Swings and Roundabouts

With the market recovery in the past couple of days it looks like this month's net worth figure will just manage to break even. My stock investments are still down around 5% for the month but this was offset by a jump in the estimated values for my home and investment property. Unfortunately I already have the raw data for calculating next month's house price estimates and about half of this month's real estate gain will be given back next month. Perhaps the market has bottomed out and next month will gain enough for net worth to stay relatively constant. If nothing else this is proof of the value of having an diversified allocation of uncorrelated assets.

Of course it won't always be the case that one asset class is doing well when others are struggling - I'm sure there will be periods when everything in my portfolio is doing badly, and the rare 'perfect storm' when everything is going gang-busters. In the inevitable bad times an asset allocation on the efficient frontier isn't enough to see you through, you also need to take the long term view and stick to your plan. So it's especially important to have a plan that is based on realistic expected returns (historic returns over 20, 50 or 100 years may not be replicated over your 10-20+ year investment time frame, but it's the best guess available), and which has a risk (volatility) level that matches your risk tolerance. When I get bored and want to plan around with my investment plan I take my current asset allocation, grab some historic annual returns for the past 20 or 50 years, and use a spreadsheet to simulate my portfolio using randomly selected returns. This sort of "Monte Carlo" simulation will show you what the most likely outcome of your plan is. But of more interest is to see how your portfolio might perform in particularly good or bad periods. If you translate the bad patches into prospective dollar losses you can get an idea of how hard it will be to stick with your plan in those trying times. Looking at the worst performing runs of your simulation will also give you an idea of how comfortable you would be in retirement in a likely worst case scenario. This might help motivate you to live frugally and up your savings rate a notch or two. I always figure it's better to live frugally by choice while I'm working than to have an impoverished lifestyle when I'm retired.

Copyright Enough Wealth 2007

We'll all be 'rooned

In the 70's I was an impressionable teenager that did door knocks raising funds for the National Parks and Wildlife service, joined the World Wildlife Fund (now called World Wide Fund for Nature), and was naive enough to believe the "Club of Rome" report about how most finite resources were going to run out in the next 10-15 years...

In the 80's I first studied the "greenhouse effect" and possible global warming while at Uni doing a course on environmental chemistry. It was around that time that Greenpeace was gaining support and WWF decided to morph from an endangered species/habitat conservation society and jump on the anti-nuclear bandwagon. Since I knew that from a global environmental viewpoint coal-fired power stations were a much greater threat than nuclear power stations, I quit WWF and generally was disillusioned by the whole "green" movement. While I'm all in favour of protecting endangered species, eliminating pollution and building a society that uses finite resources more efficiently, I find that the Greens attract too many phobics - those with a dread fear of nuclear power, GMOs, and so so. There's a point where rational concern about safety and ethics turns into paranoia.

I was reminded of this when reading an article by Steve Biddulph on the SMH website today. If you want to have a chuckle, go and read this waffle. It was so reminiscent of the Club of Rome that I had to smile. I think I'll keep a clipping of this article just so I can send it to the author in 2014. While I make no claims as a futurist, I'm fairly confident that Australia in 2014 will look a lot more like it does now than that predicted by Steve Biddulph. If nothing else, I suspect that the Liberals will still be getting more votes than the Greens in 2014 - in fact I wouldn't be surprised if it was the Labor party that lost more votes to the Greens in future.

Copyright Enough Wealth 2007

The Moneys in the Bank

While I was very busy at work today I did manage to check on my NAB credit card account to see if the 0% balance transfer funds had come through from BankWest yet (I'd faxed the form last Thursday after my original application was apparently lost in the mail). The funds had been received in my NAB account yesterday so my account was now in credit by around $14,400 (the transfer was for $16,150 but I had some charges on the card which I'd normally pay off in full on the due date next month). I went to the nearest NAB bank branch to withdraw $14,000 and deposited into my credit union account via the Westpac bank next door. NAB only processes cash advances on a credit card as cash withdrawals, so I was feeling a bit nervous walking from one bank to the other with two envelopes stuffed full of $50 notes in my bag. I've checked my credit union account tonight and the funds haven't been processed yet. As a cash deposit I expect the funds to appear tomorrow.

Since the NAB credit card is still in credit by $400 at the moment I won't have to make my normal monthly CC payment this month, so I'll be able to use that money to top up the credit union deposit to the full balance transfer amount of $16,150. Invested at 6.6% for six months I'll make around $500, allowing for the $10 cash advance fee charged by NAB and the slight reduction of the amount invested over the six months (due to the minimum monthly payment required on the BankWest account.

The banks were quite busy at lunchtime, so I had to queue up for around 20 minutes all together in the two banks to make the cash transactions. It was funny listening to the comments of some disgruntled customers waiting in line at the bank - they generally seemed to think the bank should employ more tellers to avoid them having to queue up. I personally thought having two tellers working when there was a queue of ten people during the lunch time rush was perfectly adequate. If the bank employed more staff just to cope with the busiest hour of the day then account fees would have to be increased substantially. Of course it would be ideal to just employ tellers who worked for a couple of hours a day during the peak time, but unfortunately even casual staff don't like going to work for just 1-2 hours a day!

Copyright Enough Wealth 2007

Tracking Stock Trades with Covestor

Some of you may have noticed the new Covestor widget in my sidebar - it's tracking the performance of my "Little Book That Beats The Market" portfolio of US stocks vs. the S&P500 index. I came across this widget when I was reading Timothy Sykes' blog. He is using it to provide an independently verified record of his stock trades while he attempts to replicate his original claim to fame - building up $12,415 of Bar Mitzvah Gift money into $1.65 million from 1999 to 2002 through small stock trading (mainly short selling).

I'm not an active trader - even my US stock portfolio is based on buying a stock and holding it for at least 12 months before selling it and buying a replacement from the current short-list of prospects. So tracking my trades through Covestor is a bit of overkill. However, it does provide interesting information about trading performance, risk adjusted return and so on.

I may also track my Australian stock portfolios using Covestor as they seem to be setup to handle data from various stock brokers around the world. I setup my account to track the US stocks I trade via Comsec-Pershing. You can choose to enter your initial portfolio and track future trades either automatically (by providing your account login details) or 'manually' by sending a file of your latest brokerage statment and then sending in updates for future trading activity. Since Pershing didn't seem to be included on the list of brokers I'm updating this account manually. When I setup another account to track one of my Australian brokerage accounts I may try the automated method and see how well it works.

Unfortunately you have to setup a new account (using a different email address for verification) for each individual brokerage account - it would be a lot easier if you were able to setup "sub accounts" instead. Covestor also provides ranking tables showing how well the Covestor members are performing, and you can track your favourite traders, get updates of when they make new trades, and read what comments that have made about each trade. In the longer term Covestor hopes to charge membership fees for people to be able to track successdul investors, and will pass on a percentage of these fees to the members being tracked. I doubt anyone would pay to see details of my investing activities, but active traders like Timothy may attract a day-trading fan club over time.

Copyright Enough Wealth 2007

Credit Card Arbitrage Hiccups

The Bankwest "0% interest rate for six months on balance transfers" offer I received last month still hasn't been processed. I phoned last week to check why my application hadn't been processed yet, and was told it must have been lost in the mail. I faxed a new application form last Thursday (making sure to write in big letters across the top that this was in response to an offer of 0% interest for six months. The last thing I want to do is end up with a balance transfer that costs the normal, exhorbitant interest rate). If the money hasn't hit my other CC account by the end of this week I'll have to make another phone call to Bankwest.

Meanwhile I wound up paying the minimum monthly amount on my ANZ balance transfer debt twice this month. I was checking my credit union bank account online last week and noticed that the monthly $300 automatic payment was due to be processed on the 21st. As I didn't have enough in my main account to cover this payment I quickly transferred some funds across from my other "high interest" account. When I checked this morning the automatic payment hadn't been deducted from my main account, so I quickly made a manual BPay transfer of $300 to ANZ. It was only after this payment had been made that I checked the "high interest" account and realised that the automatic payments to ANZ were setup to come out of that account, and had been made on schedule last week. Oh well, it just means I'll have $300 less as a "baloon payment" when the interest free period on this balance transfer ends early next year.

Copyright Enough Wealth 2007

Losing is Lucrative

It turns out that losing an election can be financially rewarding. Ex-prime minister John Howard will get an annual pension of $345,000 a year in retirement. This is around $15,000 a year more than he earned as prime minister. He also has the option to take a $1.5 million lump sum payout, and get a reduced pension of about $170,000.

Another person who has turned making money out of losing elections into an art form is the former One Nation party leader, Pauline Hanson. She looks likely to achieve the 4% share of the Queensland Senate vote required to get electoral funding for "costs". In 2004 Hanson got $200,000 to cover the costs of her failed Senate campaign which cost just $35,426 - netting her a profit of around $165,000 for nominating and running a low-budget election campaign for less than two months. This time she is likely to make even more out of losing the election. Of course, if she'd won she would have received this funding and had a well-paid eight year term in the Senate.

Copyright Enough Wealth 2007

Australia goes Left and Green

Labor has won a clear majority in yesterday's election - counting of postal votes is still likely to decide a couple of seats that are in doubt, but it looks like the new Prime Minister Mr Rudd will have 86 or 88 seats, giving a majority of around 11. It turned out that Labor won more seats in QLD than I had expected yesterday evening, and the Liberals didn't win any seats from Labor in WA.

A plot of majority (as a percentage of total seats) for all post-war Australian elections is quite interesting. As you can see below, yesterday's result is the best Labor has had since the first win by Bob Hawke back in the early 80's. It's big enough that Labor is likely to have at least two terms in office, which probably explains why Mr Costello has decided not to contest the leadership of the Liberal party.



As I've said previously, the policies announced during the election campaign were fairly mild. It will be interesting to see what surprises may turn up in the first Labor budget next May. Labor appealed to the green voter more than the Liberals, with promises to ratify "Kyoto" and be more pro-active about setting 'aspirational' greenhouse gas emission targets. It will be interesting to see how this pans out in the longer term, as Australia is largely dependent on coal-fired power stations and exports a lot of coal. Labor has a reasonably strong anti-nuclear policy, which means that Australia won't be getting any nuclear power generation capacity in the foreseeable future. However, their policy to not expand on uranium production for export may conflict with the increase in the use of nuclear power in SE Asian countries and China.

It will also be interesting to see how Prime Minister Rudd handles the withdrawal of combat troops from Iraq next year, while leaving anout 2/3 of the troops there for embassy security and "support" roles. The ALP is also going to keep the Australian tropps in Afghanistan, which may become the next foci of anti-war protestors in Australia. In recent weeks there have been several Australian servicemen killed in Afghanistan, and the latest fire-fight seems to have also killed some Afghan civilians. Next election we could see the "No War" protestors targetting the ALP, just as in the UK.

Copyright Enough Wealth 2007

Labor Wins Australian Election?

Looks like the opinion polls were correct and the Australian Labor Party will win today's Federal election. Counting hasn't produced figures for WA yet, but the results from NSW and QLD look like the ALP will win enough seats to form government. I'd guess the ALP will end up with a small majority of only 2-5 seats.

The published policies of the two parties were pretty similar, apart from withdrawal of combat troops from Iraq and unwinding of the "work choices" legislation by Labor if they win. However, the big risk is that with the economy growing strongly, unemployment at 4% and inflation heading above 3%, an ALP win will result in a wages break-out, which will boost inflation. This will in turn require larger interest rate rises by the RBA. If this ends up coinciding with a global slow-down (lead by the US) it could mean Australia has it's first recession for more than ten years, and unemployment heads back up again. Unfortunately Labor policies to boost productivity by increased spending on skills training will take longer to have any impact than would the removal of Work Choices and a resurgence in union campaigns for wage rises. We'll see how things work out over the next three or four years. If Labor ends up with a slim majority and the economy runs into troubles during this period we could end up with a one term Labor government.

Copyright Enough Wealth 2007

Reverse Mortgages can be a Wealth Hazard.

A recent phenomena in the finance industry has been the increased marketing and availability of "reverse mortgage" products for retirees to access the equity tied up in their family home, without having to sell their home. However, such loans are poorly understood by many retirees. A recent ASIC survey found that almost half of those with a reverse mortgage product did not know how much the loan would eventually cost. As there are around 31,500 such loans at present in Australia, worth around $1.8 billion, this could become a big issue. Retirees often have never had access to such a large lump sum of cash before, and can be in danger of spending it all and then having to radically cut their expenses when the money runs out. The loans are not particularly cheap (around 1% more than the standard variable home loan rate) and because the lender is taking on the longevity risk (Reverse mortgages are a form of equity release that allow retirees who own their own home to borrow against the property but defer all repayments until they die or the home is sold) the loan is often fairly small compared to the value of the property. If the lump sum is poorly invested or rapidly spent then the wealth tied up in the family home can easily be consumed by accumulating loan interest long after the initial loan has been spent.

For example, one retired man in his 70s spent more than $135,000 he obtained through a reverse mortgage in only two and a half years."I've been in business all my life and never had to budget. I might have to budget now.", Another woman borrowed $50,000 "in anticipation of needing it over the next three to five years", but then invested the money in a term deposit at a lower interest rate than the loan was charged. Other retirees were recently encouraged by financial planners (who were getting commissions of up to 10%) to take out home equity loans and invest the proceeds in mezzanine financing products that offered double-digit returns. The recent collapses of Westpoint property group, Fincorp and Australian Capital Reserve left such investors with nothing. While a reverse mortgage can be a good way to provide retirees with some extra income without having to sell their only significant asset (their house), it can be dangerous given the relatively poor financial literacy of the retirees being sold these products.

Copyright Enough Wealth 2007

Children's Stock Investments

Since the market was down again today I decided to go ahead and buy some stocks for DS2. I bought 80 CSL at $32.08 and 250 CPU at $9.95. Total cost was $5,113.80 ($5,053.90 + $59.90 brokerage). While the investment is long term, it was nice to see the market recover a bit after I placed the order, so that by the close DS2's "portfolio" was worth $5,125.80, a rise of 1.4% above the purchase price.

DS1's portfolio consists of 246 ANZ shares and 438 QBE shares. The initial purchase cost $4,134.01 and is now worth $20,292.06.

Hopefully these four stocks continue to perform well over the next 10-20 years and will form the core of a stock portfolio they can add to as they grow up. If nothing else buying stocks for the kids provides a good opportunity to explain the concepts of share ownership, dividends, and compound interest. Because the accounts list their names (as trustors) they take an interest dividend statements and so on arrive in the mail.

Copyright Enough Wealth 2007

Picking Stock for the Kids

I bought a couple of stocks for DS1 when he was one year old (six years ago), the idea being that they would be a good nest egg by the time he leaves home. At the time the banks looked set for continued growth (a lot less certain now) so I bought ANZ bank. There was also an opportunity to buy QBE when it was marked down due to concerns about insurance liabilities after 9/11. The other reason to pick these stocks was that they had bonus share plans, which means that dividends are foregone in exchange for bonus shares. This avoids income tax issues for the child, although there will be a higher rate of capital gains tax liability as the bonus shares have a zero cost base. Since then both stocks have done quite well, although ANZ has actually underperformed the broader market slightly.

DS2 has recently turned one, so the current market downturn is a good opportunity to buy a couple of stocks for him. I'm thinking of buying either Cochlear (COH), Commonwealth Serum Laboratories (CSL), or Computershare (CPU).

Copyright Enough Wealth 2007

Raising the Bar (and cost) to become a Teacher

I'm currently enrolled in a Graduate Diploma of Education (Secondary Science) course, studying part time by distance education. The plan is to change careers in 3-5 years time, and spend 10-15 years as a high school science teacher as my version of "transition to retirement".

When I first had a go at doing the GradDipEd course ten years ago (I dropped soon after starting when I got retrenched from my previous job and had to work long hours getting established in my new job) it consisted of just 6 subjects and 8 weeks practical experience, and cost a couple of thousand dollars in fees. When I decided to enrol again last year the course had changed to increase the number of subjects to 8, and the cost per subject had increased substatially (to around $800 per subject). In the meantime the basis for teacher's salaries had been changed so that overall pay rates were slightly better in real terms than ten years ago, but I would actually be worse off as they no longer count years of relevant professional experience outside of teaching when working out your starting salary level.

They've now changed the course again - from next year they will require 60 days of prac teaching instead of the current 45 days. They are also phasing out the current GradDipEd course and replacing it with a Bachelor of Teaching degree from 2009, The BTeach degree will require completing 10 theory subjects instead of the GradDipEd's current 8 subjects.

I'm not too fussed by the changes, although it will mean at least an extra $2,400 in fees and an extra years to complete the course before I can apply for a teaching position around 2010 or 2011! The extra weeks of prac teaching will help me decide if I really want to become a teacher, and I was thinking of doing an extra curriculum studies subject anyhow (so that I'm qualified to teach both science and IT).

The funny thing is that I'll get the same classification (as a 'four year trained' teacher) when I do the BTeach degree as I would have with the current GradDipEd. By the time I start teaching I'll have completed a 3-year Applied Chemistry degree, and Graduate Diploma in Applied Science, a Graduate Diploma in Industrial Math & Computing, and a 3-year Teaching degree! (and I'll probably also have completed my Masters in IT by then). The starting salary will be around half of my current salary, and after 6 years I'd reach the maximum pay rate, which is about $15,000 pa less than my current wage. If I DO decide to change careers and become a teacher (I won't decide until I complete the course and see how much I enjoy the three months of prac teaching) it certainly won't be for the money.

While I don't mind the move from 45 days to 60 days prac experience, I suspect terminating the GradDipEd course and only offering the BTeach degree is being done by the University in order to get more fees out of the students. The HECS fee of $800 per subject is supplemented by the government, so the Uni receives more the $1,000 per distance education student for each subject attempted. Starting this year the Uni cancelled the residential week each semester that the DE course usually involves, as they had too many distance education students to fit on campus! Since each subject only involves providing a set of photocopied notes, 2 CDROMs and the marking of two essays (which gets farmed out to teaching assistants) the Uni will make a massive profit out of forcing all the current GradDipEd students to transfer to the BTeach course and take an extra two subjects.

Copyright Enough Wealth 2007

How to Halve the Amount of Tax you Pay

Although most readers will know that gearing can be used to increase returns (and risk) of an investment, some may not be as familiar with the benefits of gearing as a tax reduction* tool. This aspects of gearing means that even when rising interest rates make gearing facilities such as margin lending appear unattractive, in reality they can still be a core component of your financial plan. The fact that long term capital gains (ie. a capital gains tax event occurs more than twelve months after an asset is purchased) are taxed at half your marginal tax rate is the key to understanding how this works.

Take, as a example an ungeared investment of $100,000 in a share fund (returning 3% dividend income and 5% capital growth) vs. the same investment increased through the use of a margin loan for the same amount, with an interest rate of, say 6%. Marginal tax rate is assumed to be 30% and dividends fully franked. Net value is calculated at the end of a "typical" year:

            Ungeared      Geared
Equity      $100,000.00   $100,000.00
Loan              $0.00   $100,000.00
Total       $100,000.00   $200,000.00
Dividend      $3,000.00     $6,000.00
Franking Cr   $1,285.71     $2,571.42
Cap Gain      $5,000.00    $10,000.00
Interest          $0.00    -$6,000.00
Inc Tax      -$1,285.71      -$771.42
CG Tax         -$750.00    -$1,500.00
Net Value   $107,250.00   $110,300.00

As expected, where the margin loan interest rate (6%) is less than the total return (8%) from the investment, gearing increases your gains.

What is interesting though, is that gearing is still beneficial when the interest rate on the loan is as much as the total return on the investment (8%):

            Ungeared      Geared
Equity      $100,000.00   $100,000.00
Loan              $0.00   $100,000.00
Total       $100,000.00   $200,000.00
Dividend      $3,000.00     $6,000.00
Franking Cr   $1,285.71     $2,571.42
Cap Gain      $5,000.00    $10,000.00
Interest          $0.00    -$8,000.00
Inc Tax      -$1,285.71      -$171.42
CG Tax         -$750.00    -$1,500.00
Net Value   $107,250.00   $108,900.00

This happens because the use of gearing is effectively 'converting' taxable income into taxable capital gains, which provides a superior after tax return.

Of course gearing also magnifies any losses, so this "tax effect" is only a consideration if you are reasonably sure the total return on your investment will be at least match the cost of funds borrowed over the long term. For this reason I prefer to use margin lending to fund a diversified share portfolio, preferably with a core holding of an index fund.

It's also important to be reasonably conservative in your gearing levels so that normal market volatility and 'corrections' won't trigger margin calls. Although it's hard to correctly 'time' the market, it's probably also prudent to reduce gearing levels when the market is well above it's long term trend line, and thereby have some spare borrowing power available to add to your investments at the end of a bear market if the index is well below it's long term trend. It's also worth shopping around to find the best interest rate available for a margin loan, as there can be a significant difference between lenders. It's also worth reading the fine print, as you may be able to negotiate a reduced rate on large loan balances. For example, I get a slight discount on the standard margin loan rate from St George margin lending as we have a large home and investment property loan with them and thus qualify as 'gold' customers.

* I use the term 'tax reduction' as it seems to be the most acceptable terminology to use these days in regards to tax planning. Although tax evasion is illegal and tax avoidance/tax minimisation is, by definition, legal, there has been a trend towards vilifying and legislating against "tax minimisation schemes" and "tax avoiders". On the other hand, politicians on both sides revel in passing laws to facilitate 'tax reduction' through reduced tax rates, increased thresholds or expanded deductions, so it seems to be the PC term to use in relation to paying as little tax as possible.

Copyright Enough Wealth 2007

Buy Now, Pay through the Nose Later

HSBC sent me a "special offer" in the post yesterday. If I use my credit card to buy a large consumer item from a major retail chain (they suggest a home theatre system as an example) I will get it "interest free" for 56 months! Now, there's nothing wrong with this offer IF a) you were intending to buy this item anyhow, b) you had the cash lined up to pay for it, and c) you invest that cash in the meantime and have it ready to pay off the purchase amount in full when it falls due in five years time....

BUT, I'm sure a lot of people who accept this offer can't really afford it, and will have been tempted to buy something they would have thought twice about if they had to start paying it off straight away. After all, five years before payment is due seems like an eternity. They probably only worry about making the minimum monthly payments, and won't think about the debt until it falls due in five years time. By then the home theatre will be outdated and worth practically nothing second hand. If they aren't in a position to pay it off in full at that time, the fine print states that the amount will then be treated as a cash advance and be charged 20.99% interest!

Copyright Enough Wealth 2007

Rents Rising, Vacancy Rates Falling

What happens a few years after a real estate bubble has burst, and no one builds any new housing? Sydney is starting to find out, three years after the last boom collapsed. Vacancy rates fell last month to an all-time low of 0.9 per cent, so renters are staying put even where their landlord wanted to increase the rent. This has shown up in the number of lodgments of new bonds which has slumped 6.5 per cent in a year.

BIS Shrapnel predicts vacancy rates will stay below 1 per cent and median house rental prices will increase 10 per cent a year in Sydney for the next two years. Home loan interest rates are currently rising, which is discouraging first home buyers and has so far kept a lid on house prices. However, if rents rise 10-15% in real terms over the next two years and interest rates peak there is likely to be another 'boom' where house prices increase by more than the long-term average of around 6% pa.

Copyright Enough Wealth 2007

Still in the Top 100 PF Blogs

FIREFinance has released the update 'Top 100' listing for November (based on October traffic). EnoughWealth.com managed to rank 36 (Compete), 48 (Sitemeter), and 61 (Quantcast), although it's interesting so see that my pagerank (2) is much lower than other PF Blogs that have similar popularity. The problem with Google pagerank is that it's very hard to work out exactly what it is about your site that may be adversely affecting their rating of your site. I'm reasonably happy with the revised template for my blog, so I'll just leave things as they are for the rest of the year and concentrate on content -it's easy to waste a lot of time fiddling around with layout and trying to do SEO, which isn't what makes a good blog.

Copyright Enough Wealth 2007

Looking after the Pennies (Cents)

There's an old saying "Look after the pennies and the pounds will look after themselves" [ref - I find it funny that this is attributed to J.Paul Getty when I'm sure it was a common saying in English way earlier than that.] which is still one of the more useful money truisms. There are many ways to save small amounts day-to-day the overall add up to "fine tune" our investment performance, maximise income and minimise expenses.

We've moved our superannuation from the default provider (BT/Westpac) used by our employed into a self-managed superannuation fund. This should save around 1%pa in administration and management fees over the long term, which is quite a lot now that our combined retirement funds are heading towards $400,000. We were a bit unlucky in the timing of the move from the BT account into our SMSF - it was done during a period of considerable market volatility which resulted in our existing investment being cashed out when the market was down in August, and the funds not being invested until a couple of weeks later, by which time the market had recovered most of it's recent decline. I attempted to minimise the risk of reinvesting during a temporary "bounce" by using dollar cost averaging (DCA) over a couple of months, but the market continued to rise during this period and is now declining again - the worst possible trend when using DCA. We should still end up ahead by using a SMSF in the longer term, but this "timing risk" has reduced the benefit. Not all good ideas work out as planned.

On a smaller scale I recently opened a "Dragon Direct" online savings account which I can use to invest surplus funds from our home loan payment account. The idea is that the monthly rent payments from our tenant are often not needed for the mortgage payments for a couple of weeks, so we can earn some extra interest by transferring the "surplus" funds into the online savings account where it will earn around 6% (the normal savings account used to cover mortgage payments only pays around 1% interest). So far it hasn't worked out as well as I'd hoped - I forgot about an interest payment for my portfolio loan that was due to come on the 8th of the month, so the bank charged us a $38 overdraft fee to cover the interest payment out of the normal savings account. Since I had more than this amount sitting in the Direct Savings account at the time it was most annoying (and won't happen again!). This one fee has cost as much as we'll earn in extra interest using the online savings account for two months.

I will be opening up new BankWest kids savings accounts for the boys (DS1 and DS2) in a couple of weeks (as soon as a new BankWest branch opens nearby). These accounts will pay a whopping 10% interest on the kids savings, provided they deposit between $25-$250 each month and make no withdrawal during the month. Both kids already have money sitting in St George "Happy Dragon" savings account which pays a low interest rate, and DS1 has a "Dragon Direct" account earning 6.5% which holds the proceeds from his paper round earnings. So, moving $250 each month into the new BankWest accounts will earn them at least 3% pa more on the money in the BankWest account. After one year this would be $3,000 for each boy, meaning they're earning an extra $90 pa in interest. Of course there will be a few minutes spent filling in paper work to open the accounts, and setting up automatic transfers of funds between accounts each month, but every little bit extra helps.

And, of course, the usual things like brown-bagging lunch to work, buying petrol on the day of the week when it's usually cheapest, doing the shopping on the way home when I stop to collect mail from the post box, rather than making extra trips in the car, and so on.

ps. Looking up the origin of the idiom I found an interesting list of money expressions.
Copyright Enough Wealth 2007

Blog Performance and Monetization Update: November 2007

READERSHIP: EnoughWealth.com

Readership in September didn't increase beyond that of June-August, but then picked up considerably in October. Regular posting and topic rotation (personal, local and general investing) seems to have helped convert casual visitors (via search engines) into regulars. Posting comments on the Freakonomics or Dilbert blogs, Kiplinger forum and Yahoo! Answers has also provided traffic, as has contributions to PF-oriented blog carnivals.

My Technorati 'authority' has increased from 105 in September to now be 115 [good] (but 'rank' has sliped from 49,721 to 55,948 [bad]).

My Alexa rank has risen [bad] considerably above the 1-million-mark to 1,261,875 (from 969,013 in Sep), although over the past couple of weeks (where number of daily visits has increased) the Alexa rank is down to 764,630 [good]. I'm not sure how reliable the Alexa figures are, as the report for my site doesn't include any "links in" data, and my site isn't registered in OPD/DMOZ yet. I might add the Alexa rank widget to my blog template as this allegedly helps increase your Alexa ranking (for what it's worth). I would also like to add the Alexa toolbar to my browser, but there isn't a version yet that's compatible with Vista.

The latest PF Bloggers ranking post by FireFinance now includes Enough Wealth, although that may change next month (the recent google algorithm changes that affected a lot of sites dropped my pagerank from 4 down to 2 [bad]).

I get quite a lot of casual traffic from google search results, so I was a bit concerned by the drop in pagerank (to the extent of rejigging my blog template to move my blogroll off the homepage and onto a 'links' page). However, this doesn't seem to have affected to number of visitors coming from google search. I've started monitoring my position on the google search results pages for some terms where I currently rank quite well (top 10) - wealth, enough wealth, wealth blog.

Quantcast estimate of my readership is:
Global: 1,968 uniques (~visitors) per month
US: 1,082 uniques per month
My QuantCast rank is 1,017,055

Feedburner Subscriptions is increasing very slowly, currently sitting at 57 subscribers.

I've stopped mirroring my posts onto the EnoughWealth.SavingAdvice.com site as google tends to penalise sites that have'duplicate' content. I had tried just posting the start of each post, and including a link to enoughwealth.com for the full version, but the SavingAdvice.com administrators started deleting these posts. As SavingAdvice.com gets all the adsense revenue from the blogs they host I wasn't too impressed by this attitude, and I've started deleting my old posts off that site. This change will reduce the number of visitors recorded for that blog and the combined totals, so I'll be mainly focusing on just the enoughwealth.com site stats in future. I may change the graphs to reflect this once I've removed all the content from the enoughwealth.savingadvice.com site



MONETIZATION:

I prefer sponsors that make payment direct into my PayPal account, as a USD cheque costs a lot in fees to bank in Australia. The last US cheque (from KAGI) cost around $40 to have processed by my credit union!

My income from PayPerPost has trailed off as there were getting to be fewer and fewer topics that fitted into the scope of my blog. Also, the reduction in google pagerank reduced the number of 'opportunities' on offer.

I did get two sponsorships for my blog, which generated $270 revenue.

AdBrite revenue from interstitial ads continued to only be around 2c-3c per day, I increased the estimated CPM rate. This means that AdSense gets displayed most of the time. I also added an unobtrusive AdSense banner at the top of the blog. This seems to have been more successful, with AdSense revenue increasing significantly. It appears that Google Adsense only becomes worthwhile once you have copious amounts of content and reasonable traffic levels.

Newsroom continued to accumulate revenue from display of their feeds, but the amount of revenue is negligible and there isn't much content that suits my blog. Newsroom currently pays out monthly by cheque once you hit $50 (which I won't reach for a long while), but will "soon" start making payments via PayPal.

My Amazon affiliate earnings haven't increased since a few books were purchased by a blog visitor last year, I removed the half dozen recommended books off my RH margin. I had intended to do book review posts of my favourite PF books, but for some reason the amazon widgets don't work correctly when embedded within blogger posts. Since Amazon now charges a $15.00 admin fee for each cheque payment I won't try using Amazon as a revenue stream any more.

Feedburner revenue is accruing (slowly) for ads that get attached to feeds of my post distributed via the IBN group. I recently linked the FAN setup to my Google Adsense account. I'm not such exactly what that will do, but hopefully it can't hurt.

                  PAID [PayPal]  PENDING        ACCRUED [CHQ]  ACCRUED [EFT]
Advertisers:      USD $270.00        -             -              -
PayPerPost:       USD $443.25        -             -              -
Blogsvertise:     USD $114.50    USD $ 10.00       -              -
SponsoredReviews: USD $ 16.25        -             -              -
ReviewMe:         USD $ 60.00        -             -              -
AdSense:              -              -             -           USD $ 27.04    [$100 threshold]
AdBrite:              -              -          USD $ 34.14       -           [$100 threshold]  
Newsroom:             -              -          USD $  1.01       -           [$ 50 threshold]*  
Amazon:               -              -          USD $  2.71       -           [$100 threshold + $15 fee applies]
Feedburner:       USD $  2.12    USD $  2.32       -              -        
                  ------------   ------------   ------------   ------------   
TOTALS:           USD $906.12    USD $ 12.32    USD $ 37.86    $USD $ 27.04
Grand total:      USD $983.34

It's good that AdSense may be finally starting to generate a noticeable amount of revenue. My goal is to move away from sponsored posts and get all blog revenue from Advertisers (Site Sponsors) or AdSense/Adbrite/Feedburner. This would mean that the income is "passive" in the sense that it doesn't rely on specific paid posts (although it would still rely on the blog having fresh content to attract readers). At the moment my blog income is around 1% of my salary from my "real" job, but I'm spending around 15 hours per week on this "hobby" - so the "pay" from blogging is around $1.18 an hour.

EXPENSES:

Around USD$51.23 pa. The income generated is now significantly more than the out-of-pocket costs of maintaining and promoting the site.

Annual domain name registration with Dotster USD$14.95, plus $10.00 for the redirection required to have my blog hosted by Blogspot but still use my domain name.

PFBlogs "Friends" fee: USD$2.00 per month.

Google AdWords: USD$0.76 for 4 clicks. Budget is set at max. $7.80 per month, but so far only getting around 1 click per month at $0.19 per click.

Copyright Enough Wealth 2007

Warren Buffet's View on Tax Reform

In this video clip Warren Buffet discusses why the tax system is
inequitable, and why many of the rich in the US wouldn't object to reform.

Copyright Enough Wealth 2007

How much would I need to retire tomorrow?

I currently earn around $84K + 9% superannuation, but could "make do" with much less, which is why I can afford to think about changing careers to become a high school science teacher (with a starting salary around $50K) in a couple of years time (assuming I finish my GradDipEd course!). But what if I decided to retire tomorrow (or had to, due to a disability)? What lump sum would I need to be able to provide this level of income until I reach 60? A common "rule of thumb" is to allow a draw down of 4% pa from a lump sum, but this assumes you want the funds to last indefinitely. Assuming a total return of around 10%, 3% inflation and to provide an annual income of $50K (adjusted for inflation) for 14 years it turns out that a lump sum of around $450K would be sufficient. This is about what I expected -for example my life insurance and TPD insurance is for $400K. In fact my investments outside of my home and retirement account are more than this, so I could retire tomorrow if I suddenly had the urge, but this would mean a fairly frugal retirement, with no spare for "luxuries" or unexpected medical needs, and there wouldn't be much of an inheritance for the kids. But it does give me some peace of mind knowing that if I suddenly lost my job or quit I could afford to take my time looking for a new position.



Copyright Enough Wealth 2007

AU Shares - portfolio update: 13 Nov 2007

Here's the latest monthly update of what stocks are in my Australian Stock Portfolio. The only changes since the last update are due to a stock purchase plan offer from BBW.

Current holdings:

Leveraged Equities Account (loan balance $156,810.78, value $315,165.37). Babcock & Brown wind had a stock purchase offer, so I topped up my holding by $2,000 worth of this stock.

stock   qty   price   mkt value  margin
AEO   1,405   $2.49   $3,498.45   65%
AGK     510  $13.05   $6,655.50   70%
AMP     750  $10.09   $7,567.50   75%
ANN     480  $11.75   $5,640.00   70%
ANZ   1,107  $28.38  $31,416.66   75%
APA      88   $3.78     $332.64   70%
BBI     222   $1.605    $356.31   70%
BBP     197   $2.90     $571.30   60%
BBW   1,241   $1.835  $2,274.24   60%
BEPPA   472   $0.902    $425.74   70%
BHP     748  $41.80  $31,266.40   75%
BSL     781   $9.60   $7,497.60   70%
CDF   7,650   $1.88  $14,382.00   70%
CHB     118  $56.61   $6,679.98   70%
DJS   2,000   $4.92   $9,840.00   70%
FGL   3,751   $6.32  $23,706.32   80%
LLC     481  $19.01   $9,143.81   75%
NAB     323  $43.88  $14,173.24   75%
QBE   1,000  $31.87  $31,870.00   75%
SGM     830  $26.88  $22,310.40   70%
SUN     963  $19.07  $18,364.41   75%
SYB   2,880   $4.12  $11,865.60   70%
TLS   5,000   $4.69  $23,450.00   80%
TLSCA 3,000   $3.17   $9,510.00   80%
VRL   1,500   $2.94   $4,410.00   60%
WDC     851  $20.11  $17,113.61   80%

Comsec Account (loan balance $111,908.99, value $354,776.69). Babcock & Brown wind had a stock purchase offer, so I topped up my holding by $3,000 worth of this stock. I also decided to exercise the 124,000 options for IPE shares at $1.00. Since then IPE has gone ex div by around 5c per share.
                                       
stock   qty   price   mkt value  margin
AGK     240  $13.05   $3,132.00   70%
APA   4,685   $3.78  $17,709.30   70%
ASX     200  $56.03  $11,206.00   70%
BBI     105   $1.605    $168.53   70%
BBP      93   $2.90     $269.70   70%
BBW   1,782   $1.835  $3,269.70   60%
BEPPA   222   $0.902    $200.24   70%
CBA     130  $60.38   $7,849.40   75%
CDF  43,997   $1.88  $82,714.36   70%
IPE 132,000   $0.95 $125,400.00   60% 
IFL   1,300   $9.22  $11,986.00   60%
LDW   1,350   $6.90   $9,315.00    0%
NCM     300  $32.81   $9,843.00   60%
OST   2,000   $6.40  $12,800.00   70%
QBE     607  $31.87  $19,345.09   75%
RIO      60 $139.00   $8,340.00   75%
THG   4,000   $1.115  $4,460.00   50%
WBC     300  $28.35   $8,505.00   75%
WPL     220  $52.43  $11,534.60   75%

Copyright Enough Wealth 2007

Impulse Buying and the Dangers of Credit

Citibank sent me an offer to increase the credit limit on my Redicredit account by $10,000 to $55,000. I don't use this account very often (it used to have an interest rate around 10% so was OK for short term use when I wanted to write a cheque for a mutual fund investment or share purchase plan, but recently the rate was increased by several percentage points) and I don't carry a balance (except when they offered a 0% rate for 6 months which I used to pay some interest due on one of my margin loan accounts). However, it is always handy to be able to write out a cheque for a large amount if needed, so I'm sending in the acceptance form.

Today I also received an email notification about an online coin auction being run by the coin dealer I had bought some silver coins from last year. I had a browse through what was on offer and saw a 2002 10oz Proof Silver "Evolution of Time" coin was on offer with a minimum bid of $275 and no offers as yet. After a quick check on the internet I confirmed that this coin is currently on sale from the perth mint for $367, so at $275 it would be a good deal. I entered a maximum bid price of $276, which meant my initial (and only) bid was at the minimum price of $275. I didn't bother checking if anyone else bid on this item during the day, but tonight I received an email confirming that I had "won" the bidding on this coin. So I now have to arrange payment and delivery.



Luckily I'm not usually an impulse shopper, otherwise a $55,000 line of credit could be dangerous ;)

Copyright Enough Wealth 2007

Another Election Carrot

After several months of 'phoney election campaign', and three weeks of official campaigning, the Liberal Party had it's offiial campaign launch today and announced around $9 billion dollars worth of election promises. After Labour had announced a promise of a $750 tax rebate for the purchase of computers or other high tech equipment by parents for their high school kids, the Liberals today outdid this with a promise for a tax rebate of $800 for every secondary school student which could be used for any educational cost, such as uniforms or school fees, not just computers. Personally this is a better deal for me as the $400 rebate applies for preschool as well as primary school students, so we would be able to get this rebate for DS2's preschool year, not just $375 from when he starts primary school. The Liberal version of the educational tax rebate is promised not to be means tested, whereas the Labor version might be, which would probably mean we'd miss out on any benefit.

The other Liberal election promise regarding home affordability is also much better for us than the Labor version. The Libs scheme allows parents, grandparents and friends to contribute a total of $1000 a year into home savings accounts for children. The savings would be accessible to buy a first home once the account holder turns 18. This would be a good way for me to invest some money on behalf of DS1 and DS2 in a tax effective manner. I already invest a similar amount for each of them annually via a Child Superannuation account, but those funds won't be available to them until they reach retirement age!


Copyright Enough Wealth 2007

Taxation and Wealth Creation

Although taxation should never be the sole deciding factor when making investment decisions (after all it is much better to pay tax on a profitable investment that it is to end up losing money investing in a "tax scheme") it is important to make your investment portfolio as "tax efficient" as possible. The first step is to be aware of just how big an impact taxation can have on your wealth creation plans. Tax rates are suject to legislative risk (that is, they can change unexpectedly when new tax laws come into effect). This can be seen clearly from the change in the taxation situation in Australia over the past 25 years:

                     In 1983       In 2008
Capital Gain Tax     0%            Marginal Tax Rate*
Tax-free threshold   $4,462        $6,000
Lowest Tax Rate      30.67%        15.00%
Highwest Tax Rate    60.00%        45.00%
GST Tax Rate         0%            10%**

One thing that becomes immediately apparent is that the tax system has shifted significantly from direct taxation (income tax) to a more widely-based system of indirect taxation (capital gains and goods and services being taxed).

So, over the long term one can't be sure what tax rates might apply. However, using current tax rates one can see the effect of different tax rates on the return on your investments:

Investment return            8%          10%         12%
After tax @ 15%              6.8%        8.5%        10.2%
less inflation               3%          3%          3%
net real rate of return      3.8%        5.5%        7.2%

Investment return            8%          10%         12%
After tax @ 45%              4.4%        5.5%        6.6%
less inflation               3%          3%          3%
net real rate of return      1.4%        2.5%        3.6%

The true impact becomes even more apparent over the longer term. Just look at the difference in final value of $10,000 invested at 12% with a marginal tax rate of 15% compared with 45%:

Tax Rate applied to returns  15%         45%
Value after 20 years         $40,169     $20,286

This highlights why it is so important to make use of any tax-advantaged investment options, such as investing within a superannuation account.

* a 50% discount if assets disposed of more than 12 months after purchase.
** GST doesn't apply to 'essentials' like unprocessed food, water and financial transactions.

Copyright Enough Wealth 2007

RIO takeover by BHP

The RIO takeover by BHP (3 BHP shares for every 1 RIO share) certainly put a rocket under the RIO shares price - up by around 30% since the offer was announced. It looks as though both sides think this is a good idea (and China thinks it's a really bad idea), but that RIO will hold out for a slightly sweeter deal - perhaps some cash in addition to the shares. I currently own 60 RIO shares so the takeover offer gave me a nice "paper profit" of around $1,800 and, if the takeover goes through there won't be any immediate capital gains tax due if the deal remains a stock swap. I'll probably hold onto this stock for the medium term as the merged company would be in the global top 10 in terms of size, and would have huge marketing power in terms of global iron ore production. With the global commodities boom looking to continue for a while yet, this would translate to higher negotiated ore prices and a significantly increased profit.

Copyright Enough Wealth 2007

What If You Make Maximum Retirement Contributions For 20, 30, 40 Years? (Superannuation)

No Credit Needed did an interesting post regarding what amounts can be accumulated by Americans maxing out their retirement contributions. In this post I show similar calculations from the Australian perspective, “What If… You Make Maximum Retirement Contributions For 20, 30 or 40 Years?”

Notes about the charts -

Annual contributions are held steady at 2008 maximums ($50,000 in tax-deducted contributions [employer SGL contributions and salary sacrifice], and $150,000 in undeducted contribution]
Returns are annual and do not fluctuate
Interest is calculated using year-end-balance
I used percentages between 6% and 14% and a span of 1 to 40 years.
Tax on tax-deducted contributions is 15%. Tax on interest is calculated at 15% (it would be lower for most people as capital gains are taxed at 10% within superannuation during accumulation phase, and 0% if realised during in pension mode).



Copyright Enough Wealth 2007