:22:00.000+11:00

It looks like we'll be needing a new washing machine soon.

If yours is on the blink as well, then have a look at the $150 government rebate on offer until 30 June 2010.

http://www.sydneywater.com.au/Water4Life/InYourHome/WashingMachineRebate/

Should you invest all-at-once, or drip feed your money in over time?

2009-10-08T12:22:00.002+11:00

Good 5 minute video from Professor Ken French on this subject:
http://www.dimensional.com/famafrench/2009/06/dollar-cost-averaging.html#more

Harry Triguboff warns against rate rises

2009-10-06T18:53:00.000+11:00

Interest rates are up, and so's Harry's blood pressure by the look of things. Plenty of comments from readers on this article:
http://www.theaustralian.news.com.au/story/0,24897,26165249-643,00.html

National Rental Affordability Scheme

2009-09-28T15:46:00.000+10:00

The Federal Government has created an interesting initiative to assist with the rental affordability concerns of low to middle income earners. It has been named the National Rental Affordability Scheme (NRAS).

The efforts to develop measures such as this should be applauded. However there is a distinct lack of publicity for the scheme, meaning that investors may not be aware of this opportunity.

The National Rental Affordability Scheme is an Australian Government initiative to stimulate the supply of new affordable rental dwellings by up to 50, 000.

Under the Scheme investors will be eligible to receive a National Rental Incentive for each approved dwelling, on the condition that they are rented to eligible low and moderate income households at 20 per cent below market rates.

For investors, the first reaction is simply a loss of money, ie. discounting rental income by at least 20%. However, the Federal and State Governments have a subsidy that may equal, if not be greater than, the discount in rent.

For example, as of June 2009, the Federal Government grant is $6,504 in tax rebates per year for the next 10 years. A number of State Governments, provide investors with a $2,168 in a cash grant per year for the next 10 years. These amounts are then indexed each year as per the rental component in the national CPI.

The tenancy leases are generally of a longer term than a standard residential lease, while non-profit organisations are typically the rental property managers for each property.

Discussing this scheme with investment property specialists, there appears to be the sentiment that these properties are designed for Housing Commission type arrangements, or Defence Force style schemes.

The government has unfortunately failed to clarify these misconceptions. It is documented that the target market for this housing scheme will be public service type occupations such as nurses, teachers, police, fire brigade, etc.

Our review of providers in the marketplace indicates that there are a variety of real estate investment providers offering different versions and options within the NRAS scheme.

While the NRAS opportunity deserves further exploration for real estate investors, it would pay to do some careful research for all options prior to committing to a long term investment.

Further information can be sought from the ATO website.

Employment law changes

2009-09-18T19:42:00.000+10:00

New work balance laws come into effect on 1 January. Doesn't seem to be well publicised yet:

http://brw.com.au/viewer.aspx?ATL://1252893659327

Intrinsic importance

2009-09-16T17:40:00.000+10:00

Good 5 minute video for prioritising things that matter:

http://www.youtube.com/watch?v=WhKLSTBSgwI&NR=1

Staff motivation and compensation

2009-09-15T11:31:00.000+10:00

Here's an excellent video for any business owner/manager to view on staff motivation and compensation.

http://www.youtube.com/watch?v=rrkrvAUbU9Y

Your free credit check

2009-09-09T07:07:00.003+10:00

Ever wondered what your credit history actually is?

It's a good idea to check about once a year. You can apply for the details for free. Here's the link:-

http://www.mycreditfile.com.au/my_credit_file_product_information/my_credit_file_product_information_default.aspx

You Tube - 2008 version - Did You Know 3.0

2009-08-28T19:29:00.002+10:00

Interesting video on global change

http://www.youtube.com/watch?v=jpEnFwiqdx8&feature=fvw

Work harder, earn less

2009-08-24T14:24:00.001+10:00

As kids, we're taught that the harder you work at something, the more rewards you get. It's so true in many facets of our life.

However, numerous academic studies show that the more 'work' you do at sharemarketing investing (ie. trading), then the risks are evident that you will underperform the market itself.

Think of it this way. Some of the smartest people in the world are recruited by global financial corporations. After years of education, training and experience, the best and the brightest are then empowered with the corporations resources to buy and sell stocks every day.

The resources at their disposal is enviable. They have research staff worldwide, highly intelligent analysts as well as the ability to contact company CEO's and Directors to ascertain up to the minute information.

So these people are genuinely at the forefront of information and you would think, the ability to predict which way a company's share price is going to move.
Wrong. Over the long term, after fees and expenses, the majority of actively trading fund managers underperform the market in any one year.

What about the bad times then?...........if the market is diving off a cliff and has fallen by over 50%, then won't the smart fund managers be putting their money in cash and staying out of the market altogether?

It seems the answer is 'no' again.

Recent research from Morningstar has shown that the assumption that active fund managers will perform better in a depressed market may be under threat, with results from a survey of 47 fund managers revealing less than half of active fund managers outperformed the Australian market index in 2008.

Out of 29 active fund managers included in the survey, only 13 achieved returns above the benchmark in 2008.

The research also confirmed that only a minority of active fund managers have been able to outperform the market in the long term. Less than one-third of all active fund managers outperformed over a three, five and seven-year timeframe up to March 2009.

"The argument made by the proponents of active management - that bear markets strongly favour active managers since indexes are sure to follow as markets head south - simply did not hold up in 2008," the report said.

On average, active management did more harm than good, the report said.
Of interest, we have been analysing our DFA and Vanguard portfolios. While we typically do not reference our short term performance, the recent outperformance of these funds against that of the peer Morningstar Benchmarks (for Growth and Balanced Portfolios) has been showing very significant numbers.

In the past 18 months we have recommended investors 'stay in their seats' wherever possible. When markets return sharply, just like they have in recent months, then you can capture the market return. The rewards on offer over time are attractive, the key is patience and discipline.

Disclaimer: The statistics and figures presented in this report are based upon historical data, obtained from external sources. There is no guarantee or suggestion that markets will behave as they have in the past. Future results will be affected by political & economic events. Information is not directed to any particular persons investment financial objectives. Therefore, you must seek advice tailored to your individual circumstances before making any specific decisions.

Responsibility for the content and opinions expressed in this document rests solely with the author and opinions expressed do not necessarily represent the views and opinions of Millennium3 Financial Services Pty Ltd

Millennium3 Financial Services Pty Ltd adheres to the Privacy Act.

An investment lesson from sport

2009-08-21T11:57:00.001+10:00

It's probably no secret that i'm an avid follower of the St.George-Illawarra Dragons. So when a story crosses my desk about the coach Wayne Bennett, it's a sure bet that i'm going to read it.

The interview with the coach reviewed his keys to success. There was one point that he has echoed in his own biographies and other interviews.

Bennett states " The biggest problem with most leaders today is they don't stand for anything. Convictions provide that direction. If you don't stand for something, you fall for everything."

He continues, "Follow your beliefs and don't give in to yourself".

These comments have significant relevance for investors.

Having an investment philosophy that you believe in, and will adhere to no matter the economic commentary and media noise, is likely to the number one determinant on whether you will have a successful investment experience or not.

Your determination to remain steadfast to reaching your goal, and belief in how you will achieve it is likely to be more influential on your outcome, than the underlying investments themselves.

I have mentioned to many clients that a significant 'value add' that we provide is in our role to ensure that investors adhere to the plan, no matter how boring the investment philosophy may be.

Managing 'greed' and 'fear' is part of our role with investors. This is human nature.

But we can provide you with the knowledge and confidence of an investment methodology that has been proven to work over decades and decades of market rises and declines.

Once you have that confidence and awareness, it's inevitable that times will come when you start to doubt yourself. Particulary when the media is shouting from the rooftops that we're approaching a financial armageddon.

As Warren Buffett has stated in the past, "market falls are times when money moves from weak hands to strong hands." It makes sense as research has shown that investors typically enter the market when it's high, and sell out when it's low.

If you're confident in your investment philosophy, then stick to the Wayne Bennett saying, "Follow in your beliefs and don't give in to yourself".

Helping you save

2009-08-20T10:29:00.002+10:00

Here's a website service of interest.

Tracks your savings to match your goals with calendar targets. Simple and effective. Made in NZ.

http://www.pocketsmith.com/

Not everything on the web is cheaper...

2009-08-19T18:18:00.002+10:00

Direct life insurance can cost up to 8.5 per cent more and offer less. (SMH 19/9/08)

Link:
http://www.smh.com.au/news/business/money/planning/convenience-at-a-high-price/2009/08/17/1250362027580.html

40th birthdays and Penfolds Grange

2009-08-18T21:13:00.003+10:00

Interesting article by Huon Hooke in SMH today.

Apparently so many Penfold Granges are bought for 40th birthdays, that the secondary market prices escalate by roughly 30% for the 40th year vintages.

This has been the case recently with the 1968 Grange.

May be a tip to buy early if you've got a good friend turning 40 in the next year or two.

Jon Stewart versus Jim Cramer

2009-08-17T13:31:00.004+10:00

I've referred to this Jon Stewart versus Jim Cramer debate in a post below.

This is the link for the You Tube video of the episode:-
http://www.youtube.com/watch?v=Vi6bxKAAHzQ

Definitely worth a look if you haven't seen it before.

July 2009 - Your Wealth Newsletter

2009-08-15T23:52:00.004+10:00

Where to next for investment property?

A combination of record low interest rates, tight rental markets and generous grants to first home buyers continues to buffer residential property from the falls experienced in many developed economies.

CBA's Commsec Research report on 30th June pointed to the increase demand for housing due to the fastest population growth in 40 years, improved affordability and weak returns on other asset classes. Over the last 6 months, 87,000 homes have been bought by first home buyers.

You may recall a couple of years ago a University research paper that i commented upon. It examined the variety of factors that influence prices of residential real estate. They found the dominant factor to be interest rates. Obviously, the super low interest rate environment we are in is greatly assisting to bolster housing market prices.

This same article also highlights their research that property price movements take time. It can be a period of 12 months after interest rates fall before house prices trend upwards. If you would like a free copy of this Research paper, just email me david@reedfinancial.com.au and I will email it to you.

On the 10th June, Commsec Research had this to say about the prospects of residential real estate:

"Investors should think long and hard about property investments. Rents are rising at double-digit rates, construction is not yet keeping pace with population (although latest signs are encouraging), interest rates are low and home prices are rising."

Bullish sentiments indeed.

However, there are two key points that are short term risks for this asset class:

1) Higher unemployment
2) Existing high unaffordability base

Unemployment is an area that receives constant publicity. The figures have been trending upwards with a recent seasonally adjusted 5.8% in June (ABS).

While these figures are comparatively low to other Western countries, any future sharp increase would likely result in a faltering in housing prices. Low interest rates or not, it's extremely difficult to afford a home loan if you don't have a job and house prices are obviously impacted by how many have constant employment.

The aspect that does not receive as much publicity is the high unaffordability levels. While the general softening of median house prices has assisted, Australian capital cities remain some of the most unaffordable in the world.

The International Housing Survey for 2009 that was recently released has Sydney as the 5th most unaffordable and Melbourne as the 12th. The Sunshine Coast is the most unaffordable while the Gold Coast is 3rd.

The benchmarks for the study is that anything over 5.1 times the suburb's median annual income as a median house price is severely unaffordable.

Sydney has a multiple of 8.3 median salary for it's median home price. The Sunshine Coast is a world record 9.6. Melbourne is 7.1 which is above both New York (7.0) and London (6.9) to give some perspective to these numbers. We'll endeavour to examine this research more in a future issue.

In summary, there are fundamental factors developing so as to boost the fortunes of residential property. However unemployment is a short term risk that may dampen any sharp surge. The already high salary multiples required to buy a property should also be considered if examining certain locations.

Property and Share Market Similarities? - Value versus Growth Locale Properties

By now, most readers and clients will be aware for our preference towards an academic investment philosophy for equity markets.

In brief, historical evidence has shown that Value Companies have outperformed Growth Companies over the long term. While this is historical (and not a prediction of future movements), it has been a significant market anomaly for a long period of time.

Value Companies are technically referred to as having a High Book Value to Market Price. In layman's terms, it's saying that the market price is lower than the potential future earnings of the business.

Growth Company traits are generally based around a prediction of being the 'next big thing'. Think along the lines of Bio-tech, Internet companies and you're on the right track.

The historical markets have shown that generally investors overprice Growth Companies and in the long term, Value Companies have collectively outperformed by reasonable margin. This could be attributable to the expectations being higher (and thus priced in) to Growth companies.

So for some time, I have been researching this philosophy and it's potential applications in other markets, in particular real estate.

Unfortunately, it would appear that it's an area without significant research by the academic world. From my correspondence, it would seem that reliable data and mixed use of value methodologies has made it nigh on impossible.

Nevertheless, Shares and Properties are assets that are traded on markets every day. They have inherent values and prices that are judged by market participants every day.

The opportunity to expand the Value versus Growth methodology from businesses to real estate assets may have some elements worth considering.

Which brought me to a very interesting research paper written by respected real estate analyst, Terry Ryder. Terry publishes researches on a website called www.hotspotting.com.au and regularly appears on Channel 7.

His recent 'Iconomics' article examined many myths of property investing such as capital growth being better near the CBD.

Ryder researched the past 10 years data to highlight that these myths were not exhibited in actual returns. He highlights the example of an investor achieving a far better return in Branxton (Hunter Valley) than the Gold Coast. He refers to these areas as 'hill-change' and many were shown to outperform 'seachange' locations.

The regional areas were then compared to inner city locations. Again, it was shown that a number of regional areas outperformed considerably the inner CBD locations.

All in all, some very thought provoking research.

It goes against the grain of the typical publicity for real estate investing and what we are generally led to believe. The research also contains elements of the Value versus Growth principles that are academically proven in equity markets. Hopefully we can see more of this type of factual research in the future.

Disclaimer: The statistics and figures presented in this report are based upon historical data, obtained from external sources. There is no guarantee or suggestion that markets will behave as they have in the past. Future results will be affected by political & economic events. Information is not directed to any particular persons investment financial objectives. Therefore, you must seek advice tailored to your individual circumstances before making any specific decisions.

Responsibility for the content and opinions expressed in this document rests solely with the author and opinions expressed do not necessarily represent the views and opinions of Millennium3 Financial Services Pty Ltd.

June 2009 - Your Wealth Newsletter

2009-08-15T23:48:00.004+10:00

A time to review

With the end of the financial year, combined with significant volatilty in markets worldwide, it is a good time to review asset allocation. After all, studies show that Asset Allocation can drive 94% of your portfolio's return.

How much money is placed into the asset classes of cash, fixed interest, property and shares is really a crucial decision. It will determine the amount of fluctuation (ie. risk) and the returns that you can expect from the portfolio.

Investors worldwide have experienced one of the greatest declines in market values over the last 18 months. Therefore it's an excellent time to sit back and reflect upon this experience during this period.

After experiencing the high market volatility, it could now be the case that your feelings have changed to what your original comfort levels were.

You may have not been bothered by the volatility and understand completely that markets are subject to significant falls and rises, but over the long term, markets will trend back to their long term historical averages upwards.

Yet if your portfolio has a high weigthing of conservative assets, then it may be time to review this asset allocation and move into more growth assets.

Alternatively, if you have experienced tense concerns and worries about the portfolio, more than you originally expected, perhaps an increase in conservative assets should be considered for future investing.

The final outcome could be that while negative returns are never enjoyable, you understand market movements and remain confident that the original weightings of asset classes is suitable for you.

In summary, with investors experiencing one of the largest declines in history, it's a fine opportunity to reflect and consider that this is close to as bad as it gets.

How do I feel about the market portfolio? Should I be thinking of a different strategy for the future? Should I be more assertive, or more conservative, after reflecting upon this experience?

You're welcome to send us an email or phone in to discuss your needs more.

Competing for capital - Market risk premiums explained

Academics are higlighting that the 'risk premium' in sharemarkets are high. What does that mean exactly? The following article from Jim Parker of Dimensional explains it well:-

"One of the consequences of the global financial crisis is that equity market investors, at least in comparison to their behaviour in the recent boom, are demanding a greater premium for the risks they are adopting.

It may seem counter-intuitive, but when markets are at record highs, the expected return from equities-the premium over the risk-free rate-is lower. In other words, companies can raise capital relatively cheaply.

But now with many major markets still 30 to 50 per cent below their record highs, companies are paying a higher price to raise equity capital. Put another way, investors are demanding a higher expected return for the risks they are adopting.

This makes sense if you think of it in terms of supply and demand. A consequence of the difficult markets of the past year or so is that the supply of capital from now more risk-averse investors has tightened up. In the meantime, companies' demand for new money through the equity markets has increased. So the price of capital has gone up.

In many developed markets, there has been a glut of capital raisings in recent months as companies shore up their balance sheets or bring in new money as a buffer against the global economic downturn.

Going to the equity market becomes the only option for many firms squeezed by a combination of falling revenue and tighter lending conditions. In the UK for instance, companies have raised more money through share offerings so far this year than over the same period over the past 13 years combined, according to research firm Dealogic.

In the US market, with volatility down and fund flows improving, Dealogic says the rate of issuance recently reached its highest level in two years. In Australia, too, the trend is evident. Of the 388 Asia Pacific share issues outside Japan this year, a third has been from Australian companies. This proportion has risen to more than 60 per cent in the past eight weeks.

According to the Australian Securities Exchange, capital raisings in April alone totalled $A7.1 billion, up 65 per cent on the previous corresponding period. The vast majority of these were secondary raisings.

The major Australian companies that have tapped the market since January include Wesfarmers, Westfield Group, Fairfax Media, OneSteel, Insurance Australia Group, Qantas, Macquarie Group and Bluescope Steel.

Due to the competitive nature of the capital markets right now, the majority of these issues have been pitched at big discounts to prevailing prices and Dimensional has participated in many of them to the benefit of unitholders.

In fact, an analysis of the Australian capital raisings in which Dimensional has participated since January shows all had delivered a positive return as of early May and all but three had delivered a return above the market.

As an example, conglomerate Wesfarmers raised at least $A1.8 billion of new equity capital in January to reduce its debt load and help it deal with a severe slowdown in earnings growth. The debt was a legacy of its 2007 purchase of many of the retail assets of the old Coles Myer. Wesfarmers pitched a three-for- seven entitlement offer to institutions, priced at $13.50 a share, a very steep discount to its then prevailing on- market price of nearly $17 a share.

Dimensional took up an entitlement of nearly 900,000 shares in that offer, an investment that as of early May had yielded a return of 65 per cent, or 50 per cent above what would have been earned in the broad market.

These examples should not be interpreted, by the way, as a judgment on the long-term merits of these individual stocks. But they do serve to show that competitive capital markets are working and that companies' cost of capital equates to investors' expected return."

Disclaimer: The statistics and figures presented in this report are based upon historical data, obtained from external sources. There is no guarantee or suggestion that markets will behave as they have in the past. Future results will be affected by political & economic events. Information is not directed to any particular persons investment financial objectives. Therefore, you must seek advice tailored to your individual circumstances before making any specific decisions.

Responsibility for the content and opinions expressed in this document rests solely with the author and opinions expressed do not necessarily represent the views and opinions of Millennium3 Financial Services Pty Ltd

May 2009 - Your Wealth Newsletter

2009-08-15T23:46:00.004+10:00

The information is general in nature and may not be relevant to your individual circumstances.

You should refrain from doing anything in reliance on this information without first obtaining suitable professional advice.

End Of Financial Year Draws Near - Tax Planning Time

June 30th is the end of the financial year and while we prefer to have 'year-round' tax planning, some last minute reviews can assist with your tax strategies and superannuation contributions.

A host of ideas and strategies are listed below courtesy of MLC. If you would like to talk to us to discuss them further, please feel welcome to contact me on 1300 78 55 77.

Tax Planning
1. If you have received capital gains from your investments. You may to trigger capital losses by selling a poorly performing investment elsewhere that no longer suits your circumstances.

2. If you are thinking of selling a profitable asset in this financial year. You may want to defer the sale until a future financial year.

3. If you have, or are considering the establishment of a geared investment. Pre-pay 12 months interest on your investment loan.

4. If you are employed or self employed. You may want to pre-pay 12 months income protection insurance premiums.

Super Strategies
1. If you have an investment in your own name. You may want to cash out the investment and use the money to make a personal after-tax contribution.

2. If you earn less than $60,342 p.a of which at least 10% is from employment or a business. Make a personal after-tax super contribution to potentially qualify for a government co-contribution and boost your retirement savings.

3. If you have a spouse who earns less than $13,800 per annum. You may want to make an after-tax contribution on their behalf.

4. If you are likely to receive a bonus or lump sum payment from your employer. You may want to salary sacrifice your payment into super rather than receiving it as cash.

5. If you earn less than 10% of your income from eligible employment (eg. you are self employed or not employed). You may want to invest in super and claim your contribution as a tax deduction.

6. If you make a capital gain on the sale of an asset this financial year and earn less than 10% of your income from eligible employment. You may want to invest the sale proceeds in super and claim a portion of the contribution as a tax deduction.

7. If you are under age 60 and want to cash out some of your super. You may want to delay the withdrawal until you reach an older age bracket, ie. 60 or over so as to save lump sum tax.

Again, if you would like to discuss your situation further prior to the 30th June deadline, please contact me on 1300 78 55 77.

May Federal Budget - Your Budget Snapshot

Last week saw the Federal Budget announced and as always it receives plenty of media coverage. So we'll keep it brief and with the assistance of CommSec Economics, outline who the actual 'winners' and 'losers' were from the Budget:-

· Low-income earners: This is no 'horror budget'. The average person will be better off from July 1, courtesy of another round of tax cuts.
· Middle-income earners: Generally winners. They will receive the tax cut but some will be affected by the increase in the Medicare levy, phase out of Private Health Insurance rebate and changes to concessional superannuation contributions.
· High-income earners: Losers. While they will receive a tax cut, the Medicare Levy is increased, and the Private Health Insurance rebate is phased out for those on high incomes. And like middle-income earners, changes to concessional superannuation contributions will hurt some.
· Pensioners: Winners. An increase of $32.49 a week for singles and $10.14 per week for couples on the full rate.
· Investors: Generally winners, but some will be affected by changes to concessional superannuation contributions. The boost to infrastructure spending will lift activity by listed industrial companies. The budget is pro-growth.
· Companies: Winners - especially small business. Small businesses will be able to claim a 50 per cent tax deduction on eligible equipment. The infrastructure program is positive for industrial and transport companies.
· Housing: Winners. First Home Owners Boost extended by six months.

A key detail of the budget that will effect all workers are the changes to the private health insurance rebate. Economists have referred this change as 'reducing the carrot, and increasing the stick'.

The Medicare Levy Surcharge (ie. if you do not have private health insurance at all) will be increased incrementally from 1 per cent to 1.5 per cent for singles earning above $90,000 (couples $180,000). Those earning above $120,000 will pay the full surcharge of 1.5 per cent.

The private health rebate will be reduced (from 30 to 20 per cent) for singles earning above $75,000 (couples $180,000) and phased out completely for singles earning above $120,000 (couples $240,000).

Superannuation was largely unaffected (even though there were plenty of rumours and concerns beforehand). The primary change was a reduction of the concessional contributions (eg. employer contribution or salary sacrifice) cap by 50%.

The Government will reduce the superannuation contributions cap on the amount that attracts the lower tax rate from $100,000 to $50,000 in 2009 and then to $25,000 in 2012.

For those eligible for the government co-contribution towards your super fund. There is a temporary reduction from 150% (eg. $1500 maximum) down to 100% (eg. $1000 maximum) for 2009-2012. It will then lift to 125% for 2012-2014.

In summary, while many economists and taxation experts predicted a horror budget, the reality was comparatively quite tame.

However, the Henry Tax Review is still being undertaken and will be handed to government in December this year. Dr Ken Henry has publicly commented that he is expecting ambitious recommendations to our taxation system. A link to his comments are below if you'd like to read more.

Importantly, please note the majority of measures discussed are proposals that will need to pass through the parliamentary process and may therefore be subject to change.

Disclaimer: The statistics and figures presented in this report are based upon historical data, obtained from external sources. There is no guarantee or suggestion that markets will behave as they have in the past. Future results will be affected by political & economic events. Information is not directed to any particular persons investment financial objectives. Therefore, you must seek advice tailored to your individual circumstances before making any specific decisions.

Responsibility for the content and opinions expressed in this document rests solely with the author and opinions expressed do not necessarily represent the views and opinions of Millennium3 Financial Services Pty Ltd

April 2009 - Your Wealth Newsletter

2009-08-15T23:35:00.003+10:00

Cramer versus Stewart

For many years now we have been recommending prudent investors to avoid the 'noise' of market commentators, spruikers and crystal ball stockpickers.

In December last year we reviewed the 'stock selection' picks by the self-proclaimed gurus for the previous 12 months. You may remember the results, they were ugly and all had underformed the index, and by a very considerable margin.

Yet, if you flick your television over to any of the Finance Channels, particularly those broadcast from the USA, then it's a fair chance that you'll see a fast- talking, excitement generating host spruiking stocks to buy and sell. It seems more action than if you were watching the football on a Sports channel.

Recommendation to buy, buy, buy certain stocks are shouted down the camera with abundant reasons for doing so. It's easy to get the heart racing and actually believe these guys know what they're talking about.

However, the lastest furore in the U.S has swung the spotlight on these spruikers. And incredibly, the fuss was started by a comedian...go figure.

Jim Cramer is a classic example of a stock spruiker that operates a slick, fast and exciting tv show that recommends stocks as brazenly as a set of kitchen steak knives.

For the first time that I have witnessed, somebody has publicly questioned these spruikers performance and their role in impacting people's decisions.

In this instance, Cramer has recommended the purchase of Bear Stearns when it was trading at approximately $69. According to the video, this recommendation was maintained a number of times. About 2 months later, the company shares were bought out for $2.

I have attached the link to the You Tube broadcast of this clash between Jim Cramer and Jon Stewart. It is definitely worth a look.

Hopefully in the future, with controversy such as this emerging, we'll see more scrutiny applied to celebrity stock spruikers in the media.

Cramer v Stewart - You Tube Link

A Month Of Market Relief

Typically we don't dwell on recent performance as it can easily change the other direction. But it's interesting to note that March was an extraordinary month for returns. DFA Australian Value and their Small Companies Funds delivered historic highs at over 13% each for the month of March.

Jim Parker from Dimensional explains more "It was only a month ago, as the US market sank to 12-year lows, that The Wall Street Journal reported investors had now "grown numb to a market that knows no direction but down" (March 4, 2009).

Then came an extraordinary few weeks: The S&P-500 gained 8.5 per cent in March, its best month since October 2002. Global stocks, as represented by the MSCI World Index of 23 developed markets, put on 7.2 per cent in their best performance in six years. And the Australian benchmark S&P/ASX-200 jumped 7 per cent in its largest one-month gain since June 2003.

For many of Dimensional's own portfolios, also, returns in March 2009 were spectacular. Here in Australia, the domestic Core, Value, Small Company and Large Company trusts all registered their best ever monthly performances. (While the global trusts all posted strong monthly gains in US dollar terms, these were offset by the surge in the Australian dollar over the month.)

This positive trend was evident across regions and asset classes. In the US, an analysis of Dimensional portfolios with at least ten years of returns found that for nine portfolios, March was among the best five months in their history.

Driving this turnaround have been tentative signs of a bottoming in the US economy, nascent hopes that the global banking system may be past its worst and increasing confidence that coordinated policy action by governments and central banks will engender a recovery.

Increasing risk appetites are reflected in rising commodity prices and the revival of traditionally high- yielding currencies like the Australian dollar, which has gained for five consecutive weeks to reach its highest level since January at above 72 US cents.

Whether this turn in sentiment will last is not clear. For every optimist there is a pessimist who can string together an equally compelling argument that we are not out of the woods yet. But that is the nature of markets. The sum of all these competing views is reflected in prices.

For the individual investor, the important point from all this is that markets are unpredictable and that even in one of the most vicious bear periods in history, large gains can come in quick, unforseen surges".

Sources: Daily Show MSNBC; Jim Parker of Dimensional Funds Australia.

Disclaimer: The statistics and figures presented in this report are based upon historical data, obtained from external sources. There is no guarantee or suggestion that markets will behave as they have in the past. Future results will be affected by political & economic events. Information is not directed to any particular persons investment financial objectives. Therefore, you must seek advice tailored to your individual circumstances before making any specific decisions.

Responsibility for the content and opinions expressed in this document rests solely with the author and opinions expressed do not necessarily represent the views and opinions of Millennium3 Financial Services Pty Ltd

March 2009 - Your Wealth Newsletter

2009-08-15T23:28:00.004+10:00

What's in it for me?

The Federal Government second stimulus package that has gone through legislation comprised of the following elements:

* one-off cash payments for eligible families, individual workers, students, drought affected farmers and others
* a temporary investment tax break for small and general businesses buying eligible assets
* free ceiling insulation (capped at $1,600 per house over 3 years) for around 2.7 million Australian homes - available from 1 July 2009 until 31 December 2011 to all Australian owner occupiers who currently don't have ceiling insulation uninsulated owner occupied properties
* building or upgrading a building in every one of Australia's 9,540 schools
* building more than 20,000 new social and defence homes
significant increased funding for local community infrastructure and local road projects

One-off cash bonuses The bonuses included:

* Tax bonus for working Australians
* Single income family bonus
* Farmers hardship bonus
* Back to school bonus
* Training and learning bonus
* Bonus payments will not be taxable and will not be counted as income for social security means test purposes.

For the bonus tax payment, your taxable income has to be under $100,000 in the 2007-2008 financial year to qualify. If under $80,000 income, then a $900 bonus payment will be provided. From $80-90,000 then a $600 bonus payment applies while for $90,000to $100,000 a $250 payment applies.

On 3 February 2009 the Government announced small business and general business tax breaks. However, legislation has not yet been introduced to give effect to this measure.

Small business tax break Small businesses will be eligible for an additional 30% bonus tax deduction for eligible assets. The assets must:

* cost $1,000 or more;
* be acquired or start to hold under a contract or start to construct between 13 December 2008 and 30 June 2009
* be installed ready for use by 30 June 2010.

In addition, a small business can claim a 10% bonus tax deduction on eligible assets that are acquired, started to be held under a contract, or construction is commenced during the period from 1 July 2009 to 31 December 2009. The asset must be and installed ready for use by 31 December 2010.

General business tax break Businesses that do not qualify as small businesses will be able to claim bonus deductions for eligible assets if the assets costing $10,000 or more and meet the other criteria outlined above.

Example - 30% bonus deduction A small business purchases a commercial wood fire oven for $15,000 on 1 February 2009. It is installed and ready for use on 20 March 2009. The business can claim a bonus tax deduction of $4,500 (30%) for the financial year 2008-09

It should be noted that if the installation of the oven was delayed and the oven was installed and ready for use on say 20 July 2009, the business will be able to claim the bonus tax deduction in the 2009-10 financial year, i.e. the deduction is available in the financial year it is first held ready for use.

Expected Return In A Bad Economy - Comments from Professors Fama & French

Finding some directions or opinion on where the markets are headed in times like these is always easy. It seems everywhere you look, a self- proclaimed expert will provide you with their exclusive 'tip' on where we will be in 12 months time.

While it makes for entertaining reading, we typically adhere to academic philosophy in that it's impossible to predict what markets are going to do, and when they are going to do it. They are totally random.

The leading academics for this area of economic study is Professors Eugene Fama and Ken French.

If you google their names, or review academic archives on University libraries, you'll probably find that they have one, if not the, most cited references in the world.

So when these guys offer an opinion of markets, it's generally worth paying attention. Which brings me to their recent column, Expected Returns In A Bad Economy from the 11th March.

Their thoughts on market returns were as follows:

"The market has declined sharply in response to rough times and forecasts of future rough times. The decline in market prices combines two effects: (i) lower current and expected future profits, and (ii) higher discount rates for the expected future profits.

The discount rate, in turn, has increased because uncertainty about future profits (in other words, risk) has increased and, apparently, because investors have become more risk averse. Higher discount rates for expected profits translate into higher expected stock returns.

In short, the two of us believe that the expected return on stocks is currently high.

But beware: the high expected return is compensation for the risks associated with different possible outcomes. If the quite pessimistic assessments of future economic performance built into current market prices turn out to be right (which is our best single guess), realized returns will be high.

In other words, we will get the currently high expected return if the market's pessimistic expectations of future economic performance are realized.

On the positive side, there is a substantial chance that the current assessments of future economic performance built into market prices turn out to be too pessimistic. If so, realized returns will be even higher than expected.

But there is also a substantial chance that the current quite pessimistic assessments of economic performance built into market prices turn out to be too optimistic. In that case realized returns will be low, perhaps quite low.

This is always the general nature of the risks in stock market investing. The story is more poignant at the moment because risk is so high."

This is an interesting commentary. My simplest interpretation is that we don't know what will happen short term, but the risk premium in equities over cash is quite high. For the risk premium to return to its historical average, then significant returns must be experienced at some point in time to return us to the average.

Expected Returns In A Bad Economy (Fama/French courtesy of DFA)

Disclaimer: The statistics and figures presented in this report are based upon historical data, obtained from external sources. There is no guarantee or suggestion that markets will behave as they have in the past. Future results will be affected by political & economic events. Information is not directed to any particular persons investment financial objectives. Therefore, you must seek advice tailored to your individual circumstances before making any specific decisions.

Responsibility for the content and opinions expressed in this document rests solely with the author and opinions expressed do not necessarily represent the views and opinions of Millennium3 Financial Services Pty Ltd

February 2009 Your Wealth Newsletter

2009-08-15T22:58:00.005+10:00

Hi,

For a long time we have discussed the role that media 'noise' has upon investors and their actions. An interesting article by economic journalist Ross Gittins was in this months' Sydney Morning Herald that's worth a review.

Then with the government basically throwing money out of helicopters, and encouraging everybody to spend, a relevant article recently on 'extended warranties' is worth a read for all the shopaholics among us.

Impact of 'noise' in market emotions

We are all aware that markets are typically driven by greed and fear. These human emotions are reactions to information. In this era of global information and technology, this can obviously have a major impact upon the information received, and the human emotion. Last month, Ross Gittins provided an article in the Sydney Morning Herald outlining the role the media has had in this current downturn. We have extracted parts of the article below.

"The International Monetary Fund's forecast that the global economy will come to a virtual halt this year, its weakest performance in 60 years.

The fund defines a world recession as global growth of less that 3 per cent in a year. But this week the fund slashed its earlier forecast, predicting the advanced economies would contract by 2 per cent and the developing countries would grow by only 3.3 per cent.

This added up to global growth of a mere 0.5 per cent, the deepest world recession since World War II. As part of this, the volume of world trade would plummet.
But why is world growth of less than 3 per cent regarded as a recession? Why shouldn't the definition of world recession involve an actual contraction in production?

Partly because the developing countries, coming from such a low base, can achieve rates of growth that are very high by developed country standards. Partly because the developing countries have strong population growth, meaning they have to achieve a reasonable amount of growth just to prevent a decline in income per person.

But also because the world is a big and diverse place and, while some parts are in recession, others may be still going strong. Even if all of them end up experiencing recession, they're unlikely to do so all at the same time.

This, however, is what's happening now. All the major developed economies are already in recession and are expected to contract significantly this year. No significant part of the developed world is expected to soldier on. No part where the arrival of recession will be greatly delayed.

See what this means? Synchronisation. Virtually every major economy in the world is turning down at the same time. And while synchronisation looks great on the dance floor (or in the pool at the Olympics), it's the last thing you want in the world economy.

So what was it that caused all the developed countries to go bad at pretty much the same time? Not hard to guess. It was a single event that had huge (and predominantly negative) ramifications for all countries: the first OPEC oil shock, which for oil-importing countries was both inflationary and deflationary at the same time.

Then, it was expected that the biggest developing countries wouldn't be greatly affected by the problems plaguing the developed world. Now it's clear they will be hard hit.

So what was the major event that suddenly produced so much more synchronisation? I think it was the financial markets' hugely negative reaction to the collapse of the Wall Street investment bank, Lehman Brothers, in mid-September and all the nail-biting and argy-bargy it led to, including the protracted negotiations to get the Troubled Assets Relief Program approved by Congress

The freezing of financial markets that was part of that crisis would have had negative implications for most economies, but as well there was a huge blow to business and consumer confidence in most countries.

That's hardly surprising. The media were beaming a blow-by-blow account of the crisis all around the world, almost in real time. Now that wouldn't have happened in 1975.

So, yes, globalisation probably has had a part to play in propagating the global recession we're about to experience. But the most obvious bit is media globalisation."

What started the global crisis rolling? - 31 January 2009 (link to SMH)

Would you like an Extended Warranty with that?

The government is encouraging us to spend like never before.

With these purchases, a common promotion by store sales staff is to encourage additional warranty terms. A recent article by Chairman of the ACCC, Graeme Samuel, certainly offers consumers a warning to purchase. The following is his article:

"One of the most expensive mistakes you make this summer might be the one you spend the least time thinking about: whether or not to pay for an extended warranty. An extended warranty can seem like a prudent form of protection when making a big purchase. Yet research by the Australian Competition and Consumer Commission suggests many are not worth the paper they are written on.

Extended warranties are like a form of insurance, offered typically on purchases such as whitegoods or large electronics. They usually claim to cover the customer against faults or defects and are usually offered at the point of sale. Because they are purchased as an add-on, customers often feel compelled to make an on-the-spot decision without reading what is being offered.

But ACCC analysis suggests many consumers find this expensive additional cover next to useless when they try to lodge a claim.

Complaints received by the ACCC ranged from a waterproof camera not covered for water damage through to key accessories such as laptop batteries and cords being excluded from the warranty's cover. Some of the greatest frustrations experienced by those calling the ACCC were in relation to extended warranties on high-value items like televisions, computers and washing machines.

The ACCC found 80 per cent of consumers who reported problems were unaware they had consumer or statutory rights implied in the sales contract. These legal rights protect the public from faulty or unsatisfactory goods and services by entitling them to a refund, replacement or repair if the goods don't live up to reasonable expectations, including that goods should last a reasonable time.

In fact, some of the extended warranties examined by the ACCC were found to offer customers potentially less than they received automatically at no additional cost under their statutory rights. Extended warranties can also add considerably to the total cost - often between 15 per cent and 30 per cent of the original item cost and in some cases more.

In September, the Australian Telecommunications Users Group called on consumers to reject extended warranties offered by phone manufacturers for faults that occurred after 12 months. ATUG argued expensive mobile handsets could reasonably be expected to last two years without the need for customers to pay extra.

In Australia, fair-trading laws protect consumers when they buy goods and services. They require that goods must be fit for sale and that customers may have a claim against a retailer if goods don't live up to reasonable expectations of quality, don't match descriptions in advertising or from sales staff, or services are not carried out with due care and skill.

Consumers' legal rights have no set time limit, other than what is reasonable to expect when taking into account the cost and quality of the item.

To find out what you are already covered for under state and Commonwealth legislation, visit accc.gov.au or phone 1300 302 502."
Dissatisfaction Guaranteed - SMH 29 January 2009

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