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Investopoly

Stuart Wemyss

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Investopoly
Investopoly

Investopoly

Stuart Wemyss

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About Us

Each episode lasts between 5 and 15 minutes (as short and succinct as possible) and contains tips, strategies, research, methodology, case studies and ideas to help you build wealth safely and successfully. Stuart Wemyss is a qualified independent financial advisor, accountant, tax agent and licenses mortgage broker allowing him to provide holistic advice. He has authored three books with his latest being Investopoly. (Buy your copy here - http://investopoly.com.au/). Stuart writes a weekly blog which is reproduced on this podcast

Latest Episodes

Global recession. US/China trade war. Brexit. Low interest rates... What to do?

It feels like there is more global uncertainty at the moment. Things such as a global or domestic economic recession, US/China trade war tensions, Brexit, Trump's rhetoric, the prospect of zero (or negative) interest rates, what property prices might do here, all seem to dominate the news. You may find these matters confusing and they can create inertia. So, how do you navigate these seemingly turbulent times? Consider issues in a long-term context Last week, the Australian share market fell 3.7% between Tuesday and Thursday. These types of dramatic movements attract alarmist headlines. The reality is that despite this drop, the market is still up 10.1% over the past 12 months, which is much better than other developed markets. The volatility (VIX) index is the most common measure for the level of volatility in the US market and is charted below for the past 20 years. The VIX index averaged only 13.2 throughout calendar years 2016 and 2017, which is well below the long-term mean of 18.3. Since the beginning of 2018, the VIX has averaged 16.6, which is 25% higher than 2016 and 2017, but still below the long-term mean. https://www.prosolution.com.au/wp-content/uploads/2019/10/VIX.png?6bfec1&6bfec1 Perhaps this puts recent share market volatility in context. Whilst the market is more volatile than it has been in recent times, in context of longer-term data, it is actually not all that volatile. For example, there was almost twice as much volatility between 2008 and 2011. I share this with you to make the point that it is important to focus on the data and facts rather than how markets feel. Most of these issues are short term The best way to deal with these often-exaggerated topics (as listed in the headline) that the media, in particular, love to talk about is to ask yourself whether these are likely to have had an impact 20 years from now. Mostly, the answer is no. Many of these "issues" are short-term in nature and really won't have any impact on long term investment returns. Markets and economies move in cycles, so recessions aren't a new phenomenon for long-term investors. Government trade terms and strategies change, but markets and business always adapt. Perhaps the only factor that might have an impact in the long run is interest rates, particularly if they are lower for longer. But that impact is likely to be positive for astute investors. In short, what I am saying is; "play the long game". Focus on long term outcomes. If you do that, you don't need to worry about getting distracted by all the short-term noise and as such, it is less likely you will make a decision that you may regret in the future (or regret not making any decisions). Short term thinking creates unnecessary and unhelpful anxiety. You end up focusing on whatever dominates the news - there is always something to worry about. To avoid this ask yourself, what can you do today that is likely to strengthen your financial position 20 years from now. Forget about what might happen over the next 20 days or 20 months. Focus on quality, methodology and valuation If you are investing in shares, you must focus on ensuring you adopt the correct methodology and skew your investments away from over-priced markets. If you are investing in property, focus all your energy on quality only. Doing this is the best way to ensure your investments are strong enough to weather any storms that might be coming our way. I explain these two factors below: § Quality and methodology - ensure you have a sound methodology for selecting your investments. If you are investing in equities, arguably it would be better to adopt a valued-based approach if you share my belief that the equity bull-market is approaching its end. If you are investing in property, focus on the basics of supply and demand e.g. strong land value component in an area that has scarcity and therefore benefits from sustainable, excessive demand. Historic...

17 MIN1 weeks ago
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Global recession. US/China trade war. Brexit. Low interest rates... What to do?

The best way to help kids get into the property market

According to the Australian Bureau of Statistics, first homeowner activity has increased by 51% since March 2016. First home buyers now account for just short of 20% of all new home loans. Whilst housing affordability has improved slightly recently, it is still tough for first home buyers to get onto the property ladder. However, the current low interest rate environment and the recent dip in prices is clearly encouraging more first home buyers. So, what is the best way to help your kids get into the property market? And is there anything you need to do now? Challenge has and will always be saving a sufficient deposit There are two factors that will determine whether a person is ready to purchase their first property: (1) Cash flow Do they have a stable and reliable amount of surplus cash flow that they can contribute towards repaying a loan? There are usually two main considerations. Firstly, how stable and consistent their income is expected to be in the short to medium term? This normally requires permanent full-time employment or an established self-employed business. Secondly, do they have good cash flow management and consistently spend less than they earn i.e. are they good savers? (2) Deposit Do they have enough deposit to contribute towards the acquisition? Most banks will lend up to 95% of a property's value. Therefore, first home buyers need to contribute: (1) a 5% deposit; (2) pay for the mortgage insurance premium. This is an expense that is charged by the bank if you borrow more than 80-85% of a property's value. The cost of mortgage insurance is typically in the range of 3% and 4% of the loan amount (at a 95% LVR). A few lenders permit borrowers to add a portion (up to 2%) of the mortgage insurance premium onto the loan. The rest must be paid from cash savings; and (3) any acquisition costs which could include stamp duty (which may be nil depending on the first home buyer incentive), buyers' agent fees if you choose to use one and legal fees. Therefore, typically, first time buyers need to accumulate a sizeable deposit, and this can unfortunately take many years to save (over which time property prices will probably continue to climb). Having enough deposit is often the primary hurdle to overcome for first time property buyers. Best way to help is to help yourself first Often my clients request that their financial plan include the goal that they would like to help their kids buy a property. Sometimes clients think that buying one property per child (for example) now is a good idea. There are a few flaws with this approach, including: § The best way to help your children is to help yourself first. Build your own asset base. If you have a very strong asset base in the future, you will have the latitude to help your children in lots of ways. However, if you don't have a strong asset base, you risk being in a situation where you are relying on your kids for help, not the other way around. § Buying assets now, ultimately for your children's use, has many challenges. Firstly, if you eventually gift or sell the property to your child you will have to pay stamp duty and capital gains tax. Secondly, how do you know what property type and location will best suit your children in the future? § You may want to help your children in different ways and at different times. Some young adults can be very astute with money from a very young age. However, others can take many years to learn basic cash flow management. Forcing a person into property ownership before they are ready won't produce positive outcomes. Start with teaching good cash flow management We all know that kids learn a lot (often subconsciously) from their parents through observation and experience. Therefore, it's good to openly discuss the principals of money management, without having to disclose personal details. Discussing topics such as how to budget, focusing on getting value for money, that most...

19 MIN2 weeks ago
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The best way to help kids get into the property market

Does you partner understand your finances?

In my experience, it is common for one spouse to have a greater interest in the family's finances. In fact, the spouse that is 'most interested' typically takes fully responsibility for making the family's financial decisions. However, there are some fundamental and important flaws with this approach which I'd like to share with you. What happens if one spouse unexpectantly passes away? If the spouse that is the 'financial decision-maker" passes away, particularly if it's unexpected, it does cause the surviving spouse a lot of stress and worry. Not only do they (probably) have little knowledge of their financial affairs, but they also typically have a low level of confidence and experience with making financial decisions. This all compounds to create a lot of stress and worry, at the worst possible time. To avoid this occurrence, each spouse must understand their financial position and strategy, even if its only at a basic level. They also must know who to seek advice from and who to trust, so they are able to share the burden of making ongoing financial decisions. If the relationship breaks down beware of skeletons There have been some horrible situations of spouses finding out about how dire their family's financial situation is after their relationship has broken down. This includes massive tax debts, liabilities and so on. Of course, a strong relationship is founded on mutual trust and respect which includes discussing and disclosing all material financial decisions with your spouse before any transactions are made. Unfortunately, this does not always occur. One spouse, often men, may feel a strong sense of responsibility to "provide" for their family. Sometimes, this responsibility can unfortunately drive them to make unsound and inappropriate financial decisions. And to compound this, they might avoid discussing these decisions with their spouse, so they don't 'burden' them. Of course, this is a foolish approach. That said, I believe it is the responsibility of each spouse to ask questions and seek to understand their own financial position. Nothing is too complex to explain in simple, easy-to-understand terms. It is something you can share together. It's your money, so it's your responsibility There is one thing you cannot delegate and that is the obligation to take responsibility for your money. It is your money and its your job to be responsible for it, not anyone else's. That is not to say that you cannot trust anyone else or take their advice. But you must make sure that know what's going on i.e. where its invested, what risk you are taking, how much you spend and so on. If you don't take responsibility and you end up losing money one day, you only have one person to blame. Therefore, be engaged in the topic of money. Ask questions. You don't need to have to understand the nitty-gritty or feign competency, but you must take responsibility. If you have a financial advisor, attend at least one meeting every couple of years. If you don't have a financial advisor, ask your spouse to explain what's going on and what your family's financial plans involve. You have to be on the same page One of the important advantages of ensuring that both partners are engaged in understanding their finances is that you will be more likely to stick to the plan. For example, if your financial plan requires you to contribute say $20,000 per year into a share portfolio, and both spouses understand why this is important to maintain, then it is likely that you will hold each-other accountable for achieving it. However, if one spouse doesn't understand the strategy and therefore the importance of sticking to the $20,000 budget, then it can be more difficult to encourage them to curtail other expenditure. Therefore, there is merit in making sure each spouse "buys into" the plan and commits to it. What...

12 MIN2 weeks ago
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Does you partner understand your finances?

Property Market Prediction: what will the market do from here?

The media loves to talk about the property market; will prices rise or fall over the next year? It's really not that important. "Timing" the market is virtually valueless, as I concluded in this analysis last year. That said, I understand the psychology behind it. People want to buy at the bottom of the market, just before it takes off and only experience the upside. There has been a lot of commentary recently about improvements in auction clearance rates, uptick in lending volume in July and so on. So, I thought I'd weigh into the commentary and share my views. Looks like I called the bottom correctly Let me begin this blog with some shameless self-promotion! In December 2018, I wrote a piece for The Australian in which I said "I believe that price growth next year will be neutral or positive". At the time, I was only one of two people in Australia to make this public prediction (AMP Capital's chief economist, Shane Oliver was the other). As the chart provided by CoreLogic below illustrates, national auction clearance rates reached their lowest point in December 2018 at around 40%. Over the past nine months they recovered dramatically to be circa 70% (and mid-to high 70%'s in Melbourne and Sydney). https://www.prosolution.com.au/wp-content/uploads/2019/09/Clearance-rates.png?6bfec1&6bfec1 According to CoreLogic, national capital city house prices grew by 1% in the quarter ending August 2019, with Melbourne and Sydney leading the way at close to 2%. Therefore, it looks like the bottom of the market was in fact December 2018 when I wrote my article. All happening with very low volumes Property market sentiment began improving after 10pm on 18 May when the Coalition won the election. We definitely witnessed a temporary improvement in our business in terms of enquiry levels from both investors and homeowners. This is also evident in the chart below which begins on 11 May, the week before the federal election. It sets out Melbourne's auction clearance rate and the volume of property sold in dollar terms (data from Domain). I have selected Melbourne as auctions are more commonplace compared to other capital cities (so data is more representative). Please take note of the very low volumes. Up until mid-July only $175 million of property was being sold each weekend, on average. It has increased to $350 million over the past two weeks. But this is still well below the peak of a booming spring market in which over $1 billion of property would sell over one weekend in Melbourne. https://www.prosolution.com.au/wp-content/uploads/2019/09/Chart-ppty-predictions.png?6bfec1&6bfec1 Property market activity (volume) is well down both in terms of the number of properties selling but even more so in dollar terms, which suggests the higher end of the market is very thin. Therefore, whilst an improvement in clearance rates is a positive signal, we need more vendors to put their properties on the market. Until that happens, it's difficult to ascertain what is driving clearance rates higher. Is it very low volumes or an actual improvement in sentiment? I suspect both are relatively equal contributors at the moment. Don't get over-excited by lending volumes The media jumped all over the improvement in lending volumes (as announced by the ABS) last week. In case you missed it, the value of new loans increased by around 5% in July 2019. Some commentators interpreted this as a signal that lending has loosened a little. It's hasn't! For a loan to settle in July, the application must have been lodged in at least June, but probably before that given how arduous the application process has become. Credit was slightly tighter in May/June than it is now. It will be interesting to see what loan volume are like in August and subsequent months, but I suspect that won't show dramatic increases. Borrowing capacity has improved but it's still very difficult to...

14 MIN3 weeks ago
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Property Market Prediction: what will the market do from here?

Investing in shares 101: A beginner's guide

Many people feel investing in the share market is a complex and scary concept. This is often due to a lack of understanding. I have written a number of blogs about the advantages of index investing. However, I thought it might be useful to take a step back and take a look at the basics of share market investing. How does the stock market work? The share market is merely a place where people come to buy and sell shares. Some people will be buyers, and some will be sellers. They will each bid what price they are willing to buy or sell a particular stock. A deal will be done when they meet in the middle and agree on price. This is all done electronically (although, in Australia, prior to 1990, it was done on chalk boards). You can see an example of this in the screen-print below (for CBA). As you can see, there are 9 people that would like to buy 455 shares in CBA shares for a price of $79.77. There are also 16 people that are prepared to sell 519 shares for $79.79. Seconds after taking this screen shot, the shares traded or $79.78 (i.e. the mid-point). These transactions happen all the time and this is how shares are valued by the market. By the way, this is called market depth. That is, the number of buyers and sellers (and number of units) interested in trading a particular stock. It is important to invest in a stock with good depth to ensure your investment is liquid and fairly priced. More on this soon. What is a company worth? Obviously, the 'market' determines the value of a stock. As stated above, the market is made up of many buyers and sellers (most of them professionals). There is a concept in financial theory called the Efficient Market Hypothesis (EFH) which states that the price of a stock reflects all available information about that stock and therefore is an accurate indication of its intrinsic value. Whilst this theory has some merit, I believe that EFM is truer in the long run than it is in the short run. In the short run, popularity can drive stock prices, not fundamentals. Fundamentally, the value of a company is simply the present value of its future cash flows (i.e. profit). That is, what is the total value of say the next 10 years of profit after applying a discount rate (which is like an interest rate) to account for the businesses risk. So, the key factor that investors must focus on is cash flow (profitability). There are only two reason why someone might invest in a business that makes low to no profit. Firstly, they invest in the stock on the expectation that the company's business model is so compelling that it will generate strong profits in the future. Or, secondly, they are speculating that the stock price will continue to rise (this approach is more like gambling). What are some of the key terms and when to use them? I have listed below some of the key financial measures and terminology that are important to be familiar with if you want to invest in shares. Of course, there are lots of measures to look at, and they might vary between industries, so this isn't an exhaustive list. Earnings per share (EPS) This is the amount of profit after tax that a company makes divided by the number of shares on issue. It is good if a company's EPS is consistent (low volatility) and exhibits a good historic growth rate. PE ratio PE ratio stands for price-earnings ratio. This is calculated by dividing a stock's price by its EPS. This tells you whether the stock is valued conservatively or aggressively. The long-term average PE in the Australian market is circa 15. Most of the top 200 stocks have a PE in the range of 10 and 25. The higher the PE you pay, the longer it will take to generate an investment return (if at all), unless earnings increase significantly in the future. For example, ANZ's PE is 12.6 which means that in 12.6 years you would have made your money back (in terms of profit which is either paid as a dividend or reinvested). Compare that to...

21 MINSEP 11
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Investing in shares 101: A beginner's guide

How should your split your wealth between shares and property?

Australian's have a well-documented love affair with property. Many people pursue the "great Australian dream" of owning their own home and over 2.1 million taxpayers invest in property. Most Australian's also invest in the share market too, via their superannuation. However, one of the decisions that many people struggle with is whether to invest in property, shares or both. And if the answer is to invest in both, how much do you invest in each and is it wise to do one before the other? Like with many things in life, moderation is the key All things being equal, diversification is typically the wisest approach. Spreading your money across various asset classes helps you reduce your investment risks. Property and share investment returns are not correlated, so by investing both, hopefully the 'good' years in property will randomly offset the 'bad' years in shares (and vice-versa). That is less important in the long run, but in the short run, diversification smooths investment returns, which makes the road less bumpy and less stressful. Don't invest if you are uncomfortable Whilst you should always aim to never let your emotions guide financial decisions (as discussed here), sometimes people are very uncomfortable with investing in either property or shares. I believe that you should never invest in anything unless you are 100% comfortable. Therefore, if your risk tolerance drives you to invest in one asset class only (i.e. property or shares), then that is okay as long as you use the correct investment methodologies. At the end of the day, the quality of your investments is more important than your level of diversification, especially in the long run. You probably don't need to invest in more than two investment-grade properties Some businesses and articles online promote the benefits of acquiring a large property portfolio. Whilst this might be realistic for some, it's completely unnecessary for most people. Of all the financial plans that I formulate, I rarely recommend my clients invest in more than three properties. In fact, most plans involve investing in one or two. There are two reason for this. Firstly, quality trumps quantity every day of the week! It is much better to put all your money in one high-quality property than spread your monies across several "average" quality properties. Secondly, limiting the amount you invest in property leaves room for you to invest in other assets such as shares, thereby achieving better diversification. However, if you max-out your borrowings (through investing in property), you will probably find that you do not have any capacity to invest in other asset classes. Beware of anyone that suggests you can and should invest in lots of properties. Your ego must not determine your investment strategy. That is often difficult to do without having to make significant and ultimately costly compromises on the quality of the properties you invest in (unless you have a significant income). Most pros and cons balance themselves out at a portfolio level The shares versus property debate has raged on for many years. People in each camp will highlight the pros and cons in each. For example, shares are more liquid, you can invest in shares in smaller amounts, you don't have to worry about dodgy tenants and so forth. Whereas, for property, people are attracted to the tangible nature of the asset and you can borrow more (at lower rates) to invest in property. These are just some of the pros and cons that are often mentioned. Most of the pros and cons regularly mentioned are technically correct. However, it's not really a meaningful debate. Its tantamount to debating which is your favourite golf club; a putter or a driver. Both clubs are used for two completely different tasks. One isn't better than the other. That is nonsense. It depends on what you want to achieve with your shot - you select the right club...

12 MINSEP 4
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How should your split your wealth between shares and property?

How will zero interest rates affect investors?

You would be excused for thinking that developed economies all over the world are gradually making their way to a zero interest rate environment. Long term fixed mortgage rates in the United States are less than 3% p.a. In the UK, rates are under 2% and even lower in Europe (circa 0.50% p.a. in France for example). In Australian this week, 5-year fixed home loan rate fell below 3% p.a. And in Demark the other week, Jyske Bank announced it would pay borrowers 0.50% p.a. to take out a mortgage! Anyone that had a mortgage in the early 1990's would regard today's interest rates as almost unfathomable. What does this mean for investor, especially those that borrow to invest in property? Interest rates lower for longer? The market is predicting that the RBA will cut rates by 0.50% by mid-2020. If this turns out to be correct, Australian mortgage rates could fall even further. In July, RBA Governor, Phillip Lowe said "Whether or not further monetary easing is needed, it is reasonable to ex...

17 MINAUG 28
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How will zero interest rates affect investors?

The ATO is on the warpath! Here's what it's up to...

We all want to stay on the ATO's good side. No one wants to invite a tax audit. But, at the same time, it is prudent to investigate all opportunities to minimise the amount of tax we pay. This often requires a balance between minimising taxes wherever possible, but not being too aggressive that you risk getting into trouble with the ATO. My view is that you always stick within the black letter of the law - never transgressing into any grey areas - as it's never worth it in the long run. The ATO has made some significant changes lately that I want to bring to your attention. These changes might encourage you to review how to manage your finances. ATO: 90% of property investor tax returns have errors The ATO announced in April that it will double the number of audits of property investor tax returns to 4,500. It said that its data indicates that 90% of property investor tax returns contained errors. The ATO found four main errors: Interest deductions Errors included incorrectly claimi...

16 MINAUG 22
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The ATO is on the warpath! Here's what it's up to...

Are property buyers' agents worth the money?

A buyers' agent is a real estate professional that will help you identify and negotiate the purchase of a property according to your specifications. They typically work for property investors but can also be engaged to purchase owner-occupier homes. This blog discussed whether you should use a buyers' agent and if they are worth the money? Don't forget, I'm independent! I have no vested interest in whether my clients engage a buyers' agent or not. I am completely independent. The advantage I have is that over the past 18 years since starting ProSolution, I have seen the performance of many property purchases resulting from advice provided by many different buyers' agents. Also, like in many industries, the buyers' agent industry is small. You quickly learn what types of properties different agents are buying, and what the outcomes have been. In short, I have the perspective of being an "independent umpire" for over nearly the past two decades. These are my musings - hopefully they h...

19 MINAUG 14
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Are property buyers' agents worth the money?

How are you going to repay all your loans before you retire?

Borrowing to invest (in property or shares) is typically a good wealth accumulation strategy as long as you do it prudently and adopt a proven methodology to select quality investments. If used wisely, debt can be a very effective tool. However, whilst your investment strategy might require you to get into debt, the strategy must also articulate how you will get out of debt (i.e. repay it). This blog sets out some of these strategies. How much debt is safe to take into retirement? You must think about your interest rate sensitivity in retirement. For example, if you have $2 million of borrowings, an interest rate increase of 1% will cost you an extra $20,000 per year. If your only source of income is from investments and super, that increased amount of interest might have a big impact on your cash flow and standard of living. Generally, you want to aim for a debt level that is far less sensitive to changes in interest rates. Worrying about interest rate changes is the last thing you...

11 MINAUG 7
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How are you going to repay all your loans before you retire?

Latest Episodes

Global recession. US/China trade war. Brexit. Low interest rates... What to do?

It feels like there is more global uncertainty at the moment. Things such as a global or domestic economic recession, US/China trade war tensions, Brexit, Trump's rhetoric, the prospect of zero (or negative) interest rates, what property prices might do here, all seem to dominate the news. You may find these matters confusing and they can create inertia. So, how do you navigate these seemingly turbulent times? Consider issues in a long-term context Last week, the Australian share market fell 3.7% between Tuesday and Thursday. These types of dramatic movements attract alarmist headlines. The reality is that despite this drop, the market is still up 10.1% over the past 12 months, which is much better than other developed markets. The volatility (VIX) index is the most common measure for the level of volatility in the US market and is charted below for the past 20 years. The VIX index averaged only 13.2 throughout calendar years 2016 and 2017, which is well below the long-term mean of 18.3. Since the beginning of 2018, the VIX has averaged 16.6, which is 25% higher than 2016 and 2017, but still below the long-term mean. https://www.prosolution.com.au/wp-content/uploads/2019/10/VIX.png?6bfec1&6bfec1 Perhaps this puts recent share market volatility in context. Whilst the market is more volatile than it has been in recent times, in context of longer-term data, it is actually not all that volatile. For example, there was almost twice as much volatility between 2008 and 2011. I share this with you to make the point that it is important to focus on the data and facts rather than how markets feel. Most of these issues are short term The best way to deal with these often-exaggerated topics (as listed in the headline) that the media, in particular, love to talk about is to ask yourself whether these are likely to have had an impact 20 years from now. Mostly, the answer is no. Many of these "issues" are short-term in nature and really won't have any impact on long term investment returns. Markets and economies move in cycles, so recessions aren't a new phenomenon for long-term investors. Government trade terms and strategies change, but markets and business always adapt. Perhaps the only factor that might have an impact in the long run is interest rates, particularly if they are lower for longer. But that impact is likely to be positive for astute investors. In short, what I am saying is; "play the long game". Focus on long term outcomes. If you do that, you don't need to worry about getting distracted by all the short-term noise and as such, it is less likely you will make a decision that you may regret in the future (or regret not making any decisions). Short term thinking creates unnecessary and unhelpful anxiety. You end up focusing on whatever dominates the news - there is always something to worry about. To avoid this ask yourself, what can you do today that is likely to strengthen your financial position 20 years from now. Forget about what might happen over the next 20 days or 20 months. Focus on quality, methodology and valuation If you are investing in shares, you must focus on ensuring you adopt the correct methodology and skew your investments away from over-priced markets. If you are investing in property, focus all your energy on quality only. Doing this is the best way to ensure your investments are strong enough to weather any storms that might be coming our way. I explain these two factors below: § Quality and methodology - ensure you have a sound methodology for selecting your investments. If you are investing in equities, arguably it would be better to adopt a valued-based approach if you share my belief that the equity bull-market is approaching its end. If you are investing in property, focus on the basics of supply and demand e.g. strong land value component in an area that has scarcity and therefore benefits from sustainable, excessive demand. Historic...

17 MIN1 weeks ago
Comments
Global recession. US/China trade war. Brexit. Low interest rates... What to do?

The best way to help kids get into the property market

According to the Australian Bureau of Statistics, first homeowner activity has increased by 51% since March 2016. First home buyers now account for just short of 20% of all new home loans. Whilst housing affordability has improved slightly recently, it is still tough for first home buyers to get onto the property ladder. However, the current low interest rate environment and the recent dip in prices is clearly encouraging more first home buyers. So, what is the best way to help your kids get into the property market? And is there anything you need to do now? Challenge has and will always be saving a sufficient deposit There are two factors that will determine whether a person is ready to purchase their first property: (1) Cash flow Do they have a stable and reliable amount of surplus cash flow that they can contribute towards repaying a loan? There are usually two main considerations. Firstly, how stable and consistent their income is expected to be in the short to medium term? This normally requires permanent full-time employment or an established self-employed business. Secondly, do they have good cash flow management and consistently spend less than they earn i.e. are they good savers? (2) Deposit Do they have enough deposit to contribute towards the acquisition? Most banks will lend up to 95% of a property's value. Therefore, first home buyers need to contribute: (1) a 5% deposit; (2) pay for the mortgage insurance premium. This is an expense that is charged by the bank if you borrow more than 80-85% of a property's value. The cost of mortgage insurance is typically in the range of 3% and 4% of the loan amount (at a 95% LVR). A few lenders permit borrowers to add a portion (up to 2%) of the mortgage insurance premium onto the loan. The rest must be paid from cash savings; and (3) any acquisition costs which could include stamp duty (which may be nil depending on the first home buyer incentive), buyers' agent fees if you choose to use one and legal fees. Therefore, typically, first time buyers need to accumulate a sizeable deposit, and this can unfortunately take many years to save (over which time property prices will probably continue to climb). Having enough deposit is often the primary hurdle to overcome for first time property buyers. Best way to help is to help yourself first Often my clients request that their financial plan include the goal that they would like to help their kids buy a property. Sometimes clients think that buying one property per child (for example) now is a good idea. There are a few flaws with this approach, including: § The best way to help your children is to help yourself first. Build your own asset base. If you have a very strong asset base in the future, you will have the latitude to help your children in lots of ways. However, if you don't have a strong asset base, you risk being in a situation where you are relying on your kids for help, not the other way around. § Buying assets now, ultimately for your children's use, has many challenges. Firstly, if you eventually gift or sell the property to your child you will have to pay stamp duty and capital gains tax. Secondly, how do you know what property type and location will best suit your children in the future? § You may want to help your children in different ways and at different times. Some young adults can be very astute with money from a very young age. However, others can take many years to learn basic cash flow management. Forcing a person into property ownership before they are ready won't produce positive outcomes. Start with teaching good cash flow management We all know that kids learn a lot (often subconsciously) from their parents through observation and experience. Therefore, it's good to openly discuss the principals of money management, without having to disclose personal details. Discussing topics such as how to budget, focusing on getting value for money, that most...

19 MIN2 weeks ago
Comments
The best way to help kids get into the property market

Does you partner understand your finances?

In my experience, it is common for one spouse to have a greater interest in the family's finances. In fact, the spouse that is 'most interested' typically takes fully responsibility for making the family's financial decisions. However, there are some fundamental and important flaws with this approach which I'd like to share with you. What happens if one spouse unexpectantly passes away? If the spouse that is the 'financial decision-maker" passes away, particularly if it's unexpected, it does cause the surviving spouse a lot of stress and worry. Not only do they (probably) have little knowledge of their financial affairs, but they also typically have a low level of confidence and experience with making financial decisions. This all compounds to create a lot of stress and worry, at the worst possible time. To avoid this occurrence, each spouse must understand their financial position and strategy, even if its only at a basic level. They also must know who to seek advice from and who to trust, so they are able to share the burden of making ongoing financial decisions. If the relationship breaks down beware of skeletons There have been some horrible situations of spouses finding out about how dire their family's financial situation is after their relationship has broken down. This includes massive tax debts, liabilities and so on. Of course, a strong relationship is founded on mutual trust and respect which includes discussing and disclosing all material financial decisions with your spouse before any transactions are made. Unfortunately, this does not always occur. One spouse, often men, may feel a strong sense of responsibility to "provide" for their family. Sometimes, this responsibility can unfortunately drive them to make unsound and inappropriate financial decisions. And to compound this, they might avoid discussing these decisions with their spouse, so they don't 'burden' them. Of course, this is a foolish approach. That said, I believe it is the responsibility of each spouse to ask questions and seek to understand their own financial position. Nothing is too complex to explain in simple, easy-to-understand terms. It is something you can share together. It's your money, so it's your responsibility There is one thing you cannot delegate and that is the obligation to take responsibility for your money. It is your money and its your job to be responsible for it, not anyone else's. That is not to say that you cannot trust anyone else or take their advice. But you must make sure that know what's going on i.e. where its invested, what risk you are taking, how much you spend and so on. If you don't take responsibility and you end up losing money one day, you only have one person to blame. Therefore, be engaged in the topic of money. Ask questions. You don't need to have to understand the nitty-gritty or feign competency, but you must take responsibility. If you have a financial advisor, attend at least one meeting every couple of years. If you don't have a financial advisor, ask your spouse to explain what's going on and what your family's financial plans involve. You have to be on the same page One of the important advantages of ensuring that both partners are engaged in understanding their finances is that you will be more likely to stick to the plan. For example, if your financial plan requires you to contribute say $20,000 per year into a share portfolio, and both spouses understand why this is important to maintain, then it is likely that you will hold each-other accountable for achieving it. However, if one spouse doesn't understand the strategy and therefore the importance of sticking to the $20,000 budget, then it can be more difficult to encourage them to curtail other expenditure. Therefore, there is merit in making sure each spouse "buys into" the plan and commits to it. What...

12 MIN2 weeks ago
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Does you partner understand your finances?

Property Market Prediction: what will the market do from here?

The media loves to talk about the property market; will prices rise or fall over the next year? It's really not that important. "Timing" the market is virtually valueless, as I concluded in this analysis last year. That said, I understand the psychology behind it. People want to buy at the bottom of the market, just before it takes off and only experience the upside. There has been a lot of commentary recently about improvements in auction clearance rates, uptick in lending volume in July and so on. So, I thought I'd weigh into the commentary and share my views. Looks like I called the bottom correctly Let me begin this blog with some shameless self-promotion! In December 2018, I wrote a piece for The Australian in which I said "I believe that price growth next year will be neutral or positive". At the time, I was only one of two people in Australia to make this public prediction (AMP Capital's chief economist, Shane Oliver was the other). As the chart provided by CoreLogic below illustrates, national auction clearance rates reached their lowest point in December 2018 at around 40%. Over the past nine months they recovered dramatically to be circa 70% (and mid-to high 70%'s in Melbourne and Sydney). https://www.prosolution.com.au/wp-content/uploads/2019/09/Clearance-rates.png?6bfec1&6bfec1 According to CoreLogic, national capital city house prices grew by 1% in the quarter ending August 2019, with Melbourne and Sydney leading the way at close to 2%. Therefore, it looks like the bottom of the market was in fact December 2018 when I wrote my article. All happening with very low volumes Property market sentiment began improving after 10pm on 18 May when the Coalition won the election. We definitely witnessed a temporary improvement in our business in terms of enquiry levels from both investors and homeowners. This is also evident in the chart below which begins on 11 May, the week before the federal election. It sets out Melbourne's auction clearance rate and the volume of property sold in dollar terms (data from Domain). I have selected Melbourne as auctions are more commonplace compared to other capital cities (so data is more representative). Please take note of the very low volumes. Up until mid-July only $175 million of property was being sold each weekend, on average. It has increased to $350 million over the past two weeks. But this is still well below the peak of a booming spring market in which over $1 billion of property would sell over one weekend in Melbourne. https://www.prosolution.com.au/wp-content/uploads/2019/09/Chart-ppty-predictions.png?6bfec1&6bfec1 Property market activity (volume) is well down both in terms of the number of properties selling but even more so in dollar terms, which suggests the higher end of the market is very thin. Therefore, whilst an improvement in clearance rates is a positive signal, we need more vendors to put their properties on the market. Until that happens, it's difficult to ascertain what is driving clearance rates higher. Is it very low volumes or an actual improvement in sentiment? I suspect both are relatively equal contributors at the moment. Don't get over-excited by lending volumes The media jumped all over the improvement in lending volumes (as announced by the ABS) last week. In case you missed it, the value of new loans increased by around 5% in July 2019. Some commentators interpreted this as a signal that lending has loosened a little. It's hasn't! For a loan to settle in July, the application must have been lodged in at least June, but probably before that given how arduous the application process has become. Credit was slightly tighter in May/June than it is now. It will be interesting to see what loan volume are like in August and subsequent months, but I suspect that won't show dramatic increases. Borrowing capacity has improved but it's still very difficult to...

14 MIN3 weeks ago
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Property Market Prediction: what will the market do from here?

Investing in shares 101: A beginner's guide

Many people feel investing in the share market is a complex and scary concept. This is often due to a lack of understanding. I have written a number of blogs about the advantages of index investing. However, I thought it might be useful to take a step back and take a look at the basics of share market investing. How does the stock market work? The share market is merely a place where people come to buy and sell shares. Some people will be buyers, and some will be sellers. They will each bid what price they are willing to buy or sell a particular stock. A deal will be done when they meet in the middle and agree on price. This is all done electronically (although, in Australia, prior to 1990, it was done on chalk boards). You can see an example of this in the screen-print below (for CBA). As you can see, there are 9 people that would like to buy 455 shares in CBA shares for a price of $79.77. There are also 16 people that are prepared to sell 519 shares for $79.79. Seconds after taking this screen shot, the shares traded or $79.78 (i.e. the mid-point). These transactions happen all the time and this is how shares are valued by the market. By the way, this is called market depth. That is, the number of buyers and sellers (and number of units) interested in trading a particular stock. It is important to invest in a stock with good depth to ensure your investment is liquid and fairly priced. More on this soon. What is a company worth? Obviously, the 'market' determines the value of a stock. As stated above, the market is made up of many buyers and sellers (most of them professionals). There is a concept in financial theory called the Efficient Market Hypothesis (EFH) which states that the price of a stock reflects all available information about that stock and therefore is an accurate indication of its intrinsic value. Whilst this theory has some merit, I believe that EFM is truer in the long run than it is in the short run. In the short run, popularity can drive stock prices, not fundamentals. Fundamentally, the value of a company is simply the present value of its future cash flows (i.e. profit). That is, what is the total value of say the next 10 years of profit after applying a discount rate (which is like an interest rate) to account for the businesses risk. So, the key factor that investors must focus on is cash flow (profitability). There are only two reason why someone might invest in a business that makes low to no profit. Firstly, they invest in the stock on the expectation that the company's business model is so compelling that it will generate strong profits in the future. Or, secondly, they are speculating that the stock price will continue to rise (this approach is more like gambling). What are some of the key terms and when to use them? I have listed below some of the key financial measures and terminology that are important to be familiar with if you want to invest in shares. Of course, there are lots of measures to look at, and they might vary between industries, so this isn't an exhaustive list. Earnings per share (EPS) This is the amount of profit after tax that a company makes divided by the number of shares on issue. It is good if a company's EPS is consistent (low volatility) and exhibits a good historic growth rate. PE ratio PE ratio stands for price-earnings ratio. This is calculated by dividing a stock's price by its EPS. This tells you whether the stock is valued conservatively or aggressively. The long-term average PE in the Australian market is circa 15. Most of the top 200 stocks have a PE in the range of 10 and 25. The higher the PE you pay, the longer it will take to generate an investment return (if at all), unless earnings increase significantly in the future. For example, ANZ's PE is 12.6 which means that in 12.6 years you would have made your money back (in terms of profit which is either paid as a dividend or reinvested). Compare that to...

21 MINSEP 11
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Investing in shares 101: A beginner's guide

How should your split your wealth between shares and property?

Australian's have a well-documented love affair with property. Many people pursue the "great Australian dream" of owning their own home and over 2.1 million taxpayers invest in property. Most Australian's also invest in the share market too, via their superannuation. However, one of the decisions that many people struggle with is whether to invest in property, shares or both. And if the answer is to invest in both, how much do you invest in each and is it wise to do one before the other? Like with many things in life, moderation is the key All things being equal, diversification is typically the wisest approach. Spreading your money across various asset classes helps you reduce your investment risks. Property and share investment returns are not correlated, so by investing both, hopefully the 'good' years in property will randomly offset the 'bad' years in shares (and vice-versa). That is less important in the long run, but in the short run, diversification smooths investment returns, which makes the road less bumpy and less stressful. Don't invest if you are uncomfortable Whilst you should always aim to never let your emotions guide financial decisions (as discussed here), sometimes people are very uncomfortable with investing in either property or shares. I believe that you should never invest in anything unless you are 100% comfortable. Therefore, if your risk tolerance drives you to invest in one asset class only (i.e. property or shares), then that is okay as long as you use the correct investment methodologies. At the end of the day, the quality of your investments is more important than your level of diversification, especially in the long run. You probably don't need to invest in more than two investment-grade properties Some businesses and articles online promote the benefits of acquiring a large property portfolio. Whilst this might be realistic for some, it's completely unnecessary for most people. Of all the financial plans that I formulate, I rarely recommend my clients invest in more than three properties. In fact, most plans involve investing in one or two. There are two reason for this. Firstly, quality trumps quantity every day of the week! It is much better to put all your money in one high-quality property than spread your monies across several "average" quality properties. Secondly, limiting the amount you invest in property leaves room for you to invest in other assets such as shares, thereby achieving better diversification. However, if you max-out your borrowings (through investing in property), you will probably find that you do not have any capacity to invest in other asset classes. Beware of anyone that suggests you can and should invest in lots of properties. Your ego must not determine your investment strategy. That is often difficult to do without having to make significant and ultimately costly compromises on the quality of the properties you invest in (unless you have a significant income). Most pros and cons balance themselves out at a portfolio level The shares versus property debate has raged on for many years. People in each camp will highlight the pros and cons in each. For example, shares are more liquid, you can invest in shares in smaller amounts, you don't have to worry about dodgy tenants and so forth. Whereas, for property, people are attracted to the tangible nature of the asset and you can borrow more (at lower rates) to invest in property. These are just some of the pros and cons that are often mentioned. Most of the pros and cons regularly mentioned are technically correct. However, it's not really a meaningful debate. Its tantamount to debating which is your favourite golf club; a putter or a driver. Both clubs are used for two completely different tasks. One isn't better than the other. That is nonsense. It depends on what you want to achieve with your shot - you select the right club...

12 MINSEP 4
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How should your split your wealth between shares and property?

How will zero interest rates affect investors?

You would be excused for thinking that developed economies all over the world are gradually making their way to a zero interest rate environment. Long term fixed mortgage rates in the United States are less than 3% p.a. In the UK, rates are under 2% and even lower in Europe (circa 0.50% p.a. in France for example). In Australian this week, 5-year fixed home loan rate fell below 3% p.a. And in Demark the other week, Jyske Bank announced it would pay borrowers 0.50% p.a. to take out a mortgage! Anyone that had a mortgage in the early 1990's would regard today's interest rates as almost unfathomable. What does this mean for investor, especially those that borrow to invest in property? Interest rates lower for longer? The market is predicting that the RBA will cut rates by 0.50% by mid-2020. If this turns out to be correct, Australian mortgage rates could fall even further. In July, RBA Governor, Phillip Lowe said "Whether or not further monetary easing is needed, it is reasonable to ex...

17 MINAUG 28
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How will zero interest rates affect investors?

The ATO is on the warpath! Here's what it's up to...

We all want to stay on the ATO's good side. No one wants to invite a tax audit. But, at the same time, it is prudent to investigate all opportunities to minimise the amount of tax we pay. This often requires a balance between minimising taxes wherever possible, but not being too aggressive that you risk getting into trouble with the ATO. My view is that you always stick within the black letter of the law - never transgressing into any grey areas - as it's never worth it in the long run. The ATO has made some significant changes lately that I want to bring to your attention. These changes might encourage you to review how to manage your finances. ATO: 90% of property investor tax returns have errors The ATO announced in April that it will double the number of audits of property investor tax returns to 4,500. It said that its data indicates that 90% of property investor tax returns contained errors. The ATO found four main errors: Interest deductions Errors included incorrectly claimi...

16 MINAUG 22
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The ATO is on the warpath! Here's what it's up to...

Are property buyers' agents worth the money?

A buyers' agent is a real estate professional that will help you identify and negotiate the purchase of a property according to your specifications. They typically work for property investors but can also be engaged to purchase owner-occupier homes. This blog discussed whether you should use a buyers' agent and if they are worth the money? Don't forget, I'm independent! I have no vested interest in whether my clients engage a buyers' agent or not. I am completely independent. The advantage I have is that over the past 18 years since starting ProSolution, I have seen the performance of many property purchases resulting from advice provided by many different buyers' agents. Also, like in many industries, the buyers' agent industry is small. You quickly learn what types of properties different agents are buying, and what the outcomes have been. In short, I have the perspective of being an "independent umpire" for over nearly the past two decades. These are my musings - hopefully they h...

19 MINAUG 14
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Are property buyers' agents worth the money?

How are you going to repay all your loans before you retire?

Borrowing to invest (in property or shares) is typically a good wealth accumulation strategy as long as you do it prudently and adopt a proven methodology to select quality investments. If used wisely, debt can be a very effective tool. However, whilst your investment strategy might require you to get into debt, the strategy must also articulate how you will get out of debt (i.e. repay it). This blog sets out some of these strategies. How much debt is safe to take into retirement? You must think about your interest rate sensitivity in retirement. For example, if you have $2 million of borrowings, an interest rate increase of 1% will cost you an extra $20,000 per year. If your only source of income is from investments and super, that increased amount of interest might have a big impact on your cash flow and standard of living. Generally, you want to aim for a debt level that is far less sensitive to changes in interest rates. Worrying about interest rate changes is the last thing you...

11 MINAUG 7
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How are you going to repay all your loans before you retire?