Taking in my daily dose of comedy last night (A Current Affair), I came across a story about a woman who '5 years ago was recently divorced and debt ridden, but today is the owner of 71 properties worth $6.5 million'.
The story went on to show how over the last 5 years this woman has bought up properties all over Australia (and New Zealand if I remember correctly). She spruiked about how this property 2 years ago cost her $100,000, now it's worth $250,000. She claimed she was getting that much rental income that she didn't have to work, etc, etc.
A few problems with the story:
1. How did she find all these properties with such high rental yield? From what I have seen, average rental yields are around the 4-5% mark. Interest rates for borrowing are around 7.5%.
2. How did she find a lender that would keep lending to her? This woman's debts would be growing and growing, with income not growing. How did she find a lender that would lend her $6.5 million?
3. How did she find 71 good tenants? I hear plenty of horror stories about renters. If she owns 71 properties, at a total value of $6.5m dollars, this means the average price of the properties is under $100,000 (I think it must include a lot of units!). These would be low rent properties. Not to be stereotypical, but you would assume that when you get down to this level, you're more likely to have problems with tenants.
Thats just a few of the holes to be picked in the story. Unfortunately stories like this and books like Rich Dad Poor Dad make people believe this can be done risk free. The old rule applies. If it looks too good to be true it probably is!
Showing posts with label investing. Show all posts
Showing posts with label investing. Show all posts
Wednesday, April 18, 2007
Sunday, April 15, 2007
Super or the home?
With the changes to super coming in, allowing you to withdraw all of your super tax free at age 60, a strategy has come into play which involves paying interest only on your home mortgage, whilst using the difference between the capital repayments on your mortgage to increase your superannuation contributions.
The theory is that you gain immediate taxation benefits, with the super contributions being salary sacrificed, and when you turn 60, you withdraw what you borrowed on your mortgage and simply pay it back. The way I see this strategy, is it lets you have the lifestyle benefits of home ownership, but allows you to invest your money in assets that you may prefer to property (eg shares).
So I've run the two scenarios through my modelling software. I have taken a 30 year mortgage, with an interest rate of 8%. The super fund I have used is invested "aggressively". with projected return of around 9% pa (after tax). The loan is for $300,000.
The net benefit of the interest only loan strategy comes out to be $34,000. That is $34,000 in 30 years time. In today's dollars it's more like $15,000. Obviously, if the rate of return on the super fund is higher than 9% pa, the benefit would be greater, but I really wanted to be conservative on my projections.
There's also the added risk that interest rates will rise (or more favourable, decrease) and the legislative risk that super may be preserved beyond 60 for 30 year olds (lets hope not!).
In short, unless you can get a guaranteed return of over 10% pa over 30 years, this strategy really won't provide a huge benefit. The risks are far greater than the rewards.
The best strategy in my opinion would be to repay your mortgage asap, then once it's paid off increase your super contributions. That way you get the best of both worlds!
The theory is that you gain immediate taxation benefits, with the super contributions being salary sacrificed, and when you turn 60, you withdraw what you borrowed on your mortgage and simply pay it back. The way I see this strategy, is it lets you have the lifestyle benefits of home ownership, but allows you to invest your money in assets that you may prefer to property (eg shares).
So I've run the two scenarios through my modelling software. I have taken a 30 year mortgage, with an interest rate of 8%. The super fund I have used is invested "aggressively". with projected return of around 9% pa (after tax). The loan is for $300,000.
The net benefit of the interest only loan strategy comes out to be $34,000. That is $34,000 in 30 years time. In today's dollars it's more like $15,000. Obviously, if the rate of return on the super fund is higher than 9% pa, the benefit would be greater, but I really wanted to be conservative on my projections.
There's also the added risk that interest rates will rise (or more favourable, decrease) and the legislative risk that super may be preserved beyond 60 for 30 year olds (lets hope not!).
In short, unless you can get a guaranteed return of over 10% pa over 30 years, this strategy really won't provide a huge benefit. The risks are far greater than the rewards.
The best strategy in my opinion would be to repay your mortgage asap, then once it's paid off increase your super contributions. That way you get the best of both worlds!
Monday, March 12, 2007
Never too early to start saving for retirement
I often see financial advice columns strongly advising against young people putting additional money into super, due to the fact that they can't access it until they're 60.
Fair enough, as there's likely to be significant expenditure requirements between 25 and 60 (I'm thinking exorbitant mortgages), where these funds could be better used. However, retirement saving should not be forgotten. Compulsory superannuation contributions of 9% are unlikely to provide enough to retire comfortably on, even for those of us who have been benefiting from these contributions for our whole working lives. You have to start savings for your retirement sometimes, the earlier you get the money in, the more time you will benefit from compounding growth in this tax effective environment.
I ran a little experiment to see for myself what the difference would be.
We are talking about a 25 year old here, retiring at age 60, with $20,000 currently in super and an annual income of $60,000. The following graph estimates in today's dollars the estimated end benefit, assuming the funds are invested 'aggressively' (ie, entirely in shares and property) and they receive the standard 9% employer contributions.
As it can be seen, an end benefit of around $480,000. Not that much, considering 9% on top of your income every year has been contributed to super. I think I'll be wanting more than that to retire on!
So, lets say the 25 year old decides to salary sacrifice around $100 a week (I'll use $5,000 pa). These contributions willbe taxed at 15% upon contribution. This is what we're looking at in today's dollars:
An end benefit of around $820,000. Looking like a much more healthy balance!
You really can't beat starting early. In reality, few 25 year olds are likely to forgo this sort of money for 35 years, but the key to benefiting from compounding returns is to start early. Thanks to the great Paul Keating, we will save significantly for our retirements without having to do too much of the hard work ourselves, but with a little help will end up with a much more comfortable retirement!
Fair enough, as there's likely to be significant expenditure requirements between 25 and 60 (I'm thinking exorbitant mortgages), where these funds could be better used. However, retirement saving should not be forgotten. Compulsory superannuation contributions of 9% are unlikely to provide enough to retire comfortably on, even for those of us who have been benefiting from these contributions for our whole working lives. You have to start savings for your retirement sometimes, the earlier you get the money in, the more time you will benefit from compounding growth in this tax effective environment.
I ran a little experiment to see for myself what the difference would be.
We are talking about a 25 year old here, retiring at age 60, with $20,000 currently in super and an annual income of $60,000. The following graph estimates in today's dollars the estimated end benefit, assuming the funds are invested 'aggressively' (ie, entirely in shares and property) and they receive the standard 9% employer contributions.
As it can be seen, an end benefit of around $480,000. Not that much, considering 9% on top of your income every year has been contributed to super. I think I'll be wanting more than that to retire on!
So, lets say the 25 year old decides to salary sacrifice around $100 a week (I'll use $5,000 pa). These contributions willbe taxed at 15% upon contribution. This is what we're looking at in today's dollars:
An end benefit of around $820,000. Looking like a much more healthy balance!
You really can't beat starting early. In reality, few 25 year olds are likely to forgo this sort of money for 35 years, but the key to benefiting from compounding returns is to start early. Thanks to the great Paul Keating, we will save significantly for our retirements without having to do too much of the hard work ourselves, but with a little help will end up with a much more comfortable retirement!
Sunday, February 25, 2007
It's all about time in the market AND timing the market
If you've seen a Financial Planner you are likely to have heard this one: "It's about time in the market, not timing the market". Basically this means don't worry about what the market is priced at, if its over or underpriced. This doesn't matter. Just get your money in the market for the long term and over time you will be better off than those who trade in and out trying to pick "peaks" and "troughs" in the market.
This definitely makes sense, as who can tell when the right time to invest is?
However, I have recently, as part of a Post Graduate Diploma, studied Technical Analysis. When I told my colleagues I was taking on this subject, they laughed at me. Technical Analysis goes against all the fundamentals that as a Financial Planner and Economist I should believe in. At university they talk about it like it's a black art of some sort . However, I've always been interested in charting and wanted to better understand how to analyse charts, so took on this course.
For the uninitiated, Technical Analysis involves examining price action to determine changes in the supply and demand balance. In other words, using charts to determine whether to buy or sell securities. A common misunderstanding is Technical Analysis uses past prices to predict future prices. There's definitely more to Technical Analysis than this, with Behavioural Finance a major factor in Technical Analysis.
My growing understanding of Technical Analysis, has led me to believe that Technical Analysis can be used to "Time the Market". It's definitely not foolproof, but if you pick the right triggers, you can use Technical Analysis as well as Fundamentals to invest. For example, lets say I like the fundamentals of BHP and want to buy them for the long term. I can undertake some Technical Analysis and decide that I think in the next month it will fall by 10%. Then wait around and get in at a discount to what I would get in otherwise. Obviously I could be wrong and it never reaches the low that I predict, but that's the risk you take.
I remember a client last year decided to invest $500,000 in Australian Share managed funds through his margin loan. This was in early May, 2006. If you think back a while you might remember a correction of around 10% soon after this. So within a matter of weeks, this guy's portfolio was now worth around $450,000. Now, assuming a return of 10% per annum, over 10 years, the portfolio invested prior to the correction would be worth $1,167,184, a gain of $667,184 over the period. If he had of waited a month or so, the portfolio would be worth $1,296,871, an increase of $796,871 over the period. This is a net gain of $129,687 more than the other strategy.
An extra 20% return just to pick the right time to enter the market? I'll take that thankyou!
This definitely makes sense, as who can tell when the right time to invest is?
However, I have recently, as part of a Post Graduate Diploma, studied Technical Analysis. When I told my colleagues I was taking on this subject, they laughed at me. Technical Analysis goes against all the fundamentals that as a Financial Planner and Economist I should believe in. At university they talk about it like it's a black art of some sort . However, I've always been interested in charting and wanted to better understand how to analyse charts, so took on this course.
For the uninitiated, Technical Analysis involves examining price action to determine changes in the supply and demand balance. In other words, using charts to determine whether to buy or sell securities. A common misunderstanding is Technical Analysis uses past prices to predict future prices. There's definitely more to Technical Analysis than this, with Behavioural Finance a major factor in Technical Analysis.
My growing understanding of Technical Analysis, has led me to believe that Technical Analysis can be used to "Time the Market". It's definitely not foolproof, but if you pick the right triggers, you can use Technical Analysis as well as Fundamentals to invest. For example, lets say I like the fundamentals of BHP and want to buy them for the long term. I can undertake some Technical Analysis and decide that I think in the next month it will fall by 10%. Then wait around and get in at a discount to what I would get in otherwise. Obviously I could be wrong and it never reaches the low that I predict, but that's the risk you take.
I remember a client last year decided to invest $500,000 in Australian Share managed funds through his margin loan. This was in early May, 2006. If you think back a while you might remember a correction of around 10% soon after this. So within a matter of weeks, this guy's portfolio was now worth around $450,000. Now, assuming a return of 10% per annum, over 10 years, the portfolio invested prior to the correction would be worth $1,167,184, a gain of $667,184 over the period. If he had of waited a month or so, the portfolio would be worth $1,296,871, an increase of $796,871 over the period. This is a net gain of $129,687 more than the other strategy.
An extra 20% return just to pick the right time to enter the market? I'll take that thankyou!
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