2019 05 01 Money Australia
2019 05 01 Money Australia
2019 05 01 Money Australia
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36
COVER STORY
20
INTERVIEW
53
STAYING SAFE
Pay off your mortgage Mad Mex founder Same skills apply to finan-
or invest? Clovis Young cial matters and the surf
56
NEW PROPERTY
73
SUPER GUARANTEE
83
HOUSING SLUMP
Traps to avoid with Loophole that could What it means for
house-and-land packages cost you the economy
INSIDE
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For all inquiries and letters, please jobs is the way to go and timely article about super funds,
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Thank you for producing such a high-qual- Indeed, the various forms of the “bal-
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As someone who is self-employed, I bene-
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Over the years my wife and I have paid for branded as ethical, or those funds that
SHARES & X REAL ESTATE FREQUENT FLYER PERKS
GUIDE TO CGT & IV DENDS INFRASTRUCTURE HOTSPOTS WHERE TO SHOP TO BOOST POIN
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the cleaning of our house and for ironing offer a sustainable or ethical option within
PAUL CLITH RVIVE SPENDINGRACT
I H TO from time to time. their fund, invest in the big four banks.
HOW TO S
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What would be
your one money
‘do over’?
The Money
team
EDITORIAL CONTRIBUTING
Chairman & chief ARTISTS
commentator Hayden Brotchie, Phillip
DARREN SNYDER BEN KINGSLEY JOANNA MCCREERY
Paul Clitheroe Castleton, Reg Lynch,
Jim Tsinganos, Darren is managing editor Ben is managing director Joanna is a director of Majel-
Editor-in-chief
Michelle Baltazar John Tiedemann, of Money magazine. of Empower Wealth. Ben la Wealth Advisers. Joanna
(02) 8234 7500 Richard Whitfield Darren says: “Saving says: “Way back when, says: “With the benefit of
michelle.baltazar@ PHOTOGRAPHS
during university. I started I bought a property that hindsight, I’d have been less
moneymag.com.au Getty Images to save with a part-time was always destined to be conservative with my
Managing Editor job at uni but didn’t an investment property. finances in the early 2000s.
Darren Snyder ADVERTISING maintain my discipline. No one told me about the I should have kept and
(02) 8234 7528 Head of Media Sales
Ultimately, it was the benefit of using an offset rented out our Rozelle
darren.snyder@ Stephanie Antonis
(02) 8234 7547 difference in buying a mortgage account instead (Sydney) terrace instead
moneymag.com.au home much earlier.” of paying it down. Won’t of selling it to upgrade the
stephanie.antonis@
Art Director rainmaker.com.au make that mistake again.” family home. It went on
Ann Loveday to double in price.”
Designer Brand manager
Andrew McLagan Simon Park
(02) 8234 7531
Senior Sub-editors simon.park@
Bob Christensen, moneymag.com.au
Debbie Duncan
MARKETING
Senior Writers Marketing manager
Susan Hely, Pam Walkley Julian Clarkstone
Online Content Production manager
Producer Samantha Sherry
Sharyn McCowen
CONTRIBUTING CLIENT SERVICES STEVE GREATREX NICOLA MORAS VITA PALESTRANT
WRITERS Associate
Kayleigh Sotto-Corona Steve is founder of Nicola is a social media Vita was editor of the Mon-
David Bassanese, Maria
financial planning firm specialist. Nicola says: ey section of The Sydney
Bekiaris, David Bonnici, DATA
Alan Deans, Nicola Field, Wealth on Track. Steve “When I started making Morning Herald and The
Research associate
Steve Greatrex, Greg says: “I will never forget serious money each Age. Vita says: “Complain!
Ben Russell
Hoffman, Nicole Jacobs, how clever I felt when I month, I was the opposite Collectively we’ve let finan-
Melinda Jennison, Ben MANAGEMENT locked in our home loan of vigilant with putting cial institutions off the hook
Kingsley, Jo McCreery, Managing director interest rate for five years. money aside for tax. I wish for rip-offs and appalling
Roger Montgomery, Christopher Page Nor how silly I felt when I did then what I do now service. Why should it take
Nicola Moras, Anthony
Executive Director Big Bank took a penalty – put a percentage of it a royal commission and a
O’Brien, Marcus Padley,
Alex Dunnin of $25k from us when we aside with every sale.” productivity commission
Scott Phillips, Vita
Palestrant, Annette Syndication inquiries:
needed to move and pay report to stop the pilfering
Sampson, Phil Slade, money@ out the loan after three of billions of dollars? Help
Gaurav Sodhi, moneymag.com.au years. Always be careful them to lift their game.
Mark Story ISSN 1444-6219 with fixed-rate loans.” See afca.org.au.”
W
hen it comes to money, an
absolute necessity is a really
good “crap meter” because,
by goodness, there is so much absolute
nonsense said and written about money and
investment. The good news for me is that
this provides an endless source of issues to
write about, but the bad news is that many
people seem to have some of the great
money myths ingrained in their DNA.
One of my favourites is the oft-quoted
“good property doubles in value every
seven years”. This seems to be in the real
estate agent’s training maanual.l But
it has also penetrated the minds
of many investors. As witth
any good myth, there is
There’s
always partial truth.
Here the part truth is
so much
that at times property
does double in seven
nonsense
years, but when it
does, watch out, as we
around that
must be nearing the
end of a boom. In our
we all need o be worth
to property PR spin keeps on churning. I
big east coast cities in
particular, there is clear
a good crap $11 billion. And
all of this happens
doubt we’ll hear the “double every seven
years” line for a while, but I did read with
evidence that in some are eas
prices did indeed double from
meter in ouur lifetime. Yep,
$1 million doubling
interest a good result from an auction in
Leichhardt, Sydney, on March 31. I also like
2011 to 2017. every seven n years, takes good news, so I was pleased for the vendors
Here a well-developed crap p meter is 70 y g the
years to get ere. So we can of a property that sold for $1,705,000, a
very handy. Let’s think about this idea that safely say that anyone offering us 10% a year, healthy $105,000 above the reserve. What
property doubles every seven years. To do going on forever, is either unaware of basic interested me more was that they bought it
this, property would need to grow at a bit maths, a fool or a crook. Take your pick. new in June 1991 for $255,000. The excited
over 10% a year. A useful tool for all of us Mind you, for investors and owners vendors had sold for over six times what
is “The Rule of 72”. If some maniac tells a property boom is a very pleasant they had paid for it.
you that an investment will double in value experience. It also helps the broader Stamp duty aside, renovations and selling
in a set number of years, just divide it into economy, as even when people don’t sell costs, and just looking at the purchase and
72. So if property will double in value in they feel richer. This increases consumer sale prices, how did they do on an annualised
seven years, divide 72 by seven and you get confidence and flows on to how we spend. rate? Well, despite buying at a very good
around 10%. Sure, it’s actually 10.285%, but The only losers are the first home buyers time in the downturn of 1991 and seemingly
10% will do us just fine. who saved diligently only to see prices go getting a good sale price, they were well off
Now 10% may seem possible. As with up more quickly than their savings. 10% a year. That would have given them
any investment, in some years it happens. But big jumps like this cannot be a sale price of $3.6 million. But they did
But our crap meter should be on high sustained. In the past a big jump in prices achieve, before any costs, an excellent return
alert because common sense shows us has been reversed by all sorts of economic of a bit over 7% a year – this would have
the problem. In many cities, $1 million is events. Usually it has been a decent been some 4.5% better than inflation.
a common price for a home. Let’s apply recession, such as the GFC of 2009. Here, On a really good investment, history
the “double in seven years” idea. In seven Australians were lucky as Chinese demand shows us that 3% to 5% above inflation,
years this house would be worth $2 million. for our commodities exploded, saving us before tax and costs, is quite possible.
That sounds possible. Seven years later it from recession. But in many parts of the That is my long-term target on my money.
would be $4 million. That sounds unlikely. US property prices fell by over a third. At But if anyone tells you about returns much
But in another seven years it would be other times it has been very high interest higher than that, your crap meter should
$8 million. And to my great amusement, rates, such as in 2000 when mortgage rates be on high alert.
as I love compound interest, if we jump hit 18.75%. This time it is different. Interest
forwards 21 years, our house is worth rates are low but we have had low wages Paul Clitheroe is Money’s chairman and
$64 million. Even better, 21 years later it growth and the banks have turned down the chief commentator. He is also chairman
is worth $512 million. Then you have to lending tap, making finance harder to get. of the Australian government’s Financial
wait only seven more years for your house Even in a tough property market, the Literacy Board and a best-selling author.
1 Year
% *
5.20 after fees
p.a.
var
ON MY MIND
CALENDAR
OF EVENTS Protection against poverty
Tuesday, May 7
Balance of trade J ust as medical vaccinations
rely on immunity of the herd
to protect against diseases,
The simple fact is that the more people in the
superannuation system, the better off we will all be,
for two reasons. First, increasing the level of private
NAB business confidence
superannuation relies on the par- savings for more people in retirement means more
RBA interest rate decision ticipation of the herd to protect us will be self-funded for longer, thereby reducing pres-
Thursday, May 16 all from poverty in retirement. sure on government budgets and enabling a decent
Westpac consumer Today, one in four people sits outside the super age pension for those who need it. Second, the
confidence system. That may be because they are working in greater the number of people in the super system,
Unemployment rate the gig-economy, are self-employed, are at home the greater the economies of scale, which benefits
caring for children or parents, or other reasons. us all in the form of lower fees, better services and
Saturday, May 18 The percentage of the population covered by enhanced ability to manage liquidity requirements
Federal election
super is in decline and unless we act now to for the retirement phase.
include these outliers many more people face Martin Fahy, chief executive, Association of Super-
a bleak retirement, living in poverty. annuation Funds of Australia (ASFA).
I mpulse buying
can blow a
T he findings of the recent banking royal
commission have highlighted the
potential traps that you can fall into when
hole in even the you have multiple superannuation accounts.
best-planned It’s all too common for people changing jobs
budget, and online shopping is to automatically fall into the “default” super
making it easier than ever to account offered by their employer, meaning
spend on things we don’t really that if you change jobs several times you
KOCHIE’S 11-STEP need or want. can end up with multiple accounts.
MONEY PLAN But there is a way to combat Fund underperformance and excessive
by David Koch the urge to splurge. charges levied across multiple accounts can
(Macmillan Australia, $29.99) If you use Google Chrome as rapidly eat into your retirement savings, leav-
your web browser, try adding ing you thousands of dollars worse off than
HEALTH INSURANCE
creating a money checklist leasing the property using a • Open an international bank
is a good step to ensure property manager or short- account for transactional and savings
your financial and term rental manager; capabilities. Financial institutions
property affairs are and consider a family such as HSBC, Citibank, Deutsche
in order. member or friend Bank and Bank of America are well
Alfred Moller, managing it via an suited, depending on the country
Omniwealth expat Airbnb account. where you will be living.
FIRST TIMERS
PROPERTY
Housing affordability
picks up
they must closely monitor issues climbing the property ladder. consumers will
concerning prospective borrowers Thirty-seven per cent ranked ability be looking to trusted
and develop solutions. to afford the type of property they experts more than ever to help
The non-bank lender surveyed want as a pressing concern. them determine the best solution
1126 borrowers in January, before About a third of borrowers were for their situation,” says Aaron
the banking royal commission’s worried about being declined by Milburn, director, sales and
final report, and found the greatest their bank. “With a volatile property distribution, at Pepper.
Alternative
to term
deposits
A s recently as
2011 you could
collect an annual
compared with term deposits,
including capital value volatility
caused by day-to-day fluctuations in
$500,000 and above. As such, most
individual investors access bonds
through managed funds and ETFs.
return of more than the value of the underlying securities Most importantly, because bond
6% on term deposits. Since then there and not having a government investors legally must be repaid their
has been consistent decline in rates to guarantee. However, they can carry capital by maturity, fixed income
just over 2%, where they sit now. less risk of permanent capital loss is considered much lower risk than
And much of the commentary and day-to-day value movement shares or real property.
on interest rates indicates it will be than equities or real property But not all bond ETFs are equal. An
some time yet before term deposit investments held for income. actively managed bond fund can be
rates shift higher. Investors are a sensible option compared with a
often willing to accept this because Lower risk passive (or benchmark-hugging) one
they feel their money is secure and A bond is a fixed-income instrument because fixed-income benchmarks
accessible in a bank. However, there that represents a loan made by an are giving investors much lower
XMORE are viable alternatives. investor to a borrower, typically a returns with more risk than they
INVESTING For example, fixed-income company or a government. It has an were 10 or even five years ago.
STORIES ON exchange traded funds (ETFs) are end date, when the principal is due At a time when self-managed
convenient and easily accessible, to be paid to the bond owner, and super funds have a high
P64-75 offer the ability to buy and sell during usually includes variable or fixed- concentration of Australian equities
the stockmarket’s opening hours interest payments (coupons) that and high amounts of cash in term
and can offer a higher rate of return will be made by the borrower. deposits and saving accounts, a
than term deposits. Bonds are easily tradable, but fixed-income ETF is one alternative
These ETFs do carry extra risk often only in denominations of to diversify a portfolio.
a trend away from large strategic international markets, says while this moment to reflect upon.
investments in resources, energy and annual result brings Chinese ODI in “Australian companies seeking
infrastructure. However, this total Australia back to the second lowest further investment must continue to
was down 36.3% year on year. level since the mining and gas-driven explore and present unique oppor-
A report by KPMG and the Univer- investment peak of 2008, “there is no tunities that appeal to the key value
sity of Sydney says that after a steady reason why Australia can’t return to drivers of targeted Chinese inves-
growth trajectory since 2015, health- higher levels of Chinese capital inflow tors,” says Ferguson.
SHARES
PROSPECTS
5 upgraded
stocks to watch
T he equities experts at invest-
ment bank JP Morgan have
re-rated these five companies and
3. Janus Henderson (JHG)
Janus sales have improved
on better market conditions
increased their recommendation and improved performance,
to overweight: which will help earnings growth/val- downgrades for the 2019 and 2020
uation. JP Morgan says the dividend financial years. After a drop of 29%
1. Charter Hall (ASX: CHC) yield is high and a balance sheet net the share price is 13% below JP Mor-
The property group’s potential for cash position provides some down- gan’s target and it says the underly-
increasing economies of scale is side protection for shares, partially ing business remains in solid shape.
relatively strong, says JP Morgan. It mitigating a greater equity exposure.
also enjoys favourable portfolio com- Even though there are challenges to 5. Vicinity Centres (VCX)
position with office, industrial and the asset management sector, it says A year ago Vicinity canvassed
long weighted average lease expiry Janus benefits from bigger-than-peer market opinion on the prospects of
(WALE) assets at 85% of its assets performance fee revenue. It has a separating its portfolio tail via an
under management. price target of $29. in-specie distribution, which received
mixed feedback. JP Morgan says it
2. Fortescue Metal Group (FMG) 4. St Barbara (SBM) believes the two potential entities
JP Morgan says it has bitten the The gold producer has released could likely trade stronger than the XMORE
bullet on its rating, upgrading the its findings from the Gwalia mass current 17% discount to net tangible SHARES
stock following upgrades to its 58% extraction (GMX) study, a key expan- assets. On a stand-alone basis, Vicin- STORIES ON
increase in the iron ore price fore- sion project at its flagship asset, ity’s balance sheet is in good shape,
cast to $60-$55 a tonne with higher Gwalia. The study has highlighted its $400 million buyback has been
P76-86
prices over the medium term. The that the best option is to continue reactivated, its operational sales
share price has rallied strongly this with trucking operations instead of performance is improving and its
year, from just over $4 in January to developing an underground process- valuation metrics remain attractive.
around $8 in early April. ing facility. This has led to production The price target is $2.80.
they’re getting out. where it makes its money from wealth next few years. But it will return at some
Westpac is staying the course management – around $790 million stage and, with a fully franked dividend
but will stop providing financial in cash earnings for 2018, nearly 10% yield of around 7.2%, not much growth
advice. Good riddance. It lost of Westpac’s total – and management is factored into the share price. BUY.
$53 million on financial planning thinks it can grow. As expected, Rakesh Tummala is an analyst at InvestSMART.
in 2018. The planning business removing the unprofitable advice See investsmart.com.au/money.
Just mad
about
Mexico
I
t seems an oxymoron to claim
that fast food is good for you. Yet Fact file
that is the core pitch behind the
success of Mexican food chain Clovis Young
Mad Mex. It is also behind its The former Wall Street equities trader
current push into Asia, and one of the migrated to Australia with a yearn to make
main attributes that could stand in
its favour as a US-owned rival fast Mexican food. Age 45; lives in Sydney’s
food giant, Taco Bell, returns to our Rushcutters Bay.
shores later this year in a big way.
Even though it has always promoted Favourite pastime is enduro dirt-bike riding because
its healthy ingredients, Mad Mex is it burns a lot of nervous energy. He invests in shares,
doubling down on what it views as describing his philosophy as stockpiling cash to have
a major point of difference. the firepower for cheap opportunities when they
The chain’s tag is “Your Body is Your arise, then buying and holding. Applies the
Temple”. It claims that its customers same thinking to property, buying his first
should never have to choose between a Sydney apartment last year when
quick meal and quality, healthy food. Its prices fell.
website features a nutritional calendar
so people can check levels of calories,
carbs, fats, sugars and more in all of its
dishes. It even publishes recipes so they the whole world. I really fell in love with rice cooked with vegetables and garlic, and
can be cooked at home. Now it also caters Mexican food.” beans, and simple meats with chilli mari-
for vegans and people with allergies and But his family moved to Massachusetts, nades. There is no processing. It’s cooked
gluten intolerance, and was the first quick and there was no Mexican food to be found at home. It’s that simple. What we put on
service restaurant to sell RSPCA chicken. anywhere. For 20 years, the notion of mak- the table is everything that you can make
Mad Mex founder Clovis Young says he ing burritos stayed with him but it didn’t at home.”
became hooked on Mexican food when materialise until he moved to Australia. Mad Mex has 60 stores in Australia and
growing up in California. Surfing or boo- “Here there was a big Mexican eating more than 10 in New Zealand. It owns 20 of
gie boarding while holidaying with his culture in the ’80s, with sit-down restau- the stores locally, the rest being franchised.
grandparents in San Diego would work rants, hen’s nights and tequila shots. They “When I started the business, we had three
up quite an appetite. “After four hours in were places you would go once a year and restaurants in Sydney. We had great prod-
the water, you buy a burrito with rice and have a bender. It was very much Tex-Mex, ucts, but I didn’t know the first thing about
beans and guacamole, and the juice drips very unhealthy food. Yet, inherently, Mex- franchising. I didn’t know how to do a lease
down your chin. It was the best thing in ican is very simple. It is peasant food. It is deal. Phillip Blanco, who had been with
The chain operates mainly in NSW, it opened in new cities in Australia. After graduating from high school,
Victoria and WA, and has a few stores in For Young, it’s a long way from being Young took a job as an equity trader on
Queensland. It pulled back from South a busboy – a dishwasher and waiter – in Wall Street. “I thought it was fun. It’s like
the same page. I had to bring them along training. It’s amazing how much better it is current situation, where there are two
without destroying the culture. The biggest when you get the people piece right.” contracts and no guiding principles about
challenge we had for the first six years He says that the Mad Mex model is to how the business runs.”
7.70%pa
trilogy monthly income trust
*
An inheritance
from a parent
needs to be
invested carefully
CASE STUDY
RICHARD WHITFIELD
Safe spot for $200k
W
hen an inheritance from a When the inheritance came through,
NAME: Cheryl Lewin parent comes along, there are Cheryl bought a new car and kept some
STATUS: A resourceful 67-year-old. plenty of questions about what money aside for “the big trip”, which
QUESTIONS: What is the best place to to do with it. So it is a perfect time to visit included seeing her friends who live
safely invest a $200,000 inheritance for a financial planner – and this is exactly overseas and her daughter and grand-
12 months, with the option to re-invest what Cheryl Lewin did. The advice cost children in Canada, as well as her son
annually? Will the money impact the age her $2500 and the five suggested scenarios in Perth. She would like to stash the
pension? Is there a secure account that included putting her money in Challenger $200,000 somewhere safe for 12 months,
is higher yielding than the current one? annuities. Cheryl weighed it up but the with the view to re-investing each year,
ANSWERS: Cash and term deposits idea didn’t appeal to her and she decided as she would like to rent again. But
are your best bet for a risk-free place to not to go ahead with it. what is the best place for her cash?
park your inheritance for 12 months and Cheryl describes herself as financially She has deposited it in a Suncorp
longer. At the cash rates of return, you astute and was well set up, but around 55 Plus account for people aged over 55.
won’t lose much of your pension. If you 20 years ago, through some bad business It pays an interest rate of 2.4%, or 2.65%
want to micro-manage your savings decisions, she lost everything. Her mar- for 12 months. Should she leave it with
you could earn 2.9% with a bonus riage ended and she no longer owns a Suncorp, or is there a safe investment
savings account or 3.05% by home. She managed an aged care team that pays more?
COMPILED BY SUSAN HELY
chasing introductory offers. but has retired and is on an age pension. Cheryl would like confirmation from
She says she “sticks to a tight budget” and the Department of Human Services that
lives frugally by housesitting for people, her $200,000 will not impact her age
working as a marriage celebrant and pension. Also what would another
mature modelling. financial planner recommend?
Q
&
A
Q
Ask Paul, Money
magazine, Level 7, 55 I own my Melbourne home, which is I think for 20¢. I bought some decades ago, but not
Clarence Street, Sydney valued at $875,000 with a $563,000 debt. at 20¢, sadly! CSL remains a first-class business and
NSW 2000 or money@ I also jointly own an investment property I continue to hold shares in the company.
moneymag.com.au. in Melbourne, with my share valued at $540,000 As you own a couple of properties and have super,
and an interest-only debt of $402,000. I am 37, you could go a few ways with your $75,000. The safest
Sorry, but Paul can’t single and earn $130,000pa with no personal debt. is to pop it into an offset account attached to your
personally answer your I am paying down my home loan by about $10,000 mortgage. This is a really safe way to earn, tax free,
questions other than each year and am saving a net $19,000 each year. whatever your mortgage rate is.
in the Q&A column. My super balance is $157,000 and I have $93,000 Shares have historically performed well above
By submitting your in cash. My question is: what would be the best the interest rate on your mortgage, but are riskier, in
question to Money, thing to do with the cash savings in my current particular in the short term. Here you could buy, say,
you consent to having situation. I am considering spending $18,000 to three to four shares to add to your CSL. I’d diversify
your question and the buy CSL shares but I would like to know what across sectors, possibly a bank such as Macquarie,
response you receive to do with the remaining $75,000? a food group (Woolies or Coles), a resource compa-
from Paul published ny (BHP or Rio) and so on. Equally, you could use an
in the print and digital I have a soft spot for CSL shares. My dad was a doctor exchange traded fund (ETF) to keep it simple and
edition of Money. and he could see the importance of blood plasma and cost effective. An advantage of an ETF is that you
inoculation, so bought CSL shares at the original float, could choose one with global exposure.
SMSF is a
minefield
Q My husband and I set up a self-
managed super fund about
six years ago, for the purpose
of investing in residential property.
We have five properties in our SMSF.
I retired recently and my husband is
due to retire in September. We would
like to take one of the properties out of
our SMSF (once my husband retires),
so we can use it for ourselves.
The problem is that the property is
in the name of our SMSF and we want
to transfer it into our names. Is there
a way this can be done without having
to pay stamp duty again on a house To boost Glynis’s retirement savings ...
that we (the two-member SMSF) have
& $30k to
A kickstart
deposit
Q I am a 32-year-old with a
great job and potential for
wage growth. I earn $85,000
and own an apartment. I have about Here, Pam, we have the classic risk-and- month. This will turn into a large deposit,
$210,000 left on my mortgage and return dilemma. Paying off your mort- so if you want to buy another property
about $30,000 saved in an offset gage by adding to your offset account you can do so more safely. You also
account. I transfer around $1000 is a really sensible and super-safe option. mentioned your prospects for a higher
every month into my mortgage. Gearing up and borrowing money to buy salary – in time that would allow debt
I will be inheriting around $30,000 an investment property offers more risk to be paid off more easily.
in the next six months. Should I put but potentially higher returns. I chuckled at your honest comment
the money towards my mortgage or The best way to minimise risk in about shares. Do remember, though, that
should I look at buying another prop- property is to borrow less and have a you will hold shares in your super fund.
erty? Or should I look at investing long-term time frame. So with a falling I’d suggest this is a good time to check
in the stockmarket? property market in most parts of Austral- your super, make sure it is in a low-fee
I am clueless when it comes to ia, it seems to me you could do well fund, ensure any insurance in the fund
shares and similar investments, so to pop the inheritance into your offset is what you need and take a look at the
I wouldn’t even know where to begin. account and keep adding the $1000 a shares the fund owns for you.
# AUZ M I N E S
THIS MONTH
Destination Russia
SMART SPENDING
From Russia with love ... clockwise from above, Church of the Savior on the
Spilled Blood in St Petersburg; Matryoshka dolls; Grand Palace of Peterhof;
Aphrodite in the Hermitage Museum of St Petersburg.
Six things to do
1. Admire: The Church of the Resurrection (Savior age, the second largest museum in the world. Three
on the Spilled Blood) in St Petersburg. The century-old million art items are spread across six buildings, five of
cathedral is located in one of the oldest areas of St which are open to the public. Head to the Winter Palace
Petersburg, making it a must-visit site for history buffs. first, if you’re pressed for time. Founded in 1764, the Her-
The church stands out because of its magnificent archi- mitage boasts many of the early works of the world’s
tecture, which is relatively ostentatious among the most celebrated artists, including Matisse and Picasso.
surrounding buildings. Visitors must stay on their 4. Buy: Matryoshka dolls for family and friends back
guard, though, as pickpockets abound. Many tour home. St Petersburg is a better place to buy the famous
guides recommend leaving valuables on the bus, Russian nesting dolls. By the time you get to Moscow, the
to be guarded by tour staff. dolls either double in price or are not of the same quality.
2. Cruise: By hydrofoil to the Palaces and Gardens of 5. Catch: The Sapsan train to Moscow. This high-
Peterhof. Journey along the Baltic shore to a place better speed train reaches Moscow from St Petersburg in a
known as the Russian Versailles. For more than 200 few hours. Enjoy views of the countryside from the
years, the Grand Palace of Peterhof was the summer comfort of this luxurious mode of public transport.
residence of Russian tsars. Lines can get long so do 6. Capture: Photos of the Russian capital. Visit Red
your research online for the best time to visit or to Square, the famous onion-shaped domes of St Basil’s
find entry tickets when available online. Cathedral, Lenin’s Mausoleum and, finally, the Kremlin.
3. Visit: The Hermitage Museum. A visit to St Peters- After seeing all of that, you’ll understand how the song
burg is not complete without a day or two at the Hermit- From Russia With Love came to be. MICHELLE BALTAZAR
SMART TECH
SMART SPENDING
Small gadgets fit
smaller spaces
GIVE IT UP WEBFIND
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PAUL’S VERDICT Paul Clitheroe
H
i Dom. I remember this stage of have every reason to be optimistic about shoes I would try to make the renovation
life, though it does fade as I rapidly the future. Now to your conundrum. I really happen sooner rather than later.
head for 64. With the benefit of understand how hard you have both worked You mention CBD views. From this I
hindsight, it is really interesting how life and to get money into the offset account. I have suspect your house is in a good location with
money move through distinct stages. During to leave it to you to do a long-term financial the prospect of long-term capital growth.
school it was all about earning a bit of money, forecast and a budget, but my sense is that, So it seems reasonable to argue that the
firstly picking oranges and then, when I hit 18, yes, you can afford to use the $116,000 in $300,000 you spend is not wasted money. In
working in a pub. My uni years were great fun. your offset and borrow another $184,000 fact, it should increase the value of your home
I was pretty poor, but it did not feel like it. Beer to get the $300,000 you need. by that amount or a bit more. So we have
was only 33¢ for a schooner and my pushbike The repayments on $200,000 would be a “balance sheet shuffle” where your asset
was cheap to maintain. around $10,000 a year and the fact that you value is unchanged or maybe a bit better. The
Then it was the first “real” job, back in 1979. add $400 to your investments and are building big issue, though, is that the more valuable
My salary was $13,000 and I had so much your offset account shows me you can afford asset, your home, does not produce income.
money I didn’t know what to do with it … until I this. But the variables I do not know are You and your wife do that.
got married and along came a mortgage. Then potential changes in your jobs and school fees. I’d be looking to make this renovation
I was at your stage, making progress with the School fees are quite predictable, and happen, but I would want to be very sure that
mortgage, but children were coming along and you can build those into your budget. But the new job on an equivalent or higher salary
we also had issues with space for our three the change in jobs is a big deal. I presume was certain. You can plan for all the cash flow
kids, not to mention school fees. you would only change for the same or a issues such as school fees.
You will be pleased to hear that with careful greater salary, but if there is to be much of Anyway, I wish you all the best for the
control of your money, as you are doing now, a delay between leaving and starting a new potential new job and hopefully a beautifully
in about 20 years another stage comes along. job I would be cautious. More debt and job renovated house.
This one is a cracker. For me it is like being uncertainty do not appeal to me at all.
back at uni, only I have more money. With This is an issue only you and your wife can ASK YOUR QUESTION
adult kids, no mortgage and money invested, work out and plan for. One thing I know about
you can plan for this stage of relative freedom. life is that it goes by really quickly. Your family If you have a question, email money@money-
It is terrific! will get most enjoyment out of the renovations mag.com.au or write to Level 7, 55 Clarence
Street, Sydney NSW 2000. Questions need to
At just 37 you are tracking well. Your right now, while the kids are young and at
be 150 words or less and you must be willing
mortgage is under control; you are saving home. It saddens me to see people playing
to be photographed. Readers who appear on
on a regular basis; you and your wife will it really safe and extending as the kids leave
this page will receive a six-month subscription.
be building up superannuation; and you home. So I have no doubt that if I was in your
newcastlepermanent.com.au/discover
Newcastle Permanent Building Society Limited ACN 087 651 992, Australian Financial Services Licence/Australian Credit Licence 238273. NPBS971_1118_MMFPC
COVER STORY
This recurring
household
debate is always
a close call and
there are several
options to
consider
PAY OFF
YOUR MORTGAGE
OR INVEST? OVERVIEW DARREN SNYDER
I
t’s an age-old question and the answer money towards their home loan as well as
can make a significant difference to your additional investments.
money situation over the longer term. In its latest Household Financial Comfort
Paying off your mortgage is a notable goal Report, ME Bank says more households are saving.
and achievement. Making the most of low It estimates savers, on average, are now putting
interest rates and paying off your home loan early away close to $862 a month or more than $10,000 a
is commendable and will give you great peace of year, an increase of 7% from the previous biannual
mind. However, will you benefit once you come out report in 2018. Almost half of households with a
the other side of the mortgage and have surplus mortgage (49%) continue to pay above the
cash to invest? minimum in repayments, the report also says.
Or do you pay off the mortgage for a little longer As at December 31, 2018, 47% of households are
and consider building wealth alongside the loan? At contributing more than 30% of their income
the very least, this second option is a diversification towards housing each month, and this is a nine-
strategy – having your money grow by investing in point fall from 56% over the previous six months.
other assets, potentially compounding with interest What it suggests is that there’s some wiggle
over several years. And as the mortgage is paid, an room for Australians to make additional
investment pot develops. contributions to superannuation, invest in the
But putting someone else in charge of growing sharemarket or work towards buying another
your money is not as easy as it sounds. Several property. Money has looked at these options
recent studies reaffirm what we already know: and asked three experts to detail their views
Australians are emotionally attached to their on the perennial wealth management question:
money and moving it into an investment vehicle “Do I pay off the mortgage or invest?”
is a difficult decision. It’s a close call, and it reinforces why having a
However, what these same studies tells us is long-term financial plan is critical to improving
that there’s a case for homeowners to be putting your future wealth.
PROPERTY
BEN KINGSLEY
A
hh, “Should I pay off my mort- making progress – you’re seeing your debt SO LET’S MEET ALAN AND JULIE.
gage or invest?” If I had to going down – whereas buying an investment Here’s what their current financial picture
declare my favourite money property means more debt. Debt that, without looks like:
management question, this first crunching the numbers, might feel as They’re a mid-30s couple, each earning
would be it. Why? Because it if you’ll never pay it off and, in the process, $60,000 a year.
has the potential to be financially life changing. you’ll end up paying a huge amount of mort- Total income: $120,000 gross = net income
Life changing? Well, how does more than gage interest. of $96,766.
$2.4 million over 30 years sound? The potential problem with this line of Their home is worth: $665,000.
A figure like that should raise your curiosity thinking is that households wait too long before Current mortgage: $400,000.
levels. Now I’m not automatically suggesting they start investing. They don’t give themselves Annual mortgage repayments: $35,505
that what you’re about to see illustrated is going enough time to build an investment nest egg (4% interest, principal and interest repay-
to be the same for everyone, because it won’t big enough to sustain the quality of life they ments, with 15 years remaining on the original
be. I always recommend you seek professional might be enjoying now. My advice here is: be 30-year term loan).
advice to get your own numbers crunched careful of making financial decisions based Annual household expenditure: $47,400
before doing any investing because it’s a big on feelings rather than the numbers. (bills/spending).
financial decision and one that you need to With that in mind, let’s get back to the Total annual outgoings: $82,905.
fully plan for and understand to ensure it’s $2.4 millionquestion:“Whyshouldyouprioritise Annual household surplus (cash flow):
the right thing for you. investing in property rather than pumping all $13,861 ($1155.08 a month).
Before I share with you exactly how this of your cash into your mortgage?”
is possible, let’s first recognise the two most OPTION 1
common household beliefs: Pay off mortgage only Pay off the mortgage only
• You should pay down your mortgage debt
Family Cash/ Net
As demonstrated in the table, if Alan and Julie
as quickly as possible. Year Debt commit to trapping their surplus cash flow
home savings position
• You can’t afford to invest in property and
0 $665,000 $400,000 $- $265,000
of $13,861 to make extra repayments on their
also pay off your own mortgage. mortgage, and then continue to trap this surplus
From the outset, these assumptions seem 1 $711,550 $367,751 $- $343,799
over the 30-year modelled term, their future
valid, don’t they? value position will be $7,114,924. In today’s
For one, a large chunk of our hard-earned 5 $932,697 $210,007 $- $722,690 dollar terms (allowing for 3% inflation) this
money is already feeding the monthly repay- will be $2,931,254.
10 $1,308,156 - $52,991 $1,361,146
ments on the mortgage – surely there’s no On the mortgage front, by focusing on
room to take on another one? Plus, you don’t 15 $1,834,756 - $399,221 $2,233,977 paying it off sooner, Alan and Julie would pay
really want debt “hanging over your head” off the entire loan early in an impressive nine
forever, right? 20 $2,573,340 - $835,439 $3,408,779 years and one month, instead of the 15 years
I get it – holding debt is the major reason 30 $5,062,150 - $2,052,774 $7,114,924 remaining. This will save them $51,796 in
why most of us don’t take this path. Paying mortgage interest.
Source: Empower Wealth modelling.
off the mortgage makes us feel as if we’re Nice job, right?
PROPERTY
OPTION 2
Buy a $500,000 investment property
(and take a little longer to pay off the mortgage) Top suburb picks
Well, let’s take a look at what might be possible Locality Typical house values Yield
if they chose to invest in a property instead. Seaview Downs, SA $501,000 4.1%
Spoiler alert! The table below shows you the
Clovelly Park, SA $472,000 4.1%
result, and now I’ll explain how they did it.
In this scenario, we see Alan and Julie buy Largs Bay, SA $523,000 4.1%
a $500,000 investment property. When you Karabar, NSW $525,000 4.9%
compare the two results, we see and learn a lot.
Kuluin, QLD $506,000 4.8%
First, let’s look at the difference in cash positions:
Postcodes with strong demand and low supply in $500,000 range with >4% rental yields
they would have $283,326 in additional cash if
they paid off their home and saved the cash.
What about the additional interest they paid
overall in buying the investment property?
They paid $47,921 in additional mortgage
interest on their home loan.
But here’s the kicker – this additional inter-
est allowed them to control one investment,
which in turn made them $2,425,868 in net
worth over the 30 years, giving them a total
net worth of $9,540,792. (In today’s dollar
terms this amounts to $3,930,680.)
property and cover the upfront costs (such as If Alan and Julie want to buy this investment
stamp duty, legal fees, etc), a total of $530,000. property, the numbers show us that they will
They’re able to do this based on the equity need to cover the monthly cost of $1616. If we
they have in their existing property, as no lend- look back at their current monthly surplus, it
er is going to give more than the investment was only $1155. So currently they are $461 shy
property is actually worth without additional each month of being able to cover the cost of
security to support the borrowings. So they’re holding the investment property.
using their home as security to borrow the What are their options?
full amount. This is a common approach The logical first option is to look at their
for most property investors starting out, as current bills and outgoings to see if there is
it means they don’t need to use any of their any discretionary spending they would be
own cash savings. willing to sacrifice to find this money, remem-
bering there is, potentially, a life-changing
What is the ideal equity “sweet financial story here. Are they willing to forgo
spot” and how do I work it out? some short-term spending for long-term
In my view, the equity sweet spot is when you financial gratification? Hopefully they are,
do not need to use any of your own cash or but the statistics tell us that most people
savings. Instead, you can cover the upfront aren’t prepared to do it.
costs with borrowings. However, what if it were possible to find
Let’s use Alan and Julie’s example to show this $461 a month without impacting the
how to work this out. family budget?
They own a $665,000 property with an existing Here is a way to do it. You refinance the
$400,000 debt. This represents a loan to value existing 15-year loan term on the family home,
ratio (LVR) of 60.15% ($400,000/$665,000 x where the current monthly repayments are
100). Banks are comfortable with lending up $2958.75, back to a 30-year term. The new
to 80% without asking the borrower to insure monthly repayments will be only $1909.67,
the risk of going higher by paying lenders which results in a $1049 cash flow surplus.
mortgage insurance (LMI). This clearly covers our $461 shortfall and
So I recommend that most people stay leaves $588 to go back into the mortgage offset
under 80%. This means we have $132,000 in account or available redraw if Alan and Julie
available funds using the family home as equity need any short-term funds for an emergency.
($665,000 x 80% = $532,000 less $400,000 And we learnt earlier what this move costs
already borrowed = $132,000). in terms of additional interest charges on the
The same rule applies for the investment home: only $47,921.
purchase to keep this under the 80% LVR. If This household budget restructuring strategy
we want to buy a $500,000 property, then an can be a game changer for most people who
80% LVR is $400,000 against this property. don’t realise, up until now, that it’s possible
For clarity this will also be a principal and to realise the dream of owning an investment
interest loan over 30 years. property and, in doing so, potentially build
Assuming our upfront costs are 6% for stamp greater wealth.
duty, legal fees, etc ($30,000), then to complete
the purchase we need to find $130,000, which Risk versus reward
we worked out we have. So, for me, the equity Deploying one’s money in different ways, such
sweet spot when you are in the accumulation as buying an investment property instead of
phase of buying an investment property, or just paying off your home loan sooner, can
adding one to your portfolio, is to keep your yield a significant transformation in terms of
global LVR below 80%. financial wellbeing. It does, however, require
a sound understanding of the numbers and
Can you afford it? potential risks involved, combined with a
Calculating the equity sweet spot is one of the focus and desire to take a well-planned path
two critical components needed to work out less travelled.
what you can afford to buy. The other critical
component is cash flow: can you afford to Ben Kingsley is a best-selling author, co-host of
borrow all this money without affecting the Australia’s No.1 property podcast and managing
household budget? director of Empower Wealth.
SHAREMARKET
JO McCREERY
P
aying down your mortgage and Macquarie all have platforms that you ETF (A200, 0.07%pa) for a broad Australian
as fast as you can – faster can open with $5000 or less and that offer share exposure and the Vanguard Interna-
than minimum repayments monthly savings plans. tional Shares Index Fund (VGS, 0.18%pa) for
– is a great investment plan As your initial investment, I would choose global developed market shares.
that can save you thousands either a diversified index fund or a combi- Those who are risk tolerant could also
in interest costs over the term of your loan. nation of indexed and global share funds, consider an emerging market fund such
However, if your mortgage is at a comfortable depending on your risk profile. as iShares MSCI Emerging Markets ETF
level – so that you could afford an interest Indexed strategies are low cost and have (IEM, fee 0.69%pa). To reduce the risk in
rate increase or a period where, if you are low taxable gains on an annual basis (allow- your portfolio, you can add some invest-
a couple, one of you is between jobs – then ing you to defer a lot of the capital gains tax ment-grade bonds via an ETF such as the
it’s worth thinking about broadening your until you sell the investment). Having some Vanguard Australian Fixed Interest Index
investment strategy. Australian shares in the mix will provide Fund (VAF, fee 0.24%pa).
Saving for short-term goals is best done you with some franking credits, which helps There are also actively managed listed
in your mortgage offset account, but if you reduce the tax on income. funds that give you exposure to a more select
are willing to invest for the long term (more This is a really easy way to build an invest- portfolio of shares, and some of these funds
than 10 years) then a share portfolio is a great ment portfolio. You do pay the platform should do better than an indexed fund over
option. Investing regularly – say monthly – into provider an administration fee, but for many the long term. But if they are high-turnover
a portfolio is also a good way to mitigate risk. people it will be well worth the convenience, strategies, you may find they also result in
This way you invest in the ups and downs and for savings plans that start small it will you having to pay more tax on the annual
of the market, reducing the risk of buying at also be cheaper than investing via a share distributions than with indexed funds. These
just the wrong time. trading account. types of funds need to be chosen with care
and reviewed periodically.
Set up a savings plan 2. SHARE TRADING ACCOUNT
1. INVESTMENT PLATFORM An alternative to using an investment POTENTIALLY INCREASE LONG-TERM RETURNS BY
The best way to save is to automate the platform is to invest directly in shares or ALSO INVESTING BORROWED FUNDS
process so that it happens monthly, without exchange traded funds (ETFs) through a share With either of these approaches, you can
you having to think about it. The easiest and trading account. This is a more hands-on potentially increase your long-term return
cheapest way is to invest via a platform that approach that can’t be set on autopilot like by investing borrowed funds alongside your
offers a range of managed funds, allowing the platform option. There is no automated savings. I prefer to use home equity loans
you to easily diversify your investment. This way to do this, and to minimise brokerage rather than a margin loan because the interest
is also an excellent way to control risk. I would recommend building up funds in a rate is usually much lower.
Choose one that offers a monthly savings savings account and then investing every You would have to wait until you have some
plan with no transaction fees. You will pay quarter or six months. You should also be equity in your home and then ask your bank to
the buy spread on the underlying funds, prepared for a fair amount of mail associated create a new loan account that you use only for
but that cost would be no more than 80¢ on with the investment (dividend and holding investment purposes. To keep it simple, you
a $400 investment (compared with $10 to statements, etc). could add a deposit from your home equity
$30 brokerage per transaction, if you invest If you choose to invest directly and your loan to your investment portfolio each year.
directly into the sharemarket). portfolio is starting out relatively small, I Naturally, borrowing to invest is a lot riskier
You also pay fund management and admin- would go for a broadly diversified exchange than investing savings, and if there’s a share-
istration fees ranging from about 0.7% to 1.2% traded fund such as the Vanguard Diversified market fall you could find you have more
a year ($35pa to $60pa on an investment of Growth Index ETF (ASX: VDGR, fee 0.27%pa). debt than equity. So if you’re not highly risk
$5000), depending on the funds you choose. Once your savings grow, you could add other tolerant, keep the level of debt low compared
Fund managers such as Colonial, BT, MLC funds such as the BetaShares Australia 200 with the amount invested.
IS THE OUTCOME LIKELY TO BE BETTER THAN JUST from the start, provides a better outcome.
Power of investing
PAYING DOWN YOUR HOME LOAN? Note that, in reality, investment returns are
Achieving a successful outcome for this bor- Loan and investment value not this smooth and there will be times when
rowing-to-invest approach will depend on a 600k your portfolio value falls and other times
number of factors: when it increases by more than 6%pa. You
• You stay disciplined with the investment 400k
Strategy 2 should also be aware that the right investment
– don’t sell shares when there’s a dip. Stay strategy for you will most likely change over
200k
focused on the long term and keep adding to time as factors such as your time to retirement,
the investment regularly. mortgage rates, your disposable income and
0
• Your long-term portfolio returns, after fees
Strategy 1
your risk profile change.
and tax, are higher than your mortgage rate. -200k The table compares the final outcome under
To put some numbers to this approach, we different return scenarios. It shows that if you
will assume: -400k earn only 4%pa, you would have been better
• You have a $400,000 loan with a 30-year off simply paying down your home loan.
term at an interest rate of 4.5%pa. -600k The table also shows that gearing can poten-
• You have $100 a week to invest in a port- 2019 2023 2027 2031 2035 2039 2043 2047 tially increase your return, but it also increases
folio (or you could use that to increase your the risk. In the case that returns are only 4%pa
loan repayments). How to get ahead and you had borrowed to invest, you are a lot
• Strategy 1 – pay more into your loan, then
Saving from the start is ahead by:
worse off than you would be by just saving
when it has been paid off early, invest the without borrowing. If, however, you earn 6%
repayment amount in an investment portfo- Investment or more a year, it’s a worthwhile strategy.
No borrowing Borrowing to
return after
lio earning 6%pa after fees and tax until the to invest invest
fees and tax
original end date of the 30-year loan. Joanna McCreery has over 25 years’ experience
4% -$19,329 -$67,821
• Strategy 2 – make minimum repayments
5% $22,330 $5056
in the finance industry and is a certified finan-
on your loan and invest $100 a week into a cial planner and a director of Majella Wealth
portfolio earning 6%pa, after fees and tax, 6% $75,893 $97,855 Advisers (AFSL 303260). Joanna is based in
every year for 30 years. 7% $144,284 $215,494 Leichhardt, Sydney. majellawealth.com.au.
The chart compares the two strategies – it Assumptions in the borrowing scenario: you borrow $52,00pa and invest that in
Note that this is general advice and you
shows the addition of the value of the loan your portfolio as well as saving $100pw ($5200pa); the loan interest rate is 5%pa should consult a financial adviser about how
and you pay the interest from your investment account. Note that there is likely to
remaining and the investment account balance. be capital gains tax payable when you sell down your investment portfolio. This appropriate these strategies may be for your
can be mitigated to some extent through a staggered selldown.
Given the assumptions, Strategy 2, investing own situation.
SUPER
STEVE GREATREX
E
veryone should try to make mortgage repayments were to increase from
additional payments into their $881 to $1089 per fortnight, the loan would be
superannuation. This can seem repaid in 20 years and 10 months.
challenging if you’re a family In other words, Maria and John would
with bills and a mortgage to pay. knock more than nine years off their home
However, the federal government now limits loan. Total repayments would be more than
your extra payments (both non-concessional $589,000 (including interest of more than
and concessional) into super so you cannot $189,000), saving the couple about $100,000
easily “catch up” once your home loan is paid off. from the original 30-year loan term.
Therefore, you are better off taking advantage Yet if Maria’s surplus income of $8000
of the concessional payments you can make Salary sacrifice into was instead salary sacrificed to super for 21
every year and let your home loan run a little
super: how you can save years, rather than going towards paying the
longer (though in many cases you can do both). John Maria mortgage earlier, it could enhance her super
There are two contributions you can make Income $37,000 $80,000 balance by more than $315,000.
if you are an employee: salary sacrificing and Salary sacrifice into $18,799 $17,004 Based on the super guarantee alone (and
(for lower income earners) a non-concessional super (taxed at 15%) (-$2820) (-$2551) its increase to 12% in 2024), Maria’s balance
payment that generates the federal govern- 19% +2% 32.5% +2% would grow to more than $350,000 over 21
Tax rate outside super
ment’s co-contribution. plus Medicare levy
$18,799 $17,004 years (assuming returns of 7%pa after fees).
Let us take the example of John and Maria. (-$3948) (-$5866) This means her super balance could well be
John earns $37,000 and Maria earns $80,000 a Non-concessional $812 + $406 in excess of $665,000.
super contribution (government –
year. They have a mortgage of $400,000 with Put simply, if used to accelerate mortgage
(after tax) co-contribution)
an interest rate of 4% and a term of 30 years. repayments, $5400 net over 21 years would
Tax savings $2346 $3315
They pay off their loan fortnightly (meaning result in savings of about $100,000. Where-
they make a few extra repayments a year) Source: Wealth on Track
as if $8000 gross was salary sacrificed to
with $881 instalments. super, it would result in more than $315,000
DOES IT PAY TO SALARY SACRIFICE? repaid will be more than $687,000 – including being saved. However, this would have to
If John salary sacrifices $18,799 ($723 per interest of more than $287,000 – according be reduced by the amount of the mortgage
fortnight) into super and reduces his taxable to ASIC’s Moneysmart mortgage calculator. still outstanding at the end of year 21, which
income, he can save more than $1100 and grow However, if John and Maria did not salary is around $175,000.
his super balance (see table). Additionally, if sacrifice into super and decided those same If my logic is correct, salary sacrificing
John puts $812 into super as a non-concessional dollar amounts were to be put towards the to super as opposed to making additional
(after-tax) payment and then does a tax return, mortgage (after tax), they would have about mortgage payments certainly seems to be
he will be eligible for a $406 co-contribution. an additional $26,000 or $1000 per fortnight the winner. The reasons for the difference
For Maria, she decides to salary sacrifice to put towards their loan. It would effectively are the higher net investment being made to
$17,004 ($654 per fortnight) into super. When pay off the loan in less than 10 years for a total super on a regular monthly basis as opposed
evaluating the difference between her marginal of about $485,000 and with less than $85,000 to after-tax mortgage repayments, and the
tax rate of 32.5% (plus the Medicare levy of in interest payments. higher earnings being achieved inside the
2%) and the super tax rate of 15%, Maria can However, considering this model does not take superannuation environment. M
effectively save more than $3300. into account annual household expenditure, it’s
WHAT IF THEY PUT THE MONEY INTO THE likely to need a more realistic middle ground. Steve Greatrex has worked in financial
MORTGAGE INSTEAD? MOVING THE GOALPOSTS services for 30 years and founded financial
Over 30 years, if the standard mortgage repay- Let’s say Maria had a surplus income of $8000, planning firm Wealth on Track in Adelaide
ments are made (not including fees), the total or $5400 after tax ($208 per fortnight). If the in 2009.
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RURQOLQHDWZZZQREOHRDNFRPDX1REOH2DN/LIH/LPLWHG$%1$)6/1RFOLHQWVXUYH\E\3XUHSURÀOH
MY MONEY HOME LOANS
Hit a
home
run
STORY NICOLA FIELD
M
ore than one million Aus- because they were self-employed or worked borrower’s income. “If you are self-employed,
tralians are swapping the part time. The thing is that working for yourself a freelancer or a contract/temporary worker,
9-to-5 grind for the free- doesn’t have to spell the end of home-buying you need to be able to demonstrate a history
dom of the gig economy, dreams. It just means you may need to take a of income by way of your tax returns,” says
picking up work from a few extra steps to become home-loan ready. Mitchell. Two years of tax assessments are
variety of freelance jobs – from driving for Phil Gallagher, mortgage broker with Aus- preferable but Mitchell says that as an absolute
Uber to designing websites. Add a further sie Belmont in the Lake Macquarie region minimum “lenders require a borrower’s most
1.27 million people running single-operator in NSW, says that around one in three of his recent full tax return and notice of assessment”.
businesses and it’s easy to see how the world home-buying customers is self-employed. The The catch with tax returns is that it can be
of work has changed. good news, according to Gallagher, is that tempting to downplay income. As Gallagher
Like all self-employment, the gig economy self-employed borrowers can usually access points out, banks want to see that a business
can be rewarding from both a lifestyle and the same loans and lenders as home buyers is profitable, yet accountants and tax profes-
financial perspective. The downside can working for an employer – often with a deposit sionals can focus on tax minimisation.
come when you want to buy a home. as low as 5% – as long as they meet all the Mitchell cautions that if you’ve structured
“Generally speaking, it has always been usual income and affordability requirements. your business and your financials to minimise
more challenging for self-employed workers That said, Gallagher recommends follow- tax, it can be difficult to qualify for a home
to secure a home loan, as it can be difficult to ing three key rules of thumb: “Have your tax loan. Put simply, the lower your taxable income,
demonstrate a stable income and continuity returns up to date, show that you’re earning the lower your borrowing capacity will be.
of employment,” says Susan Mitchell, CEO a profit and keep things simple.” Trying to convince a lender that you really
of Mortgage Choice. earn more isn’t the answer. Not only is it the
A 2017 report by non-bank lender Pepper Stay on top of tax returns equivalent of admitting you fudged your tax
Money found that 26% of Australians who had Without a regular payslip, lenders rely on formal return, it can also flag you for a tax audit.
been knocked back for a loan were refused tax assessments to confirm a self-employed Having a lifestyle that’s out of sync with
Keep it simple
One pitfall to be aware of is over-complicating your
business affairs. “Banks are very process driven,” says
Gallagher. “If you have something like complex lease
arrangements, the lender is unlikely to invest time trying
to understand how it all works. Presenting information
that is easy to understand will work in your favour.”
This particularly applies to the way you structure
your business. “If you don’t have control of the income
flow a lender may say no to a loan,” says Gallagher. It’s
a problem that can arise if you have less than a 50%
stake in a venture, as can be the case with a three-way
partnership. Even then, Gallagher says loan options for
more complex work arrangements may be available
through specialist lenders, though this could mean
paying a higher rate or stumping up a larger deposit.
get a better offer low-doc loans. Among those that do, the interest
rate is often higher than for a regular loan. As a guide,
borrower’s
as lenders regard low-doc loans as higher risk, you may
need a deposit of at least 20%, in some cases more. The
upshot is that it can be worth getting your tax affairs
living costs up to date and putting yourself in the running for a
more affordable home loan with a mainstream lender.
your taxable income is one of the issues that catches
the tax office’s eye. regardless of Maintain good records
employment
The solution can involve compromise. “If your goal These days lenders don’t just want to see evidence of
is to purchase a property in the next 12 months or so, income. They also like to get a better idea of a borrower’s
speak to your accountant and make them aware of living costs regardless of employment status. This makes
the potential need to maximise your income for that
purpose,” says Mitchell. It can come down to the choice
status good record keeping a must for all home loan applicants.
Mitchell says that lenders have their own requirements
between saving on tax and qualifying for a home loan. for expense verification, but self-employed workers should
keep all invoices relating to their business expenses
Lumpy cash flow isn’t a problem so that they can supply them to the lender if need be.
One of the downsides of working for yourself is the One final point worth noting is that if you’ve only
potential for irregular income. Some weeks can bring a just begun working for yourself, it may pay to delay
flood of pay cheques while others can see just a trickle your home-buying plans until you’re established and
of income or none at all. Without the benefit of set have a better idea of your annual income. “If you’ve
pay days, it can take discipline to stick to a budget and become self-employed in the past two years, don’t have
manage regular mortgage repayments. Fortunately, this an expectation that you will automatically be eligible
“lumpy” cash flow shouldn’t work against you when for a home loan,” says Mitchell. “Lenders want some
you apply for a home loan. comfort that your business is generating enough income
“It’s generally not a problem,” says Mitchell. “Lenders to service a loan. This is especially so if you’re in a
will look at a borrower’s total income over the past 12 start-up business where cash flow is tight.”
to 24 months. The fact that the income may have been Speaking to a lender or mortgage broker at an early
earned irregularly is not that important.” stage will give you a better idea of whether you’re likely to
Mitchell adds that lenders like to see consistency. qualify for a home loan and how much you can borrow. M
Along
for the
easy ride
B
STORY y 2025, 1.9 million cars on Australian occasionally, there could be a convertible or something
DAVID roads could be subscription cars. That’s a little more rewarding to drive on a summer weekend.
BONNICI 10% of the country’s current road fleet, Not to be confused with car-sharing schemes that, for
and almost four times the 515,472 private a membership fee, allow you to rent a vehicle when you
vehicles sold in 2018. need it, car subscription is a little like a mobile phone
A Netflix- Even if you halve that optimistic prediction by Forbes, plan in which all costs are covered by one monthly
style it’s going to require a revolutionary shift in how Aussies payment but it allows you to change the handset when-
view the ownership of their cars, which have long been ever you like.
service seen as the second most significant purchase after the Of course, the service comes at a price, but for many
allows family home.
So what is car subscription and how does it differ
users the fee may be less than their ownership costs.
When all associated costs are factored in, includ-
you to from buying or leasing? ing finance, registration, tax and maintenance, the
For car enthusiasts, the annual expenses of owning subscription may be the most cost-effective solution,
have a car a special car are like any other part of a hobby or particularly if a customer is able to replace more than
without the passion. But it’s a different story for people who view one car as part of the plan.
their car as a necessary appliance and prefer not to be
ownership bogged down by registration, insurance, finance and How much it costs
and maintenance costs, as well as associated inconvenience Car subscription is still in its infancy in Australia but
and paperwork. there are already a few services such as Carly, FlexiGo
financial It’s the discerning but time-poor driver that a number and Carbar that offer affordable options using new and
hassles of vehicle brands and third party providers are targeting used cars from a wide variety of makes, models, sizes
with Netflix-style subscription services, which allow you and powertrains, including electric vehicles.
to swap your vehicle according to your lifestyle, without Carly and Carbar compare their services to Netflix
the commitment of ownership or finance contracts. in that there are lock-in contracts and you can cancel
The format varies from brand to brand but each at any time, subject to a relatively brief notice period.
service revolves around the same principle. For a Using Carbar as an example, you can obtain a vehicle
weekly, monthly or annual subscription, customers from as little as $169 a week, which will get you some-
have access to a range of models. If, for example, the thing like a base-spec 2013 Holden Cruze hatchback.
subscriber is off to the snow for the weekend, they Of course, that price goes up as you opt for something
might request a large SUV to cart around people and bigger, better and newer.
kit. Back home, a smaller passenger model may be For example, want a new 2018 model year Mazda CX-5
more practical to live with for the daily commute and, with leather seats valued at $33,990? That would cost
Under the
STORY NICOLA MORAS
Whether you’re
marketing a product
or yourself online,
these strategies can
harness the power
of social media to
make money
W 1Decision
hether you’re starting important to then choose the specific audience
out in business, building You’ve got to decide what it is that you you want to sell this to.
a side hustle or expand- want to sell online – be it a physical product If, for example, you have seen the rise in the
ing an already successful or even yourself as an influencer. popularity of soy candles and you know there
business, you can leverage There are two main things to be aware of is a market for them, you would then double
the power of social media. in the decision-making phase. down on the next steps, making soy candles
Becoming an influencer in your own right The first is to find something that you the hero of all of your social media efforts.
isn’t difficult. You can build a strong presence, want to sell and that you know is needed. If You could share the life of a soy candle
and use “influencer marketing” strategies it’s something you’re also passionate about, from concept to production to retail to the
to cash in on the ever-growing number of that is even better! And if it’s “Brand You” you home. You may have decided that the peo-
people spending more and more time (and want to sell (in other words, you become an ple who buy these candles are women who
money) on social media, when you follow influencer), then social media is the way to go. love to decorate their home and have it well
these three steps. Once you have made that decision, it’s scented at all times. They love the fact that
2 Positioning
In the world of social media everyone is
fighting to be seen and heard, to cut through
helps you to create influence quickly and
bolsters your positioning because it’s based
on a solid foundation – you.
While your audience and profile are growing,
you can start to make money for what you’re
doing, and that can be as little as $50 to post
the noise and stand out. Positioning is crucial to speedy influence and talk about someone else’s product, or a
The answer to this is positioning, which is building as it creates a point of difference and 20% commission for recommending someone
all about cultivating and enhancing the point the space for you to cut through the noise else’s product, or even earning thousands of
of difference in you (or your company), not online. Once you have this in place, it’s time dollars if you’re promoting your own product
just your product. to start sharing it online. or service for sale.
People tend to skip the positioning step and Be sure to make it clear in your posts where
go straight into advertising and marketing,
which is not the best way to do things if you
want to create a fast and lasting impact.
3 Platforms
You don’t need to be on every social
media platform to make money and build
and how your audience can purchase from
you (this is known as your call to action) and
you’re on your way to making money using
Advertising guru David Ogilvy famously influence, particularly if you’re time poor. social media. M
said “positioning should be decided before the Best practice is to use your website as the
advertising is created”, which is exactly why first digital platform that you populate with Nicola Moras is a social media specialist,
step two comes before deciding what platforms content. You’ll use Facebook because it has sought-after speaker and author of Visible:
to use or creating any type of advertising the largest, most targetable audience of all Learn to leverage the online world with no
material (which we’ll discuss in step three). the social media platforms and then choose bullshit, so you stop struggling and start
You can become known as an influencer either Instagram or LinkedIn as the next getting a return on your investment.
with a relatively small audience– it’s what you platform to utilise depending on where your
do with that audience and how you commu- audience spends the most time.
nicate with it that counts. Embracing 3Pillars.Digital to bolster your
If you want to be known as an influencer in presence is an efficient and effective use of your Win a copy
the travel industry, for example, what makes time rather than trying to be on every platform. Money has five copies of
you different from the other influencers in that If you decided to go down the product Visible (Vivid Publishing,
area? Are you funny? Well travelled? Down route, once you have the product sourced or RRP $29.95) by Nicola Moras
to earth or the opposite of that? Perhaps you in production you can then start promoting to give away. For your chance
are completely new to travel and this can be it by putting up posts, photos and videos. to win a copy, tell us in 25
an excellent point of difference. This is particularly effective on Facebook words or less your top tip for making
Alternately, if you want to promote a prod- and Instagram, given the high proportion of money online. Enter online at moneymag.
uct in the travel industry, what makes that visual media that is posted every day. This com.au/win or send your entry to Money
product unique? You need to inspire, moti- works on everything from swimsuits to can- magazine, Level 7, 55 Clarence Street,
vate and educate your audience in a range of dles to pottery. Make sure you have a mix of Sydney NSW 2000. Entries open
different ways online, and there are a couple stylised photos featuring your product as well April 29, 2019 and close on June 5, 2019.
of steps to that. as some images that show it in situ with people.
W
hoever said some things cannot two parties, to identify the signs of bad
be measured has clearly never practice being tolerated in certain parts of
met an actuary. The Actuaries the business.
Institute has produced a report suggesting It doesn’t end there. The report then
there is a way to avoid another royal com- calculates the social goodwill measure,
mission into financial misconduct. which combines the weighted average
The premise is simple. The board of any measure of the quality of relationships
financial services business, particularly across all key social groups to track
a bank, needs to measure what is seem- changes over time and whether interven-
ingly unmeasurable: how public goodwill tion is needed.
towards the business improves or deterio- Restoring public trust
rates over time. Employee culture is a key part of the
Instinctively, we all know what unac- report. While focus groups, surveys and
ceptable business behaviour looks like. But customer feedback are useful, the role of
apart from anecdotal evidence, it’s been the SCR is to turn those qualitative assess-
very hard to pin it down in numbers. ments into numbers that, just like the sig-
The institute wants to change that with a nal analysis and relational analytics above,
new way of thinking: treat social capital as can be monitored over time. This has been
you would financial capital, and measure one of the missing links in existing risk
it accordingly. It suggests a living docu- management tools that are popular today.
ment called the Social Condition Report Worse, the institute argued that risk
(SCR) that measures social relationships assessments tend to be backward-look-
and risks, as a nod to an existing manda- ing. By contrast, the SCR will focus on
tory report, focused on finance, called the forward-looking indicators that monitor
Financial Condition Report (FCR). underlying risks rather than past outcomes.
The SCR would give banks a powerful For example, instead of rewarding a
tool to avoid self-inflicted wounds caused smiles, frowns, fashion sense or even car bank for its record improvement on han-
by focusing too much on money and less on choice to predict human behaviour. But dling complaints, an SCR could look at the
the people around it: investors, staff, suppli- these signals can be unreliable, so the SCR source of the complaints and how that has
ers, banking customers and the public. focuses instead on other signals that are changed in previous months, not years.
Unlike the FCR, which looks at hard processed unconsciously or are otherwise Ultimately, the institute says that while
numbers, the SCR would look at identifying uncontrollable. For example, the report it is common practice to identify risks in
key social groups (KSGs) as the data sourc- would look at connectivity (who people a number of major groupings – financial,
es. The report proposes that boards and communicate with), interactivity (how credit, insurance, operational and strate-
senior management systematically meas- they communicate) and vocabulary (the gic– it is high time to add another grouping,
ure the quality of its relationships with language style they use when communi- called social risks, to this list.
the following: customers (retail banking, cating). A scorecard built on social capital and
wealth, business); employees; suppliers and Signal analysis can also use social net- social goodwill might just be the circuit
partners; shareholders; the public (ex-cus- work analysis, psycho-linguistics, machine breaker banks need to restore public trust.
tomers, others); politicians and bureau- learning, artificial intelligence and other The Social Condition Report – A Sugges-
crats; regulators; and the media. methodologies, such as sentiment analysis. tion for Financial Services Business is avail-
Once those social groups are properly Goodwill measure able on the website actuaries.asn.au.
identified, the institute suggests using The second metric, the relational analytics,
“signal analysis” and “relational analytics” uses a tried-and-tested proprietary Michelle Baltazar is editor-in-chief of
to rate the bank’s relationship with each framework that many UK companies Money. She has worked on various finance
of these key social groups. Signal analysis already implement. Put simply, it measures titles including BRW (now closed) in
refers to the use of human signals such as the “distance” in the relationship between Australia and Shares magazine in London.
W
hen Elizabeth’s She has seen women
hot water sys- who take out personal
tem blew up she loans for their children’s
didn’t have spare funds weddings, pay their rent
to fix it. The 66-year-old or pay all the bills for
needed around $1200 to working kids who still
buy a new system and live at home. “They don’t
have it installed. want their kids to feel
Living alone, Elizabeth discomfort,” she says.
didn’t want to ask her When financial diffi-
adult children, who had culties arise, typically
their own families, for older women load up the
help or to load up her credit card or, worse, visit
credit card, which already a payday lender. This is
had a long-standing debt because they don’t have
of $7000. So she had to the back-up of superan-
live without hot water nuation. Around 50%
for six months. of women retire with
Before she went to hos- a super balance under
pital for a second knee operation, she visit- and grandchildren. “Everyone in their fam- $50,000, compared with 33% of men.
ed her bank for advice. The loans manager ily pulls on them,” she says. Women’s pattern of career breaks to raise
suggested she take out a reverse mortgage. children or be caregivers costs their super
But it sounded like a lot of trouble for a hot an average of nearly $160,000, according to
water system. Where to get help Women in Super, an advocacy group.
Then she heard a radio interview with While it is tempting to take on more debt, Also, lower earnings catch up with wom-
a financial counsellor and booked to the best strategy is to avoid: en in old age. The HILDA survey found
see Kristen Hartnett, with the Salvation • Taking on a payday loan; that up until 28, male and female earnings
Army’s Moneycare. Hartnett, who has • Increasing the limit on your credit card; are on par but then they diverge signifi-
18 years’ experience helping people with • Getting a rent-to-buy deal; cantly. While the female average weekly
financial problems, told Elizabeth she had • Going bankrupt, as it has serious conse- income remains between $1000 and $1250,
done the right thing by avoiding a reverse quences. the male average increases to over $2000
mortgage and suggested she consider a Instead, talk to a professional financial before age 40.
no-interest loan instead. counsellor who is trained to clearly explain What can older women with financial
Elizabeth is typical of the many older, your options. Financial counselling is free, problems do?
stoic women with debt whom Hartnett is confidential and independent. Hartnett says it is important for them to
seeing more and more. Single women aged Call the National Debt Helpline, a not-for- reach out to their network for support if
over 60 are in the lowest income group in profit service, on 1800 007 007 between they are experiencing difficulties. If they
the 2017 HILDA (Household, Income and 9.30am and 4.30pm, from Monday to have credit card debt, speak to the hardship
Labour Dynamics in Australia) survey, Friday, or visit ndh.org.au. department that all major lenders operate.
earning on average around $30,000 a Consider a no- or low-interest loan. “You will be pleasantly surprised with
year. About 34% of single women aged See nils.com.au to find out more. what they do.”
over 60 live in poverty. No-interest loans are typically for She recommends that women in debt
Hartnett says the older women she sees household appliances, medical emergen- investigate the No Interest Loan Scheme
are typically highly capable and tenacious, cies, repairs, funerals, relocation, pet bills, (nils.com.au) to see if they qualify.
but for a number of reasons – such as an computers, beds and much more. But they
earlier than planned retirement or the can’t be used for rent, general expenses Susan Hely has been a senior investment
death of a partner – find themselves in or debt repayment. writer at The Sydney Morning Herald. She
debt. Often they still support adult children wrote the best-selling Women & Money.
F
reelancer.com.au connects people or – maybe a T-shirt logo or a sales video. It being automatically charged the project
businesses that need a project com- costs nothing to enter, but Freelancer pock- fee, and the funds only being released to
pleted with freelance contractors. ets 11% of the prize or $5.50, whichever is the freelancer when the employer says
The website is open to anyone regardless greater. It’s worth noting that as far as the they’re happy with the work done or the
of skills – there is a category for handy- tax office is concerned, the so-called prize project is marked as complete. It’s a system
worker and local labour. However, the would constitute taxable income. that seems like fertile ground for disagree-
most popular categories tend to focus on As Freelancer.com.au is part of a glob- ments, and there is a disputes section on
IT and software, and creative skills such as al network, projects can be posted from the Freelancer website.
content writing, design and photography. around the world – and conversely free- On the plus side, the Milestone Payments
lancers from across the globe can compete system generates invoices that freelancers
Where to start can download for help with tax records.
To begin pitching for work you’ll need to Freelancer.com.au offers a desktop app
write a profile, noting skills and expertise, to track progress, monitor hours and com-
then upload a profile photo. The next step is municate with employers. A mobile app
to complete a verification centre checklist is also available to help freelancers and
– basically a proof of identity exercise clients stay in touch.
that prevents the website being used
for fraud or money laundering. Anthony O’Brien is a small business
and personal finance writer with
Price and costs 20-plus years’ experience in the
It costs nothing to sign up to Free- communication industry.
lancer, and once you’ve sorted the
admin you can chat and negotiate AT A GLANCE
with “employers” and bid for pro-
jects – all for free. • Freelancer.com.au is open to
Projects can have a fixed price all-comers, though many of the projects
or freelancers are invited to bid for call for IT skills (such as web design) or
the work. Average bids are displayed professional creative flair (for example,
so you can see whether your bid is copywriting, photography or design).
likely to be in the ball park. As a guide • Freelancers can bid for a project at
to the sort of money on offer, at the time the rate they choose. Or put your hat in
of writing, a job to improve a travel website the ring for a “contest”, by completing
had an average bid of $437, a project to add a a piece of work specified by the client,
search function to a real estate website had and hoping you’re the winner to pocket
an average bid of $750 and a photo-editing a fee. No winner is guaranteed.
project attracted an average bid of $518. for work. It doesn’t take long to realise that • It’s free to join but Freelancer.com.
It’s only when freelancers are awarded a here in Australia we enjoy high wages. As a au takes an 11% cut of a freelancer’s
job that Freelancer takes its cut. Expect to guide, in early April contest prizes ranged project fee.
pay 11% of the project fee or $5.50, which- from $US50 ($70) for a website logo to • You may be competing for work on
ever is greater. If you are awarded a project $US550 ($776) for 16 PowerPoint presenta- a global scale and potentially be paid
with an hourly rate, Freelancer charges tions, each comprising 25 slides. Given the in a different currency. It can be an
11%. This cost is something to factor into time taken to complete this sort of project, eye-opener to see what freelancers in
your bid. Employers also pay Freelancer the hourly rate would be low, even if you’re other countries will charge for what can
a fee equal to 3.3% of a project cost. a PowerPoint master. seem like time-consuming projects.
The other way to make money on Free- When it comes to being paid, Freelancer. • Competing websites include
lancer is via a “contest”. This is where a job com.au recommends the use of its Mile- Upwork, Fiverr, CloudPeeps and
is posted with a set fee or “prize”. Freelanc- stone Payments system. This works on an ServiceScape.
ers compete by entering a finished product escrow basis, with the employer’s account
In dangerous waters
The same survival skills apply to financial markets and the surf
I
recently took a family holiday to the or disrupt. For instance, digital disruption
Sunshine Coast to take advantage of is challenging many companies’ shares
the last few warm days of the year. which were traditionally considered blue
My teenage boys and I found ourselves chip investments.
standing alone on an unpatrolled You can’t always tell what’s going on
beach, excited and full of anticipation. underneath the surface, but you can look
As we always do before we dive in, at cues that give a good indication of
we studied the water, pointed out danger. You can’t rely on recent history
where the forces coming in and either. While it’s important to learn
out from the beach were (the rips), from historic events, history rarely
and talked through what we would repeats itself and therefore it’s an unre-
do if we got caught in a rip or found liable indicator of future success. Look at
ourselves in danger. In that moment I the financial environment for what it is.
had a realisation that the mindset you Rule No. 3: don’t swim alone. Social
need to keep safe at the beach was support in times of trouble has saved
very similar to the mindset needed to many lives. Seek out trusted others in your
confidently dive into the treacherous social circle with similar investments and
waters of financial markets. Diving into learn from each other. A word of warning,
investments with the wrong mindset can though, about discussing investments with
have devastating consequences. others – watch out for group effects such
The wisdom of the beach was passed BETWEEN THE FLAGS as group think, confirmation bias and herd
down to me as four simple rules. The first Two practical tips to help you financially instinct when either of the first two rules
rule, and by far the most important is, don’t “swim between the flags”: are broken. You often see these effects
panic. Ever. If you panic you’re more likely 1. Focus your thinking. We have limited when herds of people panic or get over-
to spend unnecessary energy, make poor cognitive capacity, so short sprints of excited. However, with this in mind,
decisions and make a bad situation worse. defined focus are needed to direct atten- realise that collective learning often
Panic is the enemy, not the water. When tion and remain aware. Over the course trumps individual brilliance.
you are calm you are in a better position to of a week pick a particular investment to Finally, test the waters. When you’re in
assess the danger and choose a course of research and challenge your current think- unfamiliar territory, don’t go in too deep
action that gets you to safety with the least ing. Find others with similar investments too quickly. Make some small investments
amount of energy spent. to talk with and ask questions such as, and consciously observe what happens. If
People often panic when they get caught “What are the external forces impacting it’s more dangerous than it first appears it’s
in a financial rip and then make poor deci- the investment?” and “Are any changes always easier to walk out of the shallows
sions. They waste a lot of energy swim- the result of others panicking or getting than swim out of trouble.
ming against the tide, doubling down on over-excited?” As you look to enter or navigate the
bad investments or convincing others there 2. Create exit strategies and visualise treacherous waters of financial invest-
is no “rip”. The first rule to protect your them. No one gets it right 100% of the ments, check your mindset. Be market-wise
financial life is don’t panic. Be calm and time. Have a clear exit strategy for any in the same way you are water-wise – it
present in the situation. decision and articulate the conditions that might just save your life.
The second rule is to assess the current would trigger it. Then practise making this
state of the beach before you swim. Rips decision through visualisation. Imagining Phil Slade is behavioural economist and
are created when energy (waves) comes the situation and yourself making the psychologist for Suncorp, works across
crashing into the beach and displaces water decision lowers status quo bias and loss digital innovation, strategy, cognitive bias
that is already there. The displaced water aversion, helps recognise warning signs and human-centred design with a key focus
needs to go somewhere and so creates a rip early and reduces negative emotions that on delivering new and improved customer
back out into the ocean. Financial rips are undermine good decision making. experiences. He has more than 15 years’
also created when strong forces displace industry experience.
BEST-CASE SCENARIO
It depends on what you earn, but pretty much everyone
will get a tax cut, whichever party wins government.
WORST-CASE SCENARIO
A weak economy could put pressure on future budgets,
with the possibility that tax cuts further out could
be cancelled or deferred.
out of their own pocket or claim on their Even though you’re not at fault, you may er about whether you will have to pay the
insurance (if they have any). have to pay the excess if you make a claim excess. Also ask if your no-claim discount
If they don’t co-operate you can send them on your policy. Insurer GIO, for example, will be affected. Then weigh this up against
a formal letter of demand. LawAccess NSW says: “If your car is insured and involved the cost of repairs before making a claim.
says the letter should state how much you are in an incident, we agree that the driver of You may find you’re better off paying for
claiming and when you would like the money. your car is not at fault, and you can give us the repairs yourself.
Go to lawaccess.nsw.gov.au for more details. the name and address of the at fault driver If you have third party property damage
If the letter of demand isn’t successful, and the registration number of the at fault insurance (not to be confused with com-
you may be able to take the other party to car, you will not have to pay an excess. pulsory third party) and the other driver
court, but this can be time-consuming and Should you be unable to provide details of doesn’t have insurance, check if your pol-
costly. If it’s all getting too hard to get the the at-fault car at the time of lodging your icy has an uninsured motorist extension.
other driver to pay and you have compre- claim, you will be required to pay the appli- Essentially this is cover for accidental dam-
hensive car insurance, you may choose cable excess. If at a later time you are able age to your car if you’re not at fault and the
to make a claim on your own policy. Your to provide the required details, then the other vehicle is uninsured. The maximum
insurer will contact the driver and try to excess can be refunded.” cover is usually about $5000. You can then
recover the cost from them. It’s a good idea to check with your insur- also make a claim on your own policy.
5 traps in
STORY MELINDA JENNISON
buying new Look beyond the fresh designer appeal to make sure your dream
home doesn’t become a nightmare
T
here are many brand-new homes Usually from the time a site is acquired by a Remember, if someone is helping you pur-
on the market and, let’s face it, developer to the time a dwelling is ready for chase a new property but their service is
for many of us, the thought of sale, the steps include obtaining council and “free”, then it is likely that they are being
living in a place that has not building approval, construction, marketing paid directly by the developer. Ultimately,
been occupied by others and and sales. Every step in this process involves this means that you are paying for their
being able to personalise its design has strong a cost and every consultant, contractor or services anyway because it will be built into
appeal. The many types of property include company engaged along the way will usually the purchase price.
units, townhouses, duplexes and house-and- make a profit.
land packages in a new estate.
But before jumping in and committing to
a new home purchase, it is important to be
This cumulative cost resulting from the
development process is built into the pur-
chase price of a new property … engineers,
2 YOU ARE LIKELY TO EXPERIENCE
LOW CAPITAL GROWTH
When we look at new house-and-land proper-
aware of the pitfalls. Here are five reasons building designers, certifiers, surveyors, ties, we generally find that these estates are on
why buying a new house-and-land property builders, project marketers, sales agents and the outskirts of the major capital cities. This is
may not pay off over the longer term. the developer will all be making money, and usually where there is an abundance of land
this is reflected in the listing or offer price. and therefore an almost endless supply of new
Boost Y
is to appeal to the emotions
of potential buyers
ou could just tidy up and hope for
your
the best but anyone can tell you
that a few small updates can make
a huge difference when it comes
to selling your home.
Darren Palmer, renowned interior designer and
judge on The Block TV show, is adamant that when
you’re presenting your home for sale you need to
profit
make it as “beautiful and amazing as possible”.
You need to paint a picture of how a prospective
buyer’s life will fit into your home. That means
removing any reference to the specifics of your
own life. It needs to look as clean and organised as
it can be and it needs to be liveable and approach-
able with lots of emotional devices to grab buyers
in style
by the heart strings.
People do not look at a house or apartment they’re
thinking of buying in the same way they look at
the place they live in. That perfectly cohesive look
teamed with beautifully styled accoutrements is
aspirational – it helps a buyer imagine how they’d
ideally like to live.
themselves in that space. Norm and Jess (The Block, Season 14)
– peacock blue-green, deep purples, bronze – will work
in most spaces to create a warm, cosy feeling, as will
pastels like dusty pinks and mint greens.
Invest in a fancy matching handwash and lotion, a door a brighter, welcoming colour can give you a little
beautiful scented candle and some matching towels. bit of “wow” factor.
If you have more than one bathroom, clean them all If the whole place looks a bit dusty, hire a power spray
and then assign the whole family to use just one. That to give it a good clean. You can do the concrete in the
way you only clean one bathroom before open houses garage and the driveway while you have it.
and the others will just need to be wiped over for dust. Walk around the whole of the house and make sure
the window frames and gutters are in good order.
Bedroom bonanza Anything that needs fixing or cleaning should be
Of course, you can say this about all of the house, but done straightaway.
unless bedrooms feel welcoming and lush, people aren’t If your garden is looking a little shabby, either plan
going to feel connected to them. on spending a day doing some mowing, trimming and
Do not overcrowd any of the spaces, but if the main planting or find a local gardener who can come in and
bedroom has room for a beautiful armchair beneath do some sprucing up for you. Even little pots of coloured
a window – styled with a chic floor lamp and even a flowers added to a garden bed or containers near the
small side table – that is a great addition. front door can make a huge difference.
Children’s bedrooms, wherever possible, should be Potential buyers will drive or walk past before the
styled in a gender-neutral way. It may be difficult to home is open for inspection. A well-maintained and
believe that a potential buyer could walk into a boy’s tidy garden will make a great first impression.
bedroom and discount it because their child is a girl,
but it’s worth factoring in to improve your chances of Fresh is best
a successful sale. On the day, there are a couple of tricks that can really
help make your house feel like a home. Fresh flowers,
Seize on street appeal if the budget allows, will make the room feel fresh,
If you are selling an apartment, sometimes there is not airy, and appealing.
much you can do to make the exterior more appealing to You have already stripped your kitchen benches of any
buyers, apart from ensuring that the hallways are clean superfluous appliances and accessories, but consider a
and tidy, there is no litter in the common areas or out big bowl of fresh fruit. There is something very striking
on the street, and sweeping up leaves on the driveway. about a big pile of citrus in a single colour – lemons or
The same goes for townhouses and villas. oranges work best, of course – in a big bowl.
If you are selling a house, you have more freedom You might read suggestions that you bake something
to make adjustments to the exterior. Even if it does not that smells delicious before buyers come to visit, but
need painting, adding a shot of colour by painting the that can be time-consuming and messy. Unless you are
Hire an expert
If all of these tips have you feeling a little overwhelmed,
it may be time to call on someone who does this kind
of thing for a living.
Most agents now have their “go to” interior stylists;
their fees are even paid by some agents. But what exactly
do they do? Well, it depends on your needs. Many will
come in to vacant properties and use the huge range of
furniture and accessories they have in their warehouse
to give your property a cohesive look that appeals to
a particular market. Professional stylists (or stagers)
can also help hide awkward floor plans or finishes that
aren’t as high-end as they could be.
Under most circumstances stylists will hire out this
furniture to you, in the first instance, for five weeks – one
week is for the styling and photography and the other
four are for your sales campaign. For a one-bedroom
apartment this can cost as little as a couple of thou-
sand dollars, but the returns are usually in the tens of
thousands of dollars.
If you do not have the luxury of moving out of your
home while you are selling it, some home stagers will
offer partial styling. They will work with your existing
furniture, tell you what should be put into storage and
bring in artwork, lamps, rugs, soft furnishings and extra
pieces of furniture to give you the best possible chance
of attracting the biggest number of potential buyers.
It may seem like you are spending money that could
be put towards your next purchase, but properly styled
properties can be the difference between selling and
not selling. M
Artwork and things on the wall are my styling The Block. Money has five copies to
give away. For your chance to win a copy, tell us in
Negative
implications
He foresees the rise of spruikers pushing
Investors need to be aware of overpriced off-the-plan property under a
possible disruptions from Labor’s gearing proposal tax regime that favours new over old. “Next
thing you know investors will be flying off
T
he clock is ticking for wannabe July 2017 peak and Melbourne prices are to the Gold Coast and shown the red car-
negatively geared property inves- down 10% from the November 2017 peak. pet!” he says.
tors and those wanting to add to Many economists, including the Grattan Another big concern for investors is the
their tax-advantaged real estate portfolio. Institute, and Treasury modelling disa- creation of a two-tiered market. “In a market
The federal Labor opposition has nominat- gree that Labor’s policy will cause Arma- where you allow far greater deductions on
ed January 1, 2020 as the start date for geddon in the property market, but any brand new property compared to a similar
its controversial plan to scrap negative change in the rules will have implications second-hand property, it will be very hard
gearing on existing properties, limiting for investors. to sell almost new property,” says Hyde.
it to new properties only, and halving There’s a possibility that house prices “Why would an investor buy a property
capital gains tax (CGT) relief from will rally as investors rush into the market that is, say, one year old when he or she can
50% of the gain to 25%. ahead of the January 1 deadline, as all buy the one that is brand new next door
Of course, it first has to win government negative gearing arrangements in place and get significantly better tax benefits?”
at the election, but if the opinion polls (and on that date will be preserved. There is already a significant benefit in
bookies) are right, it’s a distinct possibility. But this also depends on banks loosen- buying new, thanks to the changes in depre-
And then it will also need to negotiate its ing their purse strings, which were firmly ciation implemented in May 2017 (you can
changes through the upper house. tightened in reaction to the royal commis- only claim depreciation on plant and equip-
Labor’s negative gearing policy will pre- sion into financial services, which heard ment in brand new buildings) and Labor’s
vent investors from writing off the losses evidence of inappropriate mortgage lend- policy will just increase this bias against
from their property investments against ing. New home lending volumes dropped second-hand properties, claims Hyde.
the tax they pay on their wages. The latest by $11.9 billion (12%) in the quarter to But, of course, first home buyers will not
tax office figures show that 1.3 million December 2018, according to Australian discriminate between new and old because
investors made a combined loss of Prudential Regulation Authority (APRA). they get no tax breaks from either.
$12 billion on their rental homes and In the 2018 calendar year, new home lend- And he also believes, as many in the
units in the 2016-17 financial year. ing settlements fell by $25.1 billion (6.5%), property industry argue, that the timing
First announced in February 2016, the driven by a sharp drop in new investment is wrong. “Labor’s policy on negative gear-
Labor policy’s aim is to help make housing lending, which was down $17.7 billion ing was launched at a time when property
more affordable, generate construction (14%), from $126.9 billion to $109.2 in Sydney and Melbourne were, quite
industry jobs and raise $32 billion over a billion over the year. simply, inflated. As we all know, things
decade. “Labor wants to create the condi- Tyron Hyde, a quantity surveyor and have changed.”
tions that promote home ownership, not a property investor, says he understands Hyde says he’s OK with the proposed
system which promotes a nation of proper- why many Australians are against the tax changes to CGT as it will affect all asset
ty oligarchs and renters,” said the shadow deductions available to negatively geared classes equally. He is working on a solution
treasurer Chris Bowen. property investors. It can lead to someone to enable Labor to keep its election promise
The powerful real estate lobby and the owning 50 properties, claiming all the loss- in a way that will not disrupt the property
federal Coalition government have both es and reducing their taxable income down market and will still increase the govern-
warned that the plan will cause residential to zero and paying no tax. ment’s revenue. Stay tuned!
property prices to fall and rents to rise. But Hyde, who is the managing director
And since early 2016 residential property of Washington Brown, argues that Labor’s Pam Walkley, founding editor of Money and
prices, which had been booming, have solution to curb these excesses is not the former property editor with The Australian
declined. The biggest cities with the correct one and he warns it will itself Financial Review, has hands-on experience
highest prices have been hardest hit: Syd- spark new problems that investors of buying, building, renovating, subdividing
ney house prices are down 13% from their should be aware of. and selling property.
Better luck
in the lottery
T
he first experience of super an obvious flaw was that the default fund was and insurance companies have a fiduciary,
that many students have after tied to the employer rather than the employee. best-interest duty to prioritise their members
leaving school is bewildering. Following its report, and recommendations over themselves.
Juggling different jobs with of the financial services royal commission, “It changes the way young people think
different employers, they legislation was passed to address the problem. about super. It makes them cynical and less
steadily accumulate multiple small, dormant From July 1, small, dormant accounts will be engaged. And it’s happening at a time when
accounts that are soon depleted by fees and given special protections in legislation called contributing to super could make a big dif-
insurance premiums. Protecting Your Superannuation Package ference to their lifetime wealth. So just when
Anyone aged 18 and over who earns at least (see breakout). they should be engaging with it, they are
$450 a month is entitled to the 9.5% super When it comes to super, everything old having a poor experience.”
guarantee (SG) contribution. However, many is new again. Until 2013, accounts with bal- Andriessen says the multiple accounts are
young workers starting out are left with a ances under $1000 had a cap on fees. The an outcome of a super system designed 30
jaundiced view of super when their meagre fund’s administration fee could not exceed years ago that is no longer fit for purpose. “We
savings are consumed by fees (see “Battle to the investment return. The ban was dropped no longer have a 40-year career and then 30
get a refund”). with the introduction of MySuper in 2014. years of putting our feet up. Work is far more
Typically, they don’t actively choose their Jason Andriessen, managing director intermittent than that, and retirement isn’t
super fund, which means their SG is paid into of CoreData Research, says the erosion necessarily a time we stop working,” he says.
a default fund selected by their employer. of account balances has a huge impact on
Consequently, every time they start a new young people and is a stark example of super Active interest is key
job another account is established. funds behaving in a way that is detrimental He says the July 1 changes will lead to the
The multiple-account problem was high- to their membership. consolidation of small, inactive accounts and
lighted in last year’s Productivity Commission “That’s an unconscionable situation because change the economics of many super funds.
report on superannuation, which described that wasted money is paid by members to super “They are in the best interests of their younger
it as “an unlucky lottery” for many workers, funds and insurance companies – institutions members and will lead to better outcomes for
with a third of accounts (or 10 million) being that are legally and morally required to act them. It means super funds will need to find
unintended multiples. in their customers’ best interests,” he says. growth in alternative ways.”
The report put a figure on how much this He says many young workers shrug it off Andriessen advises students to take an active
costs consumers: a staggering $2.6 billion goes as a rip-off and treat the SG as just another interest in their super when they start with
into the industry’s coffers every year. It said tax. “It’s a huge problem because these funds a new employer and ensure their SG is paid
Cle &
STORY PAM WALKLEY
green
Peer-to-peer lenders are refining their platforms to cater
for a growing demand for credit
R
ateSetter, one of the few Austral- early withdrawals and is improving its edu-
ian peer-to-peer (P2P) lenders cational offering for investors. It also plans to
enabling retail investors to launch an app by the end of the year.
participate in the lucrative Investors can start with as little as $10, and
consumer and business credit at the time of writing, interest rates ranged
marketplace, is not letting a lack of competition from 2.5% for one month to 7.7% for five years.
stop it from introducing new initiatives. SocietyOne, the first P2P lender to set up shop
Investors in P2P loans enjoy superior returns – in Australia, has still not changed its business
think 5% to 8% – compared with bank accounts, model to enable retail investors to participate.
including term deposits. But this comes with Only institutions and high-net-worth individ-
increased risks, as investors in P2P loans do uals and self-managed super funds (with over
not enjoy the federal government guarantee $2.5 million in net assets or at least $250,000 in
over deposits up to $250,000 that covers banks, gross earnings a year over a minimum of two
building societies and credit unions. years) can invest via the lender. A spokesper-
RateSetter (ratesetter.com.au) has expanded son says potential retail investors can regis-
into clean energy loans, changed the rules for ter their interest online at societyone.com.au
but there’s no estimate of when they might RateSetter is firmly focused on retail inves- The online lender’s next move is to improve
be able to invest. tors, says Foggo. The company has 15,000 the customer experience, launching an app by
ASX-listed Wisr (wisr.com.au) is anoth- registered lenders, both young and old, and the year end and improving education through
er P2P lender that accepts retail investors, average investment is $20,000 by individuals online tutorials and calculators. This should
although Andrew Goodwin, chief financial and $100,000 by self-managed super funds. help make the process of reinvesting early
officer, describes it as a “neo-lender” rather By the time this article is published, Foggo repayments easier for investors.
than a marketplace lender. He says it has an expects the lender will have passed a milestone, Wisr’s retail product is deliberately much
ecosystem model, offering genuine benefit with half a billion dollars in lending, meaning less hands-on. It says its Personal Loan Fund,
to its customers and promoting financial the business is coming to scale after a period which requires a minimum investment of
wellness, for example, by showing people of deliberate growth. “We’re now lending $20 $10,000, has paid a 7.67%pa return (net of
their credit scores and providing tools to million to $25 million a month compared with fees) since inception in May 2015.
enable them to pay off debt sooner. $50 million to $90 million by the major banks.”
TruePillars (truepillars.com), which boasts RateSetter is not sitting on its hands either. Diversifying investments
an average annual return of 12.35%, offers Following the successful launch of its green Your investment is diversified across all loans
retail investors the opportunity to fund busi- loan marketplace in May 2017 with $20 mil- held in the fund, meaning the impact of any
ness loans with as little as $100. You need to lion, the P2P lender has recently attracted individual borrower not paying is greatly
register to invest and set up your investment an extra $100 million in support from the reduced. You aren’t required to select loans
instructions, and the platform will invest federal government’s Clean Energy Finance or manage monthly reinvestment. And you
your funds in loans that match your criteria. Corporation. As a result, it’s now the largest can choose to either receive your distributions
As the borrower makes their monthly loan funder of consumer loans for the purchase of monthly or reinvest them. To date the fund
repayments, you will receive distributions renewable energy equipment, such as solar has made about $100 million in loans, says
equivalent to your share of the loan. panels and home batteries. Goodwin, but only about 5% to 10% have
Latrobe Financial (latrobefinancial.com.au), “What is maybe most surprising is that been funded by retail investors, with the vast
which is a long-established and well-performing our renewable energy lending markets have majority from wholesale investors.
mortgage lender, also labels products as P2P attracted a lot of retail and SMSF investor TruePillars’ platform provides investors
investments. Its Select Investment Account interest,” says Foggo. “Investors are clearly with the opportunity to vet each loan oppor-
(P2P) enables investors with a minimum of attracted by the positive impact they can tunity and make their own decisions. Starting
$1000 to select loans they want to participate have on the environment by supporting the with as little as $100, investors can bid in the
in. All loans are secured by first mortgages uptake of renewable energy, but also by the TruePillars marketplace for a new loan or
over Australian property. Returns, which are strong credit characteristics [of the borrow- invest in an existing one.
from 6% a year, are paid monthly. ers] – homeowners improving their monthly Prospective investors can view the details
finances by reducing energy bills.” of each individual investment online, includ-
Focus on retail investors To date, RateSetter has funded $25 million of ing the borrower rate, the time frame, the
Former P2P lender MoneyPlace, which was these loans at an average rate of 6.9% and it’s estimated default rate and investor bidding.
taken over by Liberty about 18 months ago, growing at 10% a month, says Foggo. Returns Keep in mind that if you invest you will
no longer seeks retail investors. available to investors in these options at the receive the borrower rate less the 2% that
“I’m very surprised there’s not more com- time of writing were 5% for investments in TruePillars retains on each loan.
petition [in the category],” says Daniel Foggo, South Australian renewable energy and 6.4% Investors who don’t want to be so hands-on
CEO of RateSetter, which set up shop in 2014. for those in national clean energy. can instruct the company to invest on their
It would be good to have more participants to Apart from the clean energy products, behalf based on a set of fixed parameters.
make P2P a bigger investment class, he says. RateSetter’s main point of difference is its Investors with loan units are scheduled to
But, on the other hand, the lack of competitors provision fund, which lowers the risk of any receive payments on a monthly basis. But
really helps RateSetter capture the types of defaults impacting investors. The money in this as your payments depend on the business
high-quality borrowers it is trying to attract. fund comes from charges paid by borrowers, borrower making repayments as they fall due,
A major reason for the lack of companies and RateSetter is able to direct the provision the actual timing of payments will depend
in the space, compared with the situation in fund trustee to compensate a lender in the on when the business does so. Investors who
other countries, is the high barrier to entry. event of a borrower’s late payment or default. want to liquidate their loan units early can
“It took us a lot of time and cost us a lot of This fund now sits at $13 million, equating to list these investments, which will be available
money to meet the requirements of the reg- 6.2% of the loan book, says Foggo. to other investors in the TruePillars market-
ulatory regime,” says Foggo. RateSetter has also introduced a sell-out fea- place. If they’re purchased, the incoming
But this does give investors in the relatively ture, partly aimed at younger investors saving investor replaces you, and your loan units
new sector a degree of comfort. For borrowers, for a home deposit. It means that if you’re in the will be converted to cash units, less a 0.5%
including businesses, there are more options three- or five-year lending markets and your conversion fee. M
including Harmoney, Marketlend, ThinCats life circumstances change you can request an Disclosure: Pam Walkley invests through
and Bigstone. early exit, paying an exit fee of 2%, says Foggo. RateSetter.
World’s
hot spots
STORY SUSAN HELY
A
Returns are fter an appalling 2018, emerging markets the MSCI World Index is up 4.6% over the year to March,
surprised investors with a strong start compared with -7.4% for emerging market equities.
bouncing to 2019. The Chinese sharemarket, for Emerging markets had two stellar years before that
back but example, jumped 29% over the first
quarter, recording its best performance
when they comfortably outperformed by 7%pa.
The long-term history of emerging markets often
investors in more than four years. The rally was sparked by the reflects either remarkable outperformance or under-
Federal Reserve’s backflip on raising interest rates. performance, compared with developed markets.
should be China topped all sharemarkets, beating Colombia (up The questions for investors are: does this represent
prepared for 19% for the quarter), Greece (18%) and the UK (16%). an opportunity and, if it is a good time to add emerging
At a time of low returns, investors are taking a renewed market equity exposure, what is the best way to invest?
the downs as interest in emerging markets. Some funds are bouncing One way to look at emerging markets is that they offer
well as the back into the black with, for example, State Street’s SPDR attractive valuations – particularly after negative returns
S&P Emerging Markets exchange traded fund up 9.32% last year – in a world full of expensive sharemarkets.
ups over the three months to the end of March 2019. “The valuations are fairly cheap,” says Geoffrey Wong,
But on the whole developed markets are still ahead – head of emerging markets and Asia Pacific equities at
THE
EXPERTS
Building
Adnan Glinac
Executive general
manager,
life and super,
Australian Unity
bonds
These tax-effective
investments can suit a
wide range of needs but
remember to weigh
up the risks
Michael Blake
Head of Centuria
Life
Sue Herrald
Investment
specialist, IOOF
Darren James
Financial adviser,
AMP
the
MOST-ASKED
Q What is an insurance
bond?
An investment bond (also QUESTIONS
funds where investors have the
opportunity to switch between
investment options over the
known as an insurance or life of the bond at no cost.
growth bond) is a tax-paid Investment options can cover cash
investment offered by an insurance and fixed-interest funds, diversified
company. It’s technically a life insurance balanced funds, diversified growth funds,
policy so you need to nominate a life to be Australian share funds, international
insured and a beneficiary. Provided certain share funds and property and
rules are met, investment bonds can be a infrastructure funds, among others.
tax-effective way to invest for long-term MICHAEL BLAKE
investors with a marginal tax rate higher
than 30%, as the owner is not required to
include the income on their tax return.
DARREN JAMES
Q What returns should an
investment bond deliver?
Each investment option has a different
investment objective, strategy and level
A key attraction is
held. A key attraction of an investment • After 10 years, you do not pay any
that no personal tax
bond is that no personal tax is payable
when money is withdrawn from the bond
further tax on the withdrawn earnings.
ADNAN GLINAC is payable when money
after 10 years.
ADNAN GLINAC
Q Can the bond be paid to
beneficiaries?
is withdrawn after
Q When can I access the money?
Money in investment bonds is
Yes. The owner can nominate beneficiaries
on the bond and the bond therefore does not
10 years
accessible at all times but they are designed form part of the owner’s estate, nor is it dealt
to be held for 10 years to generate the with by their will in the event of death. This of investment choice, which gives the
maximum tax benefits for the owner. can be an effective way of ensuring funds are investor access to a number of options to
However, even if you make a withdrawal passed in a more timely manner to selected choose from, to cater to their lifestage.
within the first 10 years you can take beneficiaries than they would have been had If you are considering investing in a
advantage of the 30% tax offset to reduce they been passed through a will. bond there are a few things to be aware of,
your personal income tax. DARREN JAMES such as the fact that the tax benefits from
Should an investor need to withdraw investment bonds are only realised if certain
from the bond within 10 years, the
following rules apply:
• In the eighth year or earlier, all of the
Q What are the main pros and cons
of an investment bond?
They have a number of benefits. They can
rules are followed. It’s good to be across
the fees involved for the management and
running of the fund and it’s important to
earnings on the withdrawal are assessable. be a tax-effective, long-term investment, remember that you have no direct control
• In the ninth year, only two-thirds of the can provide an effective way to invest for over the investments within the bond and
earnings on the withdrawal are assessable. children, and also can be used as an estate low visibility of the underlying assets that
• In the 10th year, only a third of the planning tool. are being invested in.
earnings on the withdrawal are assessable. Generally, bonds have a reasonable level DARREN JAMES
Pay day’s
high cost
I
f you want to boost your superan- employees aged 20-29 collectively missed by the quarterly due date, which is 28 days
nuation savings but don’t have any out on $35 million in investment earnings after the end of each quarter. This means that
extra cash to kick in, there is one over the 2015-16 financial year because they people can, in effect, be paid four months
simple step that could deliver you were paid every three months rather than after they receive their wages.
more dollars when you retire. every two weeks. “We’ve welcomed all efforts to improve
It comes down to how often your employer As well, 2.2 million employees aged 30-39 compliance, but it won’t change the fact that
is paying you super. A staggering 70% of missed out on $55 million; 1.9 million aged some employers will go on using the payment
employees aren’t aware of how often employers 40-49, $55 million; 1.6 million aged 50-59, $50 hiatus for business cash flow,” says Dean.
make their super guarantee (SG) payments. million; 506,000 aged 60-64, $20 million; and “Essentially, workers are subsiding businesses
Although payslips currently record super 212,500 aged 65-69, $10 million. at the expense of their retirement savings.”
entitlements, they don’t tell you if payment For all employees aged 20-69 years, this Being paid every fortnight could also help
has been made. It is a good idea to check with was a significant amount. “The investment people identify that they are missing out
your super fund, which is easy to do online. earnings lost by SG-eligible workers from on super. Gallagher believes that, in broad
The trick is that if you get your super quarterly quarterly SG is estimated to have been $225 terms, currently 3 million Australians are
instead of every pay period – usually every million in 2015-16,” says Gallagher. underpaid an average $2000 each at a cost
fortnight – you are losing valuable investment He found that for a person on an average of $6 billion each year.
earnings that compound over time. wage working full time from 20 to 67 the The four-month initial gap between starting
Phil Gallagher, from Industry Super Australia real lifetime gain from fortnightly payments a job and getting your first super contribution
(ISA), believes that about half of employees would be $12,475. means that people lose interest in tracking
are paid quarterly. He says the long initial gap “Every penny counts in retirement, and their contributions.
between starting a job and getting your first this interest could be the difference between “If the SG was paid fortnightly at the same
super contribution means that people lose having enough and going without,” says Bernie time as wages, ISA estimates that 10% of
investment earnings on their contributions. Dean, ISA chief executive. unpaid super would be detected and paid.
Data from the tax office shows Australians ISA wants to see super payments syn- So currently this equates to $600 million
are losing millions of dollars in interest due chronised with wages. Dean says that while per year,” says Gallagher. “So the annual
to laws that allow super to be paid quarterly payslips may record super entitlements, they benefit of pay-cycle SG payment could be
rather than fortnightly. do not confirm actual payment. Currently SG over $800 million per year, when we add in
Gallagher found that around 2.3 million payments must be made to complying funds the investment interest loss.” M
T
he end of the financial year is fast contributions fortnightly or monthly, with “The law requires every employer to pay
approaching and it’s worth checking their employee’s pay, others choose to pay it your super contribution for a quarter no
to see how your super contributions quarterly, making it harder to monitor how later than 28 days after the end of a quar-
are tracking. If, like most people, your much your employer has contributed for ter,” says Mackay. “So your employer might
employer’s super guarantee hasn’t hit the the financial year. have paid the end of the 2017-18 quarter
annual $25,000 cap you may want to top it in July last year, and then decided to pay
up with a personal deductible contribution. HOW IT WORKS the June quarter this year in June.
Thanks to a rule change set in place a Previously only those who earned less than “This is where people get tripped up.
few years ago, fund members can make 10% of their total income as an employee The employer may change it year on year
concessional contributions directly into were eligible to claim a deduction for per- depending on their cash flow and the like.
their fund and claim a tax deduction when sonal super contributions. So make sure you err on the side of cau-
doing their tax returns. The rule change This meant full-time employees and tion,” she warns.
provides members with greater flexibility people who were self-employed but also This means checking your payslips
and an incentive to save. worked part-time for an employer were and asking payroll to let you know exactly
Apart from boosting savings, there are largely excluded. when the contributions were paid into your
other tax benefits. Concessional contri- The 10% rule was dropped in July 1, 2017, super from July through to now. You should
butions are taxed at just 15%. For many giving people under 75 the ability to claim also cross-check it with the transaction
employees this is lower than the rate paid an income tax deduction for after-tax history in your super account for the
on their take-home pay, which can be as personal super contributions. period from July 1.
high as 45%. It also has the potential to Make sure the contribution hits your Mackay says the rule change is welcome.
lower your tax bracket. super fund before the end of the financial “Knowing that you don’t have to rely on
“The key thing here is that anyone can year. If the contribution is received after your employer to make the payment means
make a personal deductible contribution June 30 you will have to wait until the that everyone, regardless of your employ-
to super and you don’t have to go via following financial year to claim it. ment situation, can do this, without
your employer to do so provided that your Paperwork is also important. breaching these really archaic rules
employer contribution, and your personal Once you have made your contribution – the old 10% rule [see breakout].
deductible contribution combined, don’t either by BPay or cheque, fill in a notification “Everyone has control of how they set
exceed $25,000,” says Claire Mackay, form called “Notice of intent to claim or vary themselves up for retirement. And every
a director and independent financial a deduction for personal super contribu- little bit that you can put into super helps
adviser at Quantum Financial. tions”. It’s available on the website of most – you are getting a tax deduction and it
Previously, only salaried employees funds and the ATO. Once you’ve sent it back can improve your lifestyle in retirement.
could top up their super with concessional to your fund, you should receive an acknowl- “However, if your employer does provide
contributions using their employer’s salary edgement. You’ll need this to claim the salary sacrifice, you might look to make
sacrifice benefit. However, not all employ- deduction when you lodge your tax returns. your personal contribution this year but then
ers offer it, which meant many employees, “If you don’t tell the super fund or you instigate regular salary sacrifice. The beauty
especially those working for small busi- don’t claim a deduction in your personal tax about having it is that the money doesn’t hit
ness, missed out. return, it won’t be classified as a deductible your bank account, you don’t spend it and it’s
Most people make their contribution contribution. It will be classified as a post- guaranteed to happen every pay cycle.”
towards the end of the financial year tax contribution,” says Mackay.
when they can more readily determine For more information see ato. Vita Palestrant was editor of the Money
how much they can contribute directly gov.au/individuals/super/in-detail/ section of The Sydney Morning Herald
without exceeding the cap. growing-your-super/claiming-deduc- and The Age. She has worked on major
While many employers pay the 9.5% SG tions-for-personal-super-contributions. newspapers overseas.
How to nail a
O
7-year annual profit growth 20.4%
7-year annual EPS growth 13.5% wning a stock that rises 10-fold
from your original buy price is
7-year annual DPS growth 39.0%
an aspiration for most inves-
Jumbo’s Australian success tors. The term “10 bagger” was
coined to describe such stocks
2012 2013 2014 2015 2016 2017 2018 2019 (F)
by American fund manager Peter Lynch in his
Revenue $24.1m $24.4m $23.8m $29.4m $34.2m $32.4m $39.8m $61.5m book One Up on Wall Street. These days, a more
Pre-tax profit $9.1m $6.4m $6.8m $8.1m $12.4m $12.3m $18.9m $40.0m modern term “10x” (pronounced “ten ex”) is
The
earth
moves STORY GAURAV SODHI
W
Wesfarmers hen Wesfarmers announced the
demerger of Coles, investors cheered.
stunned the Those jubilations went mute, however,
when the same company – renowned
market with for its investment and capital allocation
its bid for nous – turned around to make a bid for Lynas Corporation,
a miner of rare earth metals.
Lynas but The market’s shock was palpable – Wesfarmers’
the rewards market value fell by more than $1 billion the day the
bid was announced. Yet when a smart investor makes
could justify an unexpected move, we should take note.
the risks Lynas’ share price shot up 35% but at the time of writing
still trails the $2.25 bid price, perhaps because Lynas’
management has stridently rejected the bid and Wesfarmers
shareholders haven’t offered the strongest support.
The bid has, however, sparked endless speculation.
Who else might make a move? Why is Wesfarmers
interested? How might China react? individual elements present in the ore. Lynas is already
That raises the bigger question: is Lynas really worth decently profitable and returns will climb as it scales
all the fuss? up output and perfects its processing.
Let’s begin by correcting a widespread misnomer: Lynas mines ore from WA and ships it to Malaysia,
rare earth metals, despite their name, aren’t rare at all. where it undergoes extensive processing. Production
They were given that name because, in mining’s early is characterised by a high proportion of neodymium/
days, similar chemical properties prevented individual praseodymium (NdPr), a pair of high-value elements that
elements from being separated. Today’s technology has are vital in the production of high-powered magnets used,
removed that constraint. among other things, in electric motors and generators,
Complex processing is required to extract individual including those in wind turbines and electric cars.
rare earth elements from ore. It’s hard, expensive and dirty The high-value nature of the output makes Lynas
work. Two-thirds of the cost of producing rare earths – and particularly attractive. Since processing, which accounts
all the risk and the difficulty – comes from the processing for the bulk of cost, is a fixed expense, higher-value
of ore. This is chemistry masquerading as mining. output increases margins.
Even after rare earths are successfully separated, the Lynas is the world’s second largest producer of vital
process can leave a trail of radioactive waste. Dealing NdPr and demand is increasing. China overwhelmingly
with that waste is another problem. dominates the supply of rare earths, contributing about
It’s best to think of the business not as a mining 95% of global supply.
business but as chemical manufacturing that happens Japanese firms are Lynas’ largest customers and, for
to use mined ore as a raw material. The economics and them, NdPr is a small cost in a large value chain. Japan is
risks of rare earths production are therefore different on record, along with the US, in expressing discomfort
from those in traditional mining. about Chinese dominance of the market.
The economics of each rare earths project differ, China has been uniquely willing to bear high waste
and their profitability depends on the proportion of and environmental costs and Lynas is now the only
history of
due in September this year, will depend on meeting At full capacity, Lynas could easily generate over $200
stricter waste disposal obligations. Lynas is currently million in net profit – more if commodity prices kick higher.
investigating ways to comply with the stricter rules. Still, investors should bear in mind the high degree
Wesfarmers’ bid has put Lynas in play and there are
many suitors for an asset that is both strategic and
rare earth of risk. Lynas has already earned a warning from its
auditors and there is still a possibility of the company
potentially profitable.
While Chinese and Japanese interests are both logical miners has going broke. But the more likely outcome is that another
buyer emerges – or at least another bid.
meant few
buyers, Wesfarmers is also a sensible owner. With a The poor history of rare earth miners, and of Lynas
huge balance sheet that will comfort regulators who itself, has meant few have taken this business seriously.
worry about another miner making a mess and walking It could be time to put it on your watchlist.
away, Wesfarmers also has some chemical expertise.
It could even move the entire processing chain back to
have taken Gaurav Sodhi is senior analyst at Intelligent Investor,
Australia to maintain long-term production. That would
be expensive but it would secure supplies and remove this business part of the InvestSMART Group. To unlock more stock
research and buy recommendations, register for a free trial
the political risk that has long hung over the business.
Despite the market’s misgivings, we’re impressed by seriously at investsmart.com.au/money. This article contains general
investment advice only under AFSL 226435.
Playing
the yield
A
t face value, the higher the dividend a stocks solely on expectation of consistently high yields.”
stock pays the better it is. After all, it While stocks paying more in dividends than earnings
KEY
means more money is paid to you as risk falling into yield-trap territory, so too do those that FUNDAMENTALS
a dividend cheque or more shares are “smooth out” underlying earnings weakness with a The key
distributed to you by way of a dividend higher payout ratio, says Donohue. When searching for fundamentals
reinvestment scheme. stocks with payout ratios justifiably higher than the 75% Money magazine
But where investors often come unstuck is in assuming average, he suggests looking for industries not requiring looked at to arrive
that a dividend of, say, 6% is indicative of a company’s much capital to sustain the business or dividend, and at 10 stocks (top
150 excluding
future earnings (or yield), when it could be eroded by cites health insurers as one example.
banks) most likely
one-off events, surprise announcements, poor earnings Sean Sequeira, CIO with Alleron Investment Man-
to support future
or due to a falling share price (aka a yield trap). agement, says that underscoring the likelihood of future dividends at or
The recent spate of abnormally high dividends is due strong dividends across the market was the quality of above current
to a flurry of stocks, including Fortescue Metals, Rio last reporting season, with around half of companies levels include:
Tinto, South32, Telstra, Wesfarmers, Caltex Australia announcing higher profits, while a similar percentage Market cap:
and BHP, issuing special dividends or buybacks. Most lifted their cash holdings. “Stocks with stronger balance $1 billion-plus
of these special dividends can be attributed to federal sheets and sustainable cash flows are more likely to stocks typically
Labor’s plans to take a blowtorch to franking credit ride out short-term issues, without compromising have strong
refunds (worth around about $5 billion annually). their dividends.” defensive
Thanks largely to special dividends and buybacks, Given that the big four banks are under pressure to characteristics.
CommSec expects total dividends paid to shareholders hold dividends at current levels, Sequeira urges investors Forecast return on
equity: Above 6%
for February to June this year to be around about to seriously question how much they’re prepared to pay
to ensure earnings
$30 billion (ex-banks), up by more than 33% on the to own them. With the big four potentially moving into
cover dividend
February 2018 reporting season. Admittedly, it’s worth yield-trap territory, he says dividends from infrastructure payments.
hunting for companies with cash war chests or hefty stocks with highly sustainable core earnings may look Stock covered by: At
franking credits – with which to make future special increasingly more attractive, even if they’re relatively least five analysts.
dividends – but John Christou, senior investment adviser overpriced and lack franking credits. Forecast and historical
at CommSec, warns investors not to get used to them. dividend: Above
An extended season of special dividends, as companies Where to find extra income 4.5% ASX average.
move imputations off balance sheets, will eventually To help you pick strong, high-yielding businesses to Analyst
unravel. However, given the imponderables surrounding supplement your income, Money searched for key recommendations:
Labor’s plans to remove franking credit refunds, Denis stocks from the top 150 companies (ex-bank stocks) No consensus calls
Donohue, of Pentalpha Investment Management, says it’s that should, based on certain criteria, be high on the to sell.
Net/debt to equity:
not a foregone conclusion that companies will hurriedly radar (see table on the next page). The top 10 divi-
Less than 60%
move imputations off balance sheets. dend earners come from a cross-section of sectors ensures balance
and have an average forecast yield of 8.42%. sheets aren’t
Dividends stack up regardless Based on the criteria we used, bauxite miner and over-geared.
Assuming most companies offload their imputation alumina refiner Alumina surfaced as the ASX’s top
credits by June 30, 2020, Christou reminds income dividend stock after delivering a final payout of a
investors that an average ASX dividend of about 4.5% fully franked 19.6¢ per share. The only other stock
(even without franking credits, which grosses up to with a double-digit yield was Whitehaven Coal,
around 5.7%) is a compelling alternative to sub-3% with the cashed-up miner splashing $200 million
term deposits. “We could see some rotation out of in (unfranked) dividends following a 15¢ interim
miners, banks, non-bank financials and REITs into dividend and a 5¢ special dividend.
other sectors that, while they lack franking credits, Given that they’re susceptible to volatile com-
simply offer good yield,” he says. “There could be modity prices, Donohue reminds investors that re-
some dividend traps out there, so be careful of buying source stocks can quickly become yield traps.
E
xpectations for the Australian econ- undermine both jobs in this highly cyclical That said, even allowing for added fiscal
omy have shifted notably in recent sector and related home-buyer spending on stimulus from whichever political party wins
months – and sadly not for the bet- new furnishings and whitegoods. the federal election, it’s unlikely to be big
ter. The good news, however, is that some At the same time, the progressive decline enough and fast enough to offset the increas-
of the worst fears for the global economy, in Sydney and Melbourne house prices ingly downbeat outlook for the housing and
which led to the equity market slump in appears to have finally weighed on consumer consumer sectors. The cyclical swing effects
late 2018, are starting to dissipate. spending, with more households feeling not of the housing sector can be significant at
But first, the Australian economy. The as wealthy as they once were. Consumer major turning points, while slower-moving
bottom line is that the housing downturn spending over the second half of 2018 was consumer spending nonetheless accounts
has deepened and broadened across states, quite weak. It’s no surprise that once-buoyant for a sizeable 60% of the economy.
so much so that it’s now posing a serious measures of business sentiment have also All up, it now seems likely that growth
risk to consumer spending, which accounts taken a tumble since late 2018. will slow to a sub-trend pace over the com-
for a considerable 60% of the economy. Of course, it’s not all gloom and doom ing year and the unemployment rate will
Having been sustained at very high levels in the economy. start to rise, which in turn makes it likely
for several years, home building approvals State governments across the country are the Reserve Bank will be forced to cut
have finally started to slump, as the weight of undertaking multibillion-dollar infrastructure interest rates to even lower levels.
house price weakness, a desertion of foreign programs. Construction of office blocks and Globally, the doom and gloom of late
buyers, tax-related fears and pockets of apart- health-related facilities (such as aged care) last year is starting to ease, although it still
ment oversupply all start to take their toll. remain strong. Also a cheaper Australian seems likely that global economic growth
Although home building remains at a high dollar is seeing more tourists and foreign will slow and equity markets will find it
level, the pipeline of activity should start to students flock to our shores. harder to continue the strong bull rally of
diminish over the coming year, which will Continued solid Chinese demand and recent years.
supply disruptions in Brazil have contribut- Most importantly, the US Federal Reserve
ed to a rebound in iron ore export prices, has shifted its thinking and no longer feels it
which in turn has boosted corporate needs to lift interest rates further this year.
profits and federal government budget This has come as a big relief to markets. It is
revenues. And some of this export also encouraging that US-China trade talks
related bounty is being recycled continue and both sides seem keen to avoid
back to households through escalating tensions.
tax cuts announced in the That said, US economic growth and
recent federal budget. corporate earnings are slowing to a more
moderate pace after being buoyed by tax
cuts over much of 2018. Chinese growth
also continues to slow, albeit in a con-
trolled fashion. The biggest disappoint-
ment in recent months has been Europe,
where China’s slowdown, new environ-
mental regulations, Brexit woes and slug-
gish population growth are all taking their
toll. As a result, the European Central
Bank has joined the growing group of
global central banks that have decided
to indefinitely delay lifting interest rates
back to more normal levels.
W
hen I retire, you would imagine person they want going anywhere near stocks and, rather than picking the best,
that I – as a fund manager, stock- their money is themselves. That’s why they we exclude the worst. This portfolio will
market newsletter writer, finan- manage their own portfolios because, win outperform because of the stocks we don’t
cial planning business owner, financial or lose, they prefer to be the person respon- hold rather than the stocks we hold. Indi-
educator and long-time stockbroker – will sible. They can handle their own failures, vidual investors will tell you that this is one
relish managing my own retirement funds but not the failure of others. of the major reasons they do it themselves,
in perpetuity. The chance to do better than because an index includes all stocks, so by
But when I do retire, in, say, 10 years, average. If you invest through one of the simply excluding stocks they reckon they
assuming I have hit the number I currently big superannuation or industry funds you can do better, and I’m sure many do.
estimate I need in retirement funds, the can pretty much guarantee the average As a social activity. The stockmarket
truth is that, like a retiring mechanic, the return from every asset class. For some offers the medium to connect with other peo-
last thing I will probably want to do when people that prospect is too dull. ple. This is something that has become a way
I turn my mind to more leisurely pursuits You might think the big funds have smart of life, a necessity even, for some investors.
is to fix my own car. I probably will, as do stock pickers trying to beat the average. But Organisations such as the Australian
many people, but why do they take on the the truth is that they have so much money Investors Association, the Australian
task of managing their own retirement under management that they simply cannot Shareholders’ Association and the Aus-
funds, especially when they don’t have the materially outperform the average, and rath- tralian Technical Analysts Association
history, as I do, of experience in that indus- er than attempt it they accept it and end up (you don’t have to be a technical analyst)
try. Why would you manage your own more concerned with not underperforming provide not-for-profit opportunities to trav-
equity portfolio? Let me tell you. than performing. If you look at the data el to conferences and events, gather with
Because they can. Individual investors (see Databank, page 87), you will see that like-minded investors, share ideas, make
have unfettered access to the stockmarket. the performance of the top 20 MySuper friends and network with other members.
It didn’t used to be this way. Before the funds over the past five years ranges from It can be worth it just for that.
early 1990s, everybody had to deal through 6.6% to 9% a year. They are all pretty much Because they love it. The stockmar-
a full-service broker. It was all telephones doing the same thing, giving you access to ket is an intellectual pursuit, a learning
and 1% brokerage. But the internet changed the average return. experience, and for many it becomes a
everything. Through technology and the These multibillion-dollar funds (Austral- hobby. As one investor once put it: “When
availability of research and opinion, individ- ianSuper has over $100 billion under man- the only organ that still pumps blood is the
uals have the ability, if they have the time and agement) hold so many stocks in so many brain, the stockmarket is as close to sex as
interest, to take control of their finances at a asset classes that this is pretty much all they I can get.” If you come at the stockmarket
fraction of the cost. People manage their own are capable of: administering your access to out of necessity, if you don’t enjoy it, if you
investments because they can; it is an option the average return rather than genuinely don’t get passionate about it, you are going
available to every citizen, in every kitchen, in attempting to outperform. to burn time and create stress and you are
every home in Australia. Most individual investors will hold less more than likely going to stuff it all up.
Trust. It is an unfortunate fact of the than 20 stocks and their returns will be any- The only people who should manage
finance industry that it has lost the trust of thing but average, but they do at least have their own portfolio are those who want
the populace. The banking royal commis- a chance of making above-average returns. to do it, see it as an intellectual activity,
sion has done a good job of killing the indus- When you are behind the eight-ball, you have passion and enjoy the whole process,
try without providing anything to fill the need this chance. Managing your own share whatever the outcome. For some investors
void. Many investors understandably now portfolio is a more hopeful prospect; you are the stockmarket is everything; it occupies
choose to fill that void themselves. not resigned to the average. Some investors every vacant moment, because they love it.
If there is a cycle of trust and persecu- need that hope.
tion in financial advice, we are hopefully The ability to exclude stocks. We Marcus Padley is the author of the daily
close to the bottom of one cycle and at the have run a top 50 portfolio in the Marcus stockmarket newsletter Marcus Today.
peak of the other. But while the mistrust Today newsletter since 2011. The invest- For a free trial of the Marcus Today
remains, many investors feel that the only ment process involves taking the top 50 newsletter, go to marcustoday.com.au.
SECTOR RETAILERS
W
ith national aggregate residential Adairs share price Beacon Lighting share price Temple & Webster share price
building approvals plunging in $2.60 $1.70 $1.80
recent months, it is an odds-on
bet that building activity will soon do $2.40 $1.60 $1.60
likewise. Building always comes after
$1.50
approvals, so if approvals have slumped, it $2.20 $1.40
follows that construction activity will too. $1.40
Of course, there are serious second-order $2.00 $1.20
consequences for retailers of furniture, $1.30
electronics and other household goods, $1.80 $1.00
$1.20
not least because fewer new apartments
being built and sold means fewer couches, $1.60 $1.10 $0.80
tables and carpets.
The construction industry employs 9.6% $1.40 $1.00 $0.60
May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar
of Australia’s workforce and 37% of that
number is employed directly in residential
construction. That means 3.5% of the entire in this column the deteriorating outlook factored in. It is frequently the case that
workforce may soon face less income or for car and furniture retailers. This month a deteriorating backdrop is already built
an increase in unemployment. we examine the outlook for the retailers into the price and the share price recovers
UBS has reported that residential exposed directly to the deterioration in long before business conditions do. And as
building approvals have fallen from about sales of household goods, noting that Godfreys proved last year, even the least
280,000 dwellings to 170,000 most recently furniture and homewares is a $13.6 billion loved retailers can receive takeover bids.
– a 40% decline in forthcoming activity, market (excluding appliances and DIY).
taking into account that construction As you consider these companies, ask not Roger Montgomery is the founder and
cannot commence without an approval. only whether the outlook is deteriorating CIO at the Montgomery Fund. For his book,
Over the past 12 months we have noted or improving but what might already be Value.able, see rogermontgomery.com.
and consequently analysts downgraded a positive direction for the reasons explained. and homewares category having migrated
their earnings per share forecasts. Further Adairs’ guidance was for flat profits in 2018- online, the long-term thematic appears
deterioration in domestic conditions could 19, which implies a softer second half and the positive. The share price, however, is up from
offset the company’s online penetration requirement that analysts downgrade. 15¢ two years ago to around $1.60 today.
and online sales gains as well as its If the predicted slump in construction occurs, Operating leverage will ensure profits grow
overseas sales aspirations. further downgrades are likely, possibly quickly if sales growth can be maintained,
delivering an even lower share price than but the reverse will be true if the slump in
the current PE of nine times. household goods sales deepens.
BANKS
F
ew stocks, as a group, have made so
much money for so many people as Best in Breed’s tips so far
our banks have over the past three SECTOR STOCK
ASX
decades. Many a retiree portfolio (and not CODE
a few inheritances) have been swelled by Banks Macquarie Group MQG
the simple act of putting money into bank Resources South32 S32
floats and reinvesting the dividends. In the Consumer staples Treasury Wine Estates TWE
past 25 years, the average share price gain Discretionary retail Premier Investments PMV
for our big banks is 420%, meaning
$10,000 has become $52,000.
But add back reinvested dividends and
your $10,000 investment is now worth
more than $200,000. Talk about the power
of both compounding and reinvesting your
dividends. It’s no wonder that many inves-
tors have portfolios in which banks are
50%, 60% or more of the total. It’s a dan-
gerous level of concentration, but it’s a nice
problem to have when it’s caused by decades
of dividends and share price increases.
The past few years haven’t been so
kind, of course. Even after dividends, bank
shareholders are in the red over the past
12 months or so, while they’ve relied on and the potential changes to franking cred- low probability of a big win and a much
dividends alone for a positive return since it refunds don’t help either. higher likelihood of losing money.
2016. Falling house prices haven’t been kind Still, as the largest single sector of the Plus, given the risk that financial institu-
ASX, financial companies deserve a look. tions take on and the ever-present possibil-
And it’s not just the big four banks, either. ity of a good old-fashioned bank run (not
Foolish takeaway There are the smaller banks, insurance to mention the fact that even one of the big
Putting our criteria together, one name companies, mortgage brokers, collection four, Westpac, went close to going broke
bubbles to the top. Accordingly, my pick agencies, payday lenders and non-tradition- back in the early 1990s), it behoves us to
of the ASX financial services sector is al lenders, too. make quality a top-drawer criterion.
Macquarie Group (ASX: MQG). It’s not as The breadth of different business models, For customers and investors alike, rep-
simple a business as one of our domestic and the differing goals among investors, utation matters in financial services. An
banks, to be sure, but it has both a reputa- make this a challenging sector to review. insurer needs a reputation of “reserving”
tion for making money and experience of How do you compare Cash Converters, – putting money away for claims – ade-
innovating across both geographies and QBE and Commonwealth Bank? Especially quately. And a bank must lend prudently,
business lines as circumstances require. when some investors are untroubled by for similar reasons. Investors should also
Its executives and employees have share prices and happy to just receive a look for companies with either inexpen-
plenty of skin in the game, and it deserves steady flow of dividends, while others sive shares (on a valuation basis) or good
its moniker “the millionaires’ factory”. It are looking for capital growth. growth potential. Ideally both.
simply isn’t tied to a single market or asset For our purposes, we’ll look for total
class the way our other large banks are shareholder return (capital growth plus Scott Phillips is The Motley Fool’s chief
and offers impressive diversification. dividends) and emphasise quality. The for- investment officer. You can reach him
To be fair, it’s also higher risk than those mer means we need to find a business with on Twitter @TMFScottP and via email
banks, but the returns on offer make it a a high probability of decent profit growth. [email protected]. This article
risk worth taking. And the latter stops us buying the share- contains general investment advice only
market equivalent of lottery tickets – a very (under AFSL 400691).
DATABANK
T he table on this page contains data
and information to help you compare
superannuation funds. It showcases
allocated by their employers. Most employ-
ees can choose another fund if they don’t
like the one selected by their employer.
The table also lists each fund’s
SelectingSuper Fund Quality Rating. Funds
that achieve these quality standards are
MySuper investment options offered by The performance results displayed designated AAA. Research was prepared
some of Australia’s biggest super funds. are the annualised investment returns by Rainmaker Information, which
MySuper options are default superannua- each MySuper option has delivered after publishes Money magazine. For more info,
tion products that employees choose or are taking account of all taxes and fees. see www.selectingsuper.com.au.
T he tables on these pages contain Managed funds displayed in these bonds, cash, infrastructure, private
5-year
Mngmnt 1-year
Name APIR Code Start Date Size (m) Rank return Rank
fee %pa return
(%pa)
AMP Balanced Growth AMP0442AU 0.71% 30/09/1985 $5,429m 3.7% 48 6.1% 36
QIC Growth Fund QIC0002AU 0.50% 06/03/2002 $4,266m 3.3% 53 5.7% 43
Vanguard Growth Index Fund VAN0110AU 0.36% 20/11/2002 $4,145m 6.0% 7 7.9% 12
Vanguard Balanced Index Fund VAN0108AU 0.34% 20/11/2002 $3,701m 5.5% 11 6.9% 25
Vanguard High Growth Index Fund VAN0111AU 0.37% 20/11/2002 $2,211m 6.4% 3 8.8% 6
AVERAGE* 0.73% $545m 3.9% 81 6.3% 68
DATABANK
to you by a financial adviser. unit trust and investment fees.
The performance results displayed Research was prepared by Rainmaker
are the annualised investment returns Information and for more information
each managed fund has delivered after see www.rainmaker.com.au
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