Some investors have been spooked by the RBA hiking interest rates by 0.75% over the past two months, particularly since it has spent the past two years telling us that rates would not rise until 2024. Higher interest rates at the same time as rising prices (inflation) are a two-fold blow for household budgets.Where are interest rates heading?The banks predict that the cash rate will rise by a further 1.40% to 1.50% by March 2023. Money markets have priced in a cash rate that is more than 2.60% higher by March 2023, but most commentators feel this is too hawkish, and unlikely to happen.The theory is that, due to higher inflation, the cash rate should return to the neutral rate as soon as possible to avoid monetary policy adding to inflationary pressures. The neutral rate is when the cash rate is neither economically expansionary nor contractionary. Most commentators believe the neutral rate is between 2% and 3%.Ironically, inflation may force rates to fall againAustralian inflation is currently 5.1% p.a. and will certainly read higher in the June quarter. Inflation in other developed economies is approaching 10%. But anyone that's visited a supermarket or petrol station lately knows that inflation is a lot higher than what the CPI measure reflects. This higher inflation has already dampened consumer and business confidence, which will cool economic growth (GDP).The neutral cash rate might very well be between 2% and 3% when prices of goods and services are at normal levels. However, given the backdrop of much higher prices, it is very likely that the natural rate is closer to 1% to 1.5%. Therefore, if the RBA raises rates too far at the same time prices are very high, it will result in a decline of economic growth (GDP). In fact, last week CBA forecasted that will happen and the RBA will cut rates by 0.50% in the second half of 2023.Don't overreact to recent rate risesI was watching TV with amusement last week. Reporters were interviewing people about the RBA's recent 0.50% rate hike. People were talking like interest rates were 10%! Of course, I shouldn't be surprised at the alarmist nature of TV!The reality is that interest rates are still very low by historical standards. By the end of this month (i.e., after the most recent rate hike filters through to mortgage rates), standard variable home loan (P&amp;I) rates will be around 4.75% p.a. and investment (IO) rates approximately 6.10% p.a. Of course, new borrowers are offered hefty discounts of 2% p.a. or more off the standard variable rate. Therefore, most discounted home loan rates will be in the high 2%'s to low 3%'s.The average standard variable rate over the past 20 years was 6.36% p.a. according to RBA data. And 20 years ago, the average interest rate discount was only 0.70% p.a., so the actual average discounted rate would be closer to 5.50% p.a.Therefore, even if the RBA hikes rates by 1.40-1.50% as the banks expected, standard variable interest rates will still be about 1% below the long-term average.Avoid fixed rates for nowThe fixed rates that the banks offer customers are dependent upon the banks cost of funds e.g., how much it costs them to borrow for 3 years. Given that the interest rate curve is unrealistically steep, which makes borrowing more expensive for the banks', fixed rates are financially unattractive. For example, 3-year fixed rates are high 4%'s and 5-year fixed rates are typically above 5% p.a.Two things may occur over the next year that will put...

Some investors have been spooked by the RBA hiking interest rates by 0.75% over the past two months, particularly since it has spent the past two years telling us that rates would not rise until 2024. Higher interest rates at the same time as rising prices (inflation) are a two-fold blow for household budgets. Where are interest rates heading? The banks predict that the cash rate will rise by a further 1.40% to 1.50% by March 2023. Money markets have priced in a cash rate that is more than 2.60% higher by March 2023, but most commentators feel this is too hawkish, and unlikely to happen. The theory is that, due to higher inflation, the cash rate should return to the neutral rate as soon as possible to avoid monetary policy adding to inflationary pressures. The neutral rate is when the cash rate is neither economically expansionary nor contractionary. Most commentators believe the neutral rate is between 2% and 3%. Ironically, inflation may force rates to fall again Australian inflation is currently 5.1% p.a. and will certainly read higher in the June quarter. Inflation in other developed economies is approaching 10%. But anyone that's visited a supermarket or petrol station lately knows that inflation is a lot higher than what the CPI measure reflects. This higher inflation has already dampened consumer and business confidence, which will cool economic growth (GDP). The neutral cash rate might very well be between 2% and 3% when prices of goods and services are at normal levels. However, given the backdrop of much higher prices, it is very likely that the natural rate is closer to 1% to 1.5%. Therefore, if the RBA raises rates too far at the same time prices are very high, it will result in a decline of economic growth (GDP). In fact, last week CBA forecasted that will happen and the RBA will cut rates by 0.50% in the second half of 2023. Don't overreact to recent rate rises I was watching TV with amusement last week. Reporters were interviewing people about the RBA's recent 0.50% rate hike. People were talking like interest rates were 10%! Of course, I shouldn't be surprised at the alarmist nature of TV! The reality is that interest rates are still very low by historical standards. By the end of this month (i.e., after the most recent rate hike filters through to mortgage rates), standard variable home loan (P&amp;I) rates will be around 4.75% p.a. and investment (IO) rates approximately 6.10% p.a. Of course, new borrowers are offered hefty discounts of 2% p.a. or more off the standard variable rate. Therefore, most discounted home loan rates will be in the high 2%'s to low 3%'s. The average standard variable rate over the past 20 years was 6.36% p.a. according to RBA data. And 20 years ago, the average interest rate discount was only 0.70% p.a., so the actual average discounted rate would be closer to 5.50% p.a. Therefore, even if the RBA hikes rates by 1.40-1.50% as the banks expected, standard variable interest rates will still be about 1% below the long-term average. Avoid fixed rates for now The fixed rates that the banks offer customers are dependent upon the banks cost of funds e.g., how much it costs them to borrow for 3 years. Given that the interest rate curve is unrealistically steep, which makes borrowing more expensive for the banks', fixed rates are financially unattractive. For example, 3-year fixed rates are high 4%'s and 5-year fixed rates are typically above 5% p.a. Two things may occur over the next year that will put...

Should you do anything about rising interest rates?

Our goal is to inspire our people to adopt a holistic approach when making financial decisions. That's because financial decisions often include several interrelated considerations and consequences, including financial planning, cash flow, taxation, borrowing and so on. Also, taking a holistic approach ensures no opportunities or risks slip between the gaps.Often, the best way to make a point is to tell relatable, real-life stories. Therefore, to demonstrate how valuable a holistic approach is, I have shared six client stories below.What is a holistic approach?Traditionally, financial services have been very siloed. If you have a tax question, you ask your accountant. If you have a mortgage structuring question, you ask your mortgage broker. If you have a question about super, you ask your financial advisor. You get the point.However, the problem with this approach is that financial matters tend to be interrelated. What seems like a basic mortgage question could have tax and/or financial planning consequences, which a mortgage broker cannot be expected to have the necessary experience and knowledge to address.A holistic approach recognises that many financial decisions require a multidisciplinary approach. At ProSolution Private Clients, we ensure that our team provides a collaborative response to help clients make fully informed financial decisions.Case studiesBelow is a selection of six case studies explaining how our clients have benefited from our holistic approach. Whilst these case studies are based on actual events, we have avoided including names or financial information to preserve confidentiality.(1) Business plan integrated with personal financial planOur client recently established his own professional services business. He was achieving some excellent financial results (in a relatively short period of time) and was able to share a business plan with us. We used this business plan to formulate advice regarding a few important matters.Firstly, we ensured that he had flexible business income structures to help minimise tax.Secondly, we developed a long-term financial strategy which addresses how he was going to achieve business and personal goals. Upgrading the family home was a priority.And finally, and perhaps most importantly, we developed a financing (borrowing) strategy to ensure these plans could be implemented with the banks help.This approach ensured all interrelated matters (i.e., tax, borrowing and building wealth) were optimised.(2) Tax planning whilst maximising borrowing capacityIn some situations, safely maximising a clients' borrowing capacity can be the most important goal, as without the ability to borrow, their financial plans cannot be implemented. Unfortunately, many accountants do not appreciate how important this can be. In addition, because they don't understand how banks assess loans (which isn't always logical or predictable), they often structure a clients taxation arrangements in a way that inadvertently limits their borrowing capacity. This prevents them from investing and consequently jeopardises their long-term goals.We had a client that was self-employed, and his plan included several property acquisitions, including a family home upgrade. Our accountants and mortgage brokers worked closely together to develop a solution that minimised tax and maximised the client's borrowing capacity. Doing so required the mortgage broker to select the right lender/s which then allowed the accountant to accommodate its credit policies.Magic happens when your mortgage broker works closely with your accountant.(3)...

Our goal is to inspire our people to adopt a holistic approach when making financial decisions. That's because financial decisions often include several interrelated considerations and consequences, including financial planning, cash flow, taxation, borrowing and so on. Also, taking a holistic approach ensures no opportunities or risks slip between the gaps. Often, the best way to make a point is to tell relatable, real-life stories. Therefore, to demonstrate how valuable a holistic approach is, I have shared six client stories below. What is a holistic approach? Traditionally, financial services have been very siloed. If you have a tax question, you ask your accountant. If you have a mortgage structuring question, you ask your mortgage broker. If you have a question about super, you ask your financial advisor. You get the point. However, the problem with this approach is that financial matters tend to be interrelated. What seems like a basic mortgage question could have tax and/or financial planning consequences, which a mortgage broker cannot be expected to have the necessary experience and knowledge to address. A holistic approach recognises that many financial decisions require a multidisciplinary approach. At ProSolution Private Clients, we ensure that our team provides a collaborative response to help clients make fully informed financial decisions. Case studies Below is a selection of six case studies explaining how our clients have benefited from our holistic approach. Whilst these case studies are based on actual events, we have avoided including names or financial information to preserve confidentiality. (1) Business plan integrated with personal financial plan Our client recently established his own professional services business. He was achieving some excellent financial results (in a relatively short period of time) and was able to share a business plan with us. We used this business plan to formulate advice regarding a few important matters. Firstly, we ensured that he had flexible business income structures to help minimise tax. Secondly, we developed a long-term financial strategy which addresses how he was going to achieve business and personal goals. Upgrading the family home was a priority. And finally, and perhaps most importantly, we developed a financing (borrowing) strategy to ensure these plans could be implemented with the banks help. This approach ensured all interrelated matters (i.e., tax, borrowing and building wealth) were optimised. (2) Tax planning whilst maximising borrowing capacity In some situations, safely maximising a clients' borrowing capacity can be the most important goal, as without the ability to borrow, their financial plans cannot be implemented. Unfortunately, many accountants do not appreciate how important this can be. In addition, because they don't understand how banks assess loans (which isn't always logical or predictable), they often structure a clients taxation arrangements in a way that inadvertently limits their borrowing capacity. This prevents them from investing and consequently jeopardises their long-term goals. We had a client that was self-employed, and his plan included several property acquisitions, including a family home upgrade. Our accountants and mortgage brokers worked closely together to develop a solution that minimised tax and maximised the client's borrowing capacity. Doing so required the mortgage broker to select the right lender/s which then allowed the accountant to accommodate its credit policies. Magic happens when your mortgage broker works closely with your accountant. (3)...

6 case studies: The importance of holistic advice

Most people are familiar with the saying that "time in the market is more important than timing the market". It is very true that holding a quality investment for many decades will mask imperfect timing. However, for some asset classes/investments, timing can be very important.Most markets move in cyclesMost people understand that markets move in cycles. To generalise, an asset class can be over-valued (particularly during a boom cycle), under-valued (after a bust cycle) or fairly valued.If you had have invested in the US tech index (NASDAQ) in November 2021 you would have lost about 30% to date. This is a lesson in poor timing. $100 invested would now be worth $70. An investor needs a 43% return just to get back to $100 again (breakeven). It's worth noting that every fundamental indicator highlighted that the NASDAQ has been overvalued for some time. Of course, a bull market can last a lot longer than anyone can anticipate which invites people to ignore these fundamental indicators.Mean reversion: what goes up, must come downIf we acknowledge that most markets move in cycles, then it is obvious that we should invest in undervalued or fairly valued asset classes and sell asset classes that are overvalued. Taking this approach leverages the power of mean reversion as I explain in this blog.Investment-grade property has much flatter cyclesIt is important to define what I mean by "investment-grade property". Investment-grade property is an asset that has produced a solid historical capital growth rate, underpinned by a strong land value component and scarcity. As such, investment-grade property benefits from perpetually strong demand at a level that exceeds supply. These assets are generally located in well-established, sort after, blue-chip suburbs.Property is a lot less volatile than shares - about half the rate. I suspect there's two reasons for this. Firstly, property is a necessity. We all need a roof over our heads. It is not a discretionary asset, like shares are. Secondly, due to high transactional costs (agent fees, stamp duty, etc.), property isn't traded (bought and sold) in the same way shares are.For example, the volatility of the median houses price in Melbourne since 1980 is 9.1%. The average capital growth rate over that period was 8.3% p.a. Therefore, two-thirds of the time investors should expect the annual growth rate will range between 0.8% and 17.4%[1].That compares favourably to share markets which tend to have volatility rates of 18-20%. Therefore, two-thirds of the time share market returns will range between -11% and +28% - a much wider range.Timing the property market is less importantThis chart sets out long-term growth patterns for property in each capital city. It is noteworthy that property tends to eb between two cycles being growth and flat. Of course, it would be great if you could accurately pick when each cycle will begin and end, but you can't. It is very difficult (read impossible). Markets cycles can last longer than you may expect. For example, Melbourne's apartment market is a good example of this - it's been flat since 2010.Perhaps on...

Most people are familiar with the saying that "time in the market is more important than timing the market". It is very true that holding a quality investment for many decades will mask imperfect timing. However, for some asset classes/investments, timing can be very important. Most markets move in cycles Most people understand that markets move in cycles. To generalise, an asset class can be over-valued (particularly during a boom cycle), under-valued (after a bust cycle) or fairly valued. If you had have invested in the US tech index (NASDAQ) in November 2021 you would have lost about 30% to date. This is a lesson in poor timing. $100 invested would now be worth $70. An investor needs a 43% return just to get back to $100 again (breakeven). It's worth noting that every fundamental indicator highlighted that the NASDAQ has been overvalued for some time. Of course, a bull market can last a lot longer than anyone can anticipate which invites people to ignore these fundamental indicators. Mean reversion: what goes up, must come down If we acknowledge that most markets move in cycles, then it is obvious that we should invest in undervalued or fairly valued asset classes and sell asset classes that are overvalued. Taking this approach leverages the power of mean reversion as I explain in this blog. Investment-grade property has much flatter cycles It is important to define what I mean by "investment-grade property". Investment-grade property is an asset that has produced a solid historical capital growth rate, underpinned by a strong land value component and scarcity. As such, investment-grade property benefits from perpetually strong demand at a level that exceeds supply. These assets are generally located in well-established, sort after, blue-chip suburbs. Property is a lot less volatile than shares - about half the rate. I suspect there's two reasons for this. Firstly, property is a necessity. We all need a roof over our heads. It is not a discretionary asset, like shares are. Secondly, due to high transactional costs (agent fees, stamp duty, etc.), property isn't traded (bought and sold) in the same way shares are. For example, the volatility of the median houses price in Melbourne since 1980 is 9.1%. The average capital growth rate over that period was 8.3% p.a. Therefore, two-thirds of the time investors should expect the annual growth rate will range between 0.8% and 17.4%[1]. That compares favourably to share markets which tend to have volatility rates of 18-20%. Therefore, two-thirds of the time share market returns will range between -11% and +28% - a much wider range. Timing the property market is less important This chart sets out long-term growth patterns for property in each capital city. It is noteworthy that property tends to eb between two cycles being growth and flat. Of course, it would be great if you could accurately pick when each cycle will begin and end, but you can't. It is very difficult (read impossible). Markets cycles can last longer than you may expect. For example, Melbourne's apartment market is a good example of this - it's been flat since 2010. Perhaps on...

"Timing" the market can be more important than "time in" the market

I think we need to be prepared for the possibility that the next couple of years might be a bumpy ride in terms of the economy, financial markets, interest rates and so forth. The media thrives on higher levels of uncertainty, so be prepared for plenty of doomsday predictions and lots of negativity. The silver lining is that negative sentiment almost always creates attractive long term investment opportunities, but you must be on the lookout for them.Inflation is not demand drivenIt has been well documented that the cost of living has been rising in Australia and around the world. Australia's inflation rate is currently 5.1% p.a. (as measured by CPI), but anyone that's been to the supermarket lately knows that prices of many products has risen by a lot more than this. Inflation is a problem in many other countries too - NZ inflation is 6.9%, UK is 9.0% and US is 8.3%.Inflation occurs because demand for goods and services exceeds supply. Inflation can be demand driven (i.e., when demand is above normal, but supply remains at normal levels) or supply driven (i.e., supply is below normal).I certainly acknowledge that some sectors have experienced levels of consumer demand that are well above normal levels, particularly during lockdowns. However, at this stage, I think inflation is mainly driven by supply chain shortages. Therefore, to cool inflation, demand must be reduced to below normal levels. Unfortunately, that means financial pain for some people because household budgets need to be strained to the point that people buy fewer goods and services than they would otherwise need to buy. That will be achieved either by higher prices (market forces) or higher interest rates (RBA), or both. Cooling supply driven inflation is generally painful, especially when wages aren't rising nearly as fast as prices.https://twitter.com/barereality/status/1526819407435026432?s=11&amp;t=Vl92S8uqUmuNXQEI7PnHSgBut interest rates must return to normal ASAP almost regardless of inflationOne year ago, I wrote that interest rate expectations can change very quickly, and we shouldn't get seduced into thinking they won't rise. Last year many commentators were suggesting that interest rates might not rise for many, many years. Today, the same commentators are predicting multiple increases in the coming months.The reality is that interest rates were at emergency settings (zero) for a very good reason - Australia was in lockdown! But that is no longer the case and interest rates must return to more normal levels as soon as the economy can afford it. If interest rates were left at zero for too long, there would be severe negative long-term consequences.The big question that economists are currently wrestling with is what do normal interest rates look like? It is likely that the neutral interest rate is probably a lot lower than it used to be. The RBA thinks it's around 3.5% but most...

I think we need to be prepared for the possibility that the next couple of years might be a bumpy ride in terms of the economy, financial markets, interest rates and so forth. The media thrives on higher levels of uncertainty, so be prepared for plenty of doomsday predictions and lots of negativity. The silver lining is that negative sentiment almost always creates attractive long term investment opportunities, but you must be on the lookout for them. Inflation is not demand driven It has been well documented that the cost of living has been rising in Australia and around the world. Australia's inflation rate is currently 5.1% p.a. (as measured by CPI), but anyone that's been to the supermarket lately knows that prices of many products has risen by a lot more than this. Inflation is a problem in many other countries too - NZ inflation is 6.9%, UK is 9.0% and US is 8.3%. Inflation occurs because demand for goods and services exceeds supply. Inflation can be demand driven (i.e., when demand is above normal, but supply remains at normal levels) or supply driven (i.e., supply is below normal). I certainly acknowledge that some sectors have experienced levels of consumer demand that are well above normal levels, particularly during lockdowns. However, at this stage, I think inflation is mainly driven by supply chain shortages. Therefore, to cool inflation, demand must be reduced to below normal levels. Unfortunately, that means financial pain for some people because household budgets need to be strained to the point that people buy fewer goods and services than they would otherwise need to buy. That will be achieved either by higher prices (market forces) or higher interest rates (RBA), or both. Cooling supply driven inflation is generally painful, especially when wages aren't rising nearly as fast as prices. <a href="https://twitter.com/barereality/status/1526819407435026432?s=11&amp;t=Vl92S8uqUmuNXQEI7PnHSg" rel="nofollow" target="_blank">https://twitter.com/barereality/status/1526819407435026432?s=11&amp;t=Vl92S8uqUmuNXQEI7PnHSg</a> But interest rates must return to normal ASAP almost regardless of inflation One year ago, I wrote that interest rate expectations can change very quickly, and we shouldn't get seduced into thinking they won't rise. Last year many commentators were suggesting that interest rates might not rise for many, many years. Today, the same commentators are predicting multiple increases in the coming months. The reality is that interest rates were at emergency settings (zero) for a very good reason - Australia was in lockdown! But that is no longer the case and interest rates must return to more normal levels as soon as the economy can afford it. If interest rates were left at zero for too long, there would be severe negative long-term consequences. The big question that economists are currently wrestling with is what do normal interest rates look like? It is likely that the neutral interest rate is probably a lot lower than it used to be. The RBA thinks it's around 3.5% but most...

Be prepared for a few years of turbulence... and opportunity

A lot has been written about the good fortune of baby-boomers in that, overall, they have enjoyed a long period of economic, share market and property market prosperity. Whilst they haven't enjoyed the full benefit of compulsory super (which only began in 1992), other assets such as property has certainly compensated for that.This means an inheritance tsunami will hit the next generation over the next two decades. Baby Boomers are expected to bequeath $224 billion each year in inheritance by 2050, representing a fourfold increase in the value of inheritances over the next 30 years. This creates a huge financial planning opportunity for many families.At the same time, it invites you to think about the value of assets that you plan to leave your beneficiaries.(A) Planning to receive an inheritanceThere are many factors that you must consider if there's a chance that you may receive an inheritance.Do not rely on it, but certainly plan for itThe size of any potential inheritance and your family's circumstances will typically determine whether it's prudent to rely on receiving an inheritance when developing your personal financial plan.Whilst you might expect to receive an inheritance, we all know that circumstances can quickly change. For example, the expected benefactors (often parents) might end up spending all their money or losing it (poor investments) or changing their mind and leaving it all to charity. Anything can happen.You also must consider your family's circumstances. If there's a risk of conflict (between potential beneficiaries) then it's possible you may not receive what you expect or you may be involved in a long legal battle. Any experienced estate lawyer will tell you how often money issues upset and ruin otherwise well-functioning and happy families. Money and family rarely mix well.How can you factor it into your plans?If you are confident that you will receive an inheritance and that you are unlikely to experience any family conflict, then you may take this into account in your own financial plan. For example, you might be comfortable borrowing additional monies to invest on the assumption that the inherence will assist you in repaying or reducing this debt when you retire. Or perhaps you might prioritise your lifestyle expenditure now (and invest less).I must say that I am often reluctant to include inheritance when developing a financial plan for my clients, because it is just so uncertain - anything can change. If possible, I prefer to develop a strategy that does not consider inheritance and treat it as "icing on the cake" if its ever received.Receive it tax-effectivelyTypically, I prefer my clients to receive all inheritance via a testamentary trust. For this to be an option, a testamentary trust must be included in the benefactor's will. A testamentary trust offers a few advantages.Firstly, it can distribute to minors (your children or grandchildren that are less than 18 years old) and the income or capital gains are taxed at adult tax rates, which means each child can effectively receive circa $20,000 p.a. without paying any tax. This can be a great tax planning tool.Secondly, as it's a discretionary trust, it provides a lot of flexibility as to how income and capital gains are to be distributed which means it's a good gift-making vehicle.And finally, it provides a level of asset protection for the recipients.If you expect to receive an inheritance you need to check with the benefactor whether their...

A lot has been written about the good fortune of baby-boomers in that, overall, they have enjoyed a long period of economic, share market and property market prosperity. Whilst they haven't enjoyed the full benefit of compulsory super (which only began in 1992), other assets such as property has certainly compensated for that. This means an inheritance tsunami will hit the next generation over the next two decades. Baby Boomers are expected to bequeath $224 billion each year in inheritance by 2050, representing a fourfold increase in the value of inheritances over the next 30 years. This creates a huge financial planning opportunity for many families. At the same time, it invites you to think about the value of assets that you plan to leave your beneficiaries. (A) Planning to receive an inheritance There are many factors that you must consider if there's a chance that you may receive an inheritance. Do not rely on it, but certainly plan for it The size of any potential inheritance and your family's circumstances will typically determine whether it's prudent to rely on receiving an inheritance when developing your personal financial plan. Whilst you might expect to receive an inheritance, we all know that circumstances can quickly change. For example, the expected benefactors (often parents) might end up spending all their money or losing it (poor investments) or changing their mind and leaving it all to charity. Anything can happen. You also must consider your family's circumstances. If there's a risk of conflict (between potential beneficiaries) then it's possible you may not receive what you expect or you may be involved in a long legal battle. Any experienced estate lawyer will tell you how often money issues upset and ruin otherwise well-functioning and happy families. Money and family rarely mix well. How can you factor it into your plans? If you are confident that you will receive an inheritance and that you are unlikely to experience any family conflict, then you may take this into account in your own financial plan. For example, you might be comfortable borrowing additional monies to invest on the assumption that the inherence will assist you in repaying or reducing this debt when you retire. Or perhaps you might prioritise your lifestyle expenditure now (and invest less). I must say that I am often reluctant to include inheritance when developing a financial plan for my clients, because it is just so uncertain - anything can change. If possible, I prefer to develop a strategy that does not consider inheritance and treat it as "icing on the cake" if its ever received. Receive it tax-effectively Typically, I prefer my clients to receive all inheritance via a testamentary trust. For this to be an option, a testamentary trust must be included in the benefactor's will. A testamentary trust offers a few advantages. Firstly, it can distribute to minors (your children or grandchildren that are less than 18 years old) and the income or capital gains are taxed at adult tax rates, which means each child can effectively receive circa $20,000 p.a. without paying any tax. This can be a great tax planning tool. Secondly, as it's a discretionary trust, it provides a lot of flexibility as to how income and capital gains are to be distributed which means it's a good gift-making vehicle. And finally, it provides a level of asset protection for the recipients. If you expect to receive an inheritance you need to check with the benefactor whether their...

Should you plan to give or receive an inheritance?

I find it ironic that the two common financial mistakes that people make are (1) not investing i.e., procrastination or (2) doing too much i.e., turning over investments, changing their mind and so on.Of course, not doing anything is an obviously bad thing as nothing comes from nothing. I wrote about this in March. But, sometimes reacting, changing, tinkering, selling, buying and so on can be equally as bad. The truth is that investing requires a lot of patience. The quote below from Warren Buffett's business partner since 1975, Charlie Munger says it perfectly.Look at those hedge funds - you think they can wait? They don't know how to wait! I have sat for years at a time with $10 to $12 million in treasuries or municipals, just waiting, waiting...As Jesse Livermore said, 'The big money is not in the buying and selling...but in the waiting.'- Charlie MungerWhen it comes to investing, doing nothing is often sometimes the most intelligent thing to do.Research demonstrates that buying and selling destroys wealthThere's a commonly cited story about global fund manager, Fidelity conducting research into which investment accounts performed the best. It is said that it found that inactive accounts i.e., where the investor forgot that the account existed produced the best returns, on average.A study that included 66,465 investors concluded that portfolio turnover (i.e. buying and selling stocks) is inversely related to returns. That is, higher turnover leads to lower (about 5.5% p.a.) returns, on average. Whilst this study only considered stocks, the same would be true for every other asset class.Three reasons why you need the discipline to be patientIf you have the discipline to be patient, you will enjoy much better investment returns for three reasons.(1) Markets move in cyclesMost investment markets move in cycles. That is, a period of above-average returns follows a period of below average-returns, as shown in this chart of historic property returns. If you were unlucky and invested at the beginning of a flat growth period, it's likely that you must hold an asset for a much longer period to generate a return close to the long-term average (i.e., 7-8% p.a.).For example, generally, you must be prepared to hold a property for at least 10 years to enjoy the long-term average return (i.e., 7-8% p.a.). However, if you invest at the beginning of a flat period, you'll have to hold the property for 15 to 20 years. Returns should be similar in both cases (i.e., 7-8% p.a.). The difference is the distribution of returns over time. Investment-grade apartments are a good example of this - see here.(2) Returns compoundCompounding capital growth takes time. As this chart demonstrates, the projected growth (equity) in the first decade of ownership is $580k. But in the third decade is projected to be $2.7 million! That is the power of compounding returns. The two key ingredients are (1) &lt;...

I find it ironic that the two common financial mistakes that people make are (1) not investing i.e., procrastination or (2) doing too much i.e., turning over investments, changing their mind and so on. Of course, not doing anything is an obviously bad thing as nothing comes from nothing. I wrote about this in March. But, sometimes reacting, changing, tinkering, selling, buying and so on can be equally as bad. The truth is that investing requires a lot of patience. The quote below from Warren Buffett's business partner since 1975, Charlie Munger says it perfectly. Look at those hedge funds - you think they can wait? They don't know how to wait! I have sat for years at a time with $10 to $12 million in treasuries or municipals, just waiting, waiting...As Jesse Livermore said, 'The big money is not in the buying and selling...but in the waiting.' - Charlie Munger When it comes to investing, doing nothing is often sometimes the most intelligent thing to do. Research demonstrates that buying and selling destroys wealth There's a commonly cited story about global fund manager, Fidelity conducting research into which investment accounts performed the best. It is said that it found that inactive accounts i.e., where the investor forgot that the account existed produced the best returns, on average. A study that included 66,465 investors concluded that portfolio turnover (i.e. buying and selling stocks) is inversely related to returns. That is, higher turnover leads to lower (about 5.5% p.a.) returns, on average. Whilst this study only considered stocks, the same would be true for every other asset class. Three reasons why you need the discipline to be patient If you have the discipline to be patient, you will enjoy much better investment returns for three reasons. (1) Markets move in cycles Most investment markets move in cycles. That is, a period of above-average returns follows a period of below average-returns, as shown in this chart of historic property returns. If you were unlucky and invested at the beginning of a flat growth period, it's likely that you must hold an asset for a much longer period to generate a return close to the long-term average (i.e., 7-8% p.a.). For example, generally, you must be prepared to hold a property for at least 10 years to enjoy the long-term average return (i.e., 7-8% p.a.). However, if you invest at the beginning of a flat period, you'll have to hold the property for 15 to 20 years. Returns should be similar in both cases (i.e., 7-8% p.a.). The difference is the distribution of returns over time. Investment-grade apartments are a good example of this - see here. (2) Returns compound Compounding capital growth takes time. As this chart demonstrates, the projected growth (equity) in the first decade of ownership is $580k. But in the third decade is projected to be $2.7 million! That is the power of compounding returns. The two key ingredients are (1) &lt;...

Patience & discipline: Two vital traits of every successful investor

When it comes to building wealth, the truth is that unremarkable actions completed consistently for many years (decades) produce remarkable results. But because these actions appear unremarkable, people tend to overlook their importance. Also, sometimes, people are tempted to undertake intense and often risky "investments" as a shortcut to make up for past inaction. Unfortunately, this approach rarely pays off. Consistency beats intensity.This blog sets out the top 4 unremarkable actions that generate the most wealth if completed consistently over many years.Eliminate unconscious expenditureHolidays are expensive. And post-Covid, holidays are even more expensive. However, holidays tend to deliver a lot of happiness and satisfaction. We tend to think deeply about whether to book a holiday, where to go and how much to spend. This conscious approach to spending typically means we get good value for money i.e., in economic terms, maximise the utility per dollar spent.If you are reading this blog, it's very likely that you make wise, rational decisions about how you spend money. Therefore, your only potential weakness then is unconscious expenditure, which you must eliminate. Unconscious expenditure is when you spend money on items without thinking about it. These items tend to be small dollar value transactions. Most importantly, they tend to add little to your standard of living (i.e., utility), and as such, are a waste. A perfect example is the Stan subscription that I cancelled last month. My family hasn't watched anything on Stan for a few months, so it was a waste to continue to pay for it. Unconscious expenditure can add up to multiples of tens of thousands of dollars each year.How do you eliminate unconscious expenditure? There are two ways. You can track every dollar and cent you spend using an app like Pocketbook. However, for most people, this approach feels tedious, time consuming, and draconian. Instead, you need an approach that is simple and unintrusive so that you can stick to it for the long term. All my clients have had great success with the approach set out in this blog.If you can adopt a strategy that ensures you minimise or hopefully eliminate unconscious expenditure and stick to it for the rest of your life, it will probably literally save you millions of dollars.Invest regularly either in the share market or by making additional super contributionsIf you invest $500 per month for 20 years and earn a return of 7% p.a. (on average), you will accumulate $260,000. If you invest $1,000 per month, you will accumulate $520,000 (consisting of $240,000 of capital plus $280,000 of investment returns).You can accumulate substantial wealth by consistently investing relatively small amounts of money over long periods of time. The sooner you begin, the less you need to invest to produce substantial outcomes. For example, if a 25-year-old invested $500 per month, they would accumulate over $1.3 million by the time they were 65 years old!There are two main ways to invest money regularly. Firstly, you could make additional contributions into super (be careful to not breach your annual cap of $27,500).Or secondly, you could invest money in the share market. This blog sets out a very simple and cost-effective way to do that yourself.You must measure your progressYou have probably heard these sayings; "what gets measured gets done" and...

When it comes to building wealth, the truth is that unremarkable actions completed consistently for many years (decades) produce remarkable results. But because these actions appear unremarkable, people tend to overlook their importance. Also, sometimes, people are tempted to undertake intense and often risky "investments" as a shortcut to make up for past inaction. Unfortunately, this approach rarely pays off. Consistency beats intensity. This blog sets out the top 4 unremarkable actions that generate the most wealth if completed consistently over many years. Eliminate unconscious expenditure Holidays are expensive. And post-Covid, holidays are even more expensive. However, holidays tend to deliver a lot of happiness and satisfaction. We tend to think deeply about whether to book a holiday, where to go and how much to spend. This conscious approach to spending typically means we get good value for money i.e., in economic terms, maximise the utility per dollar spent. If you are reading this blog, it's very likely that you make wise, rational decisions about how you spend money. Therefore, your only potential weakness then is unconscious expenditure, which you must eliminate. Unconscious expenditure is when you spend money on items without thinking about it. These items tend to be small dollar value transactions. Most importantly, they tend to add little to your standard of living (i.e., utility), and as such, are a waste. A perfect example is the Stan subscription that I cancelled last month. My family hasn't watched anything on Stan for a few months, so it was a waste to continue to pay for it. Unconscious expenditure can add up to multiples of tens of thousands of dollars each year. How do you eliminate unconscious expenditure? There are two ways. You can track every dollar and cent you spend using an app like Pocketbook. However, for most people, this approach feels tedious, time consuming, and draconian. Instead, you need an approach that is simple and unintrusive so that you can stick to it for the long term. All my clients have had great success with the approach set out in this blog. If you can adopt a strategy that ensures you minimise or hopefully eliminate unconscious expenditure and stick to it for the rest of your life, it will probably literally save you millions of dollars. Invest regularly either in the share market or by making additional super contributions If you invest $500 per month for 20 years and earn a return of 7% p.a. (on average), you will accumulate $260,000. If you invest $1,000 per month, you will accumulate $520,000 (consisting of $240,000 of capital plus $280,000 of investment returns). You can accumulate substantial wealth by consistently investing relatively small amounts of money over long periods of time. The sooner you begin, the less you need to invest to produce substantial outcomes. For example, if a 25-year-old invested $500 per month, they would accumulate over $1.3 million by the time they were 65 years old! There are two main ways to invest money regularly. Firstly, you could make additional contributions into super (be careful to not breach your annual cap of $27,500). Or secondly, you could invest money in the share market. This blog sets out a very simple and cost-effective way to do that yourself. You must measure your progress You have probably heard these sayings; "what gets measured gets done" and...

"Consistency" (not intensity) is the key to building wealth

A common property investing rule-of-thumb is that you should "buy property and never sell". That's because prices always trend higher over time which means you benefit from compounding capital growth.Of course, the rule-of-thumb should be adjusted to include "buy quality property and never sell" to ensure you maximise investment returns.But the reality is, that sometimes the smartest thing to do, is to sell a property, even if it is a quality asset, if it helps you move forward towards achieving your goals.I discuss four of the most common scenarios where I have recommended clients sell property.Poor investment returnsOf course, the most obvious reason for selling a property is that its past performance has been poor i.e., a low capital growth rate. But most importantly, you must form a view about whether future returns are likely to be acceptable or not. If the assets fundamentals are sound, then it's likely you should retain the asset. Sometimes investing requires patience and discipline, which I'll write more about in a few weeks.My previous analysis concluded that a property needs to underperform by at least 2% p.a. to warrant selling it. Therefore, if a property has only slightly underperformed (by say 1% p.a.), it may not be worth selling because doing so crystalises CGT liabilities and selling costs.I believe that there's almost never a bad time to buy a quality asset (property). By extension that means there's never a bad time to sell a dud asset. Whilst that is true to a large extent, it is wise to be strategic about it. A dud asset almost always has one or more impairments (e.g. located on a busy road). Afterall, that's what makes them duds. As such, they can be more difficult to sell in a balanced or buyer's market. As such, it is best to sell impaired assets in a buoyant (seller's) market. The rationale is that the high level of buyer demand and positive market sentiment may encourage some potential buyers to overlook the property's shortfalls.IlliquidityInvestment property rental yields are relatively low e.g., a house might yield an income of 2% to 2.5% p.a. of its value and an apartment 3% to 3.5% p.a. before expenses. After subtracting expenses such as council rates, insurance, maintenance, property management and so on, you may receive a net rental income of 1% to 2% p.a. And that's before any interest expenses if you have outstanding mortgages.An obvious negative attribute of property is that its illiquid. That is, you can't gradually sell down your investment like you can with shares. Instead, it's a case of selling all or nothing.Investing a lot of your wealth in property whilst you are working can make sense because during that stage of life, you don't rely on (or need) investment income or capital to fund living expenses. However, when you are retired or approaching retirement...

A common property investing rule-of-thumb is that you should "buy property and never sell". That's because prices always trend higher over time which means you benefit from compounding capital growth. Of course, the rule-of-thumb should be adjusted to include "buy quality property and never sell" to ensure you maximise investment returns. But the reality is, that sometimes the smartest thing to do, is to sell a property, even if it is a quality asset, if it helps you move forward towards achieving your goals. I discuss four of the most common scenarios where I have recommended clients sell property. Poor investment returns Of course, the most obvious reason for selling a property is that its past performance has been poor i.e., a low capital growth rate. But most importantly, you must form a view about whether future returns are likely to be acceptable or not. If the assets fundamentals are sound, then it's likely you should retain the asset. Sometimes investing requires patience and discipline, which I'll write more about in a few weeks. My previous analysis concluded that a property needs to underperform by at least 2% p.a. to warrant selling it. Therefore, if a property has only slightly underperformed (by say 1% p.a.), it may not be worth selling because doing so crystalises CGT liabilities and selling costs. I believe that there's almost never a bad time to buy a quality asset (property). By extension that means there's never a bad time to sell a dud asset. Whilst that is true to a large extent, it is wise to be strategic about it. A dud asset almost always has one or more impairments (e.g. located on a busy road). Afterall, that's what makes them duds. As such, they can be more difficult to sell in a balanced or buyer's market. As such, it is best to sell impaired assets in a buoyant (seller's) market. The rationale is that the high level of buyer demand and positive market sentiment may encourage some potential buyers to overlook the property's shortfalls. Illiquidity Investment property rental yields are relatively low e.g., a house might yield an income of 2% to 2.5% p.a. of its value and an apartment 3% to 3.5% p.a. before expenses. After subtracting expenses such as council rates, insurance, maintenance, property management and so on, you may receive a net rental income of 1% to 2% p.a. And that's before any interest expenses if you have outstanding mortgages. An obvious negative attribute of property is that its illiquid. That is, you can't gradually sell down your investment like you can with shares. Instead, it's a case of selling all or nothing. Investing a lot of your wealth in property whilst you are working can make sense because during that stage of life, you don't rely on (or need) investment income or capital to fund living expenses. However, when you are retired or approaching retirement...

Should you ever sell property?

A few weeks ago I wrote a blog about the one thing that stops most people from making the most of their financial opportunities including making regular investments.It was my thesis that a lack of context is the main cause. Having a long-term plan provides you with the context required to make mistake-free financial decisions. It is difficult to work out what investments to make (and when) if you don't know where you are heading and how your will get there.A financial plan will give you sufficient context in which to measure your financial decisions against.We follow three distinct steps to develop and implement a financial plan for our clients. We have refined this process over many decades and have found this disciplined and logical approach helps develop very efficient evidence-based plans.Step 1: Develop a high-level strategyDetermine your future cash flow and net worthThe first step is to build a financial model. A financial model will forecast your future income and expenses and therefore, how much cash flow you have to allocate towards investing. It should also forecast your assets and liabilities i.e. net worth.The purpose of a financial model is to do two things.Firstly, to measure whether your chosen strategy will work i.e., achieve your goals. For example, if you plan to invest in 2 properties and maximise super contributions, will that be enough to generate $100k p.a. of income (after-tax) that you require in retirement?The second purpose of a financial model is to compare strategies to eliminate inferior ones and pick the one that has the highest probability of working i.e., the one that generates the highest returns for the lowest risk.Financial modelling is part-art, part-science. The science bit is the Excel skills and technical knowledge required to build financial models. The art is knowing what strategies work best in various situations, which can only be acquired with many years/decades of experience. Realistically, most people won't have the skill and experience to complete their own financial modelling.Mixture of asset classesMost people would be well served by investing in a mixture of asset classes including super, residential property, share market investments and so forth. The financial modelling exercise will help you determine optimum mixture of asset classes that suits your goals, risk profile and financial position.Level of gearingWhether you will borrow money to invest and if so, to what extent is a major strategic consideration. A financial model will assist with determining the right level of gearing. It is important you consider whether you will have enough cash flow to service debt. But even more important is to determine to what extent you need to repay debt before you retire. It is prudent to not take high levels of debt into retirement so you must have a debt retirement strategy.Of course, a strategy is only useful if it can be implemented, so you will need to consider your present and future borrowing capacity i.e., how much will the banks lend you.Ownership structuresOnce you have determined the mixture of asset classes that you will invest in and how much gearing you will adopt, you can then determine the best investment ownership structures. Considerations include income tax payable over your lifetime, land tax (for property), CGT if your strategy includes selling, current and projected cash flow, borrowing capacity and asset protection.Retain high-level focusIt is important to...

A few weeks ago I wrote a blog about the one thing that stops most people from making the most of their financial opportunities including making regular investments. It was my thesis that a lack of context is the main cause. Having a long-term plan provides you with the context required to make mistake-free financial decisions. It is difficult to work out what investments to make (and when) if you don't know where you are heading and how your will get there. A financial plan will give you sufficient context in which to measure your financial decisions against. We follow three distinct steps to develop and implement a financial plan for our clients. We have refined this process over many decades and have found this disciplined and logical approach helps develop very efficient evidence-based plans. Step 1: Develop a high-level strategy Determine your future cash flow and net worth The first step is to build a financial model. A financial model will forecast your future income and expenses and therefore, how much cash flow you have to allocate towards investing. It should also forecast your assets and liabilities i.e. net worth. The purpose of a financial model is to do two things. Firstly, to measure whether your chosen strategy will work i.e., achieve your goals. For example, if you plan to invest in 2 properties and maximise super contributions, will that be enough to generate $100k p.a. of income (after-tax) that you require in retirement? The second purpose of a financial model is to compare strategies to eliminate inferior ones and pick the one that has the highest probability of working i.e., the one that generates the highest returns for the lowest risk. Financial modelling is part-art, part-science. The science bit is the Excel skills and technical knowledge required to build financial models. The art is knowing what strategies work best in various situations, which can only be acquired with many years/decades of experience. Realistically, most people won't have the skill and experience to complete their own financial modelling. Mixture of asset classes Most people would be well served by investing in a mixture of asset classes including super, residential property, share market investments and so forth. The financial modelling exercise will help you determine optimum mixture of asset classes that suits your goals, risk profile and financial position. Level of gearing Whether you will borrow money to invest and if so, to what extent is a major strategic consideration. A financial model will assist with determining the right level of gearing. It is important you consider whether you will have enough cash flow to service debt. But even more important is to determine to what extent you need to repay debt before you retire. It is prudent to not take high levels of debt into retirement so you must have a debt retirement strategy. Of course, a strategy is only useful if it can be implemented, so you will need to consider your present and future borrowing capacity i.e., how much will the banks lend you. Ownership structures Once you have determined the mixture of asset classes that you will invest in and how much gearing you will adopt, you can then determine the best investment ownership structures. Considerations include income tax payable over your lifetime, land tax (for property), CGT if your strategy includes selling, current and projected cash flow, borrowing capacity and asset protection. Retain high-level focus It is important to...

Three steps to develop your own financial plan

This blog summarises the initiative contained in the 2022 Federal Budget announced on 29 March 2022.Budget initiatives that might affect youExtended the home loan guarantee schemeThe First Home Loan Deposit Scheme (FHLDS) allows borrowers to borrow more than 80% of a property's value whilst avoiding the cost of lenders mortgage insurance (LMI), because the government guarantees part of the loan. The government has announced it will increase the number of places from 20,000 to 50,000 per year. 10,000 of these places are reserved for regional home buyers and 5,000 for single parents.Cut the cost of petrol and diesel by 24 cents per litreEffective immediately, the fuel excise (which is currently 44.2 cents per litre) will be cut by half for 6 months i.e. until the end of September. As excise also attracts GST, the saving per litre will be a little over 24 cents. This is estimated to save drivers between $10 and $20 per tank.Excise is charged when fuel is deposited into petrol retailers' tanks (at the service station). Therefore, this saving will not flow through to consumers until fuel stocks are replenished, which should occur over the next couple of weeks.A tax refund of up to $420 when you lodge your tax return after 1 July 2022If you earn less than $126,000, you would have been entitled to the Low and middle income tax offset (LMITO) since the 2018/19 financial year. The maximum tax offset used to be $1,080 if you earned $90,000. For this financial year ending 30 June 2022, the maximum LMITO will be increase by $420 to $1,500. If you earn close to $90,000, your tax return will be $420 more when you lodge your 2021/22 tax return.One-off payment to pensionersNext month, the government will make a one-off, tax-exempt payment of $250 to eligible pensioners, welfare recipients, veterans, and eligible concession card holders.Work-related RAT tests are tax-deductibleThe cost to purchase Rapid Antigen Tests for work-related purposes are tax-deductible (and exempt from Fridge Benefits Tax if provided by employers).Minimum super pension halved for another yearIf you are retired and have a super pension account, you must draw a minimum annual pension that is based on your age; e.g. if you are under 65 you must draw 4% of your balance at the beginning of the financial year. The government will halve this minimum amount for the last two financial years to help people preserve their super balance given recent share market volatility i.e. so they didn't have to sell down investments. This initiative will extend for one further year (i.e. 2022/23).Small business tax instalments to be based on actual profitabilitySmall businesses must pay quarterly income tax instalments. The amount of the instalments is based on the business' previous financial year. The government will change the system from the start of 2024 such that instalments are based on actual quarterly profit. This should help small business improve their cash flow management.Additional 20% tax deduction for small businessSmall business' will be entitled to an additional 20% deduction for the cost of employees attending external training (provided by Registered Training Organisations)...

This blog summarises the initiative contained in the 2022 Federal Budget announced on 29 March 2022. Budget initiatives that might affect you Extended the home loan guarantee scheme The First Home Loan Deposit Scheme (FHLDS) allows borrowers to borrow more than 80% of a property's value whilst avoiding the cost of lenders mortgage insurance (LMI), because the government guarantees part of the loan. The government has announced it will increase the number of places from 20,000 to 50,000 per year. 10,000 of these places are reserved for regional home buyers and 5,000 for single parents. Cut the cost of petrol and diesel by 24 cents per litre Effective immediately, the fuel excise (which is currently 44.2 cents per litre) will be cut by half for 6 months i.e. until the end of September. As excise also attracts GST, the saving per litre will be a little over 24 cents. This is estimated to save drivers between $10 and $20 per tank. Excise is charged when fuel is deposited into petrol retailers' tanks (at the service station). Therefore, this saving will not flow through to consumers until fuel stocks are replenished, which should occur over the next couple of weeks. A tax refund of up to $420 when you lodge your tax return after 1 July 2022 If you earn less than $126,000, you would have been entitled to the Low and middle income tax offset (LMITO) since the 2018/19 financial year. The maximum tax offset used to be $1,080 if you earned $90,000. For this financial year ending 30 June 2022, the maximum LMITO will be increase by $420 to $1,500. If you earn close to $90,000, your tax return will be $420 more when you lodge your 2021/22 tax return. One-off payment to pensioners Next month, the government will make a one-off, tax-exempt payment of $250 to eligible pensioners, welfare recipients, veterans, and eligible concession card holders. Work-related RAT tests are tax-deductible The cost to purchase Rapid Antigen Tests for work-related purposes are tax-deductible (and exempt from Fridge Benefits Tax if provided by employers). Minimum super pension halved for another year If you are retired and have a super pension account, you must draw a minimum annual pension that is based on your age; e.g. if you are under 65 you must draw 4% of your balance at the beginning of the financial year. The government will halve this minimum amount for the last two financial years to help people preserve their super balance given recent share market volatility i.e. so they didn't have to sell down investments. This initiative will extend for one further year (i.e. 2022/23). Small business tax instalments to be based on actual profitability Small businesses must pay quarterly income tax instalments. The amount of the instalments is based on the business' previous financial year. The government will change the system from the start of 2024 such that instalments are based on actual quarterly profit. This should help small business improve their cash flow management. Additional 20% tax deduction for small business Small business' will be entitled to an additional 20% deduction for the cost of employees attending external training (provided by Registered Training Organisations)...

2022 Federal Budget Summary: What's in it for you?

Each episode lasts around 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 four books with his latest being Investopoly &amp; Rules of the Lending Game. Stuart writes a weekly blog which is reproduced on this podcast

Investopoly

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 expect an extended period of low interest rates." Many commentators have suggested that interest rates may not increase materially for a decade or longer. Japan, for instance, has been stuck on zero interest rates for 20 years.But the banks need to charge at least 2%A measure called the 'net interest margin' is the gross profit a bank makes from lending money to its customers. The net interest margin must cover all the banks costs and still deliver a healthy net profit. In Australia, the major banks net interest margin is approximately 2%.Therefore, even if Australia's cash rate fell to zero, it is unlikely that variable mortgage rates would fall below 2%, as the banks would seek to maintain their profit margins. Of course, a negative RBA cash rate, which exists in some countries in Europe, could push variable mortgage rates below 2%.Bye, bye negative gearing tax benefits for property investorsThe most obvious consequence of low interest rates for property investors is that it significantly reduces negative gearing tax benefits. When interest rates were 7% p.a., property investors where crystallising large income losses. That is because the interest costs and property expenses were a lot more than the property's rental income. The investor could offset this loss against employment income and enjoy a sizable tax refund (which is referred to as negative gearing).According to CoreLogic, Australia's gross rental yield is 4.1% p.a. Compare that to the current interest only investment mortgage rate of circa 4.5% p.a. and you will see why an investment property's income loss today is only 40% what it was when interest rates were much higher. As a result, taxation benefits derived from borrowing to invest in property are consequently 60% lower.In a low interest rate environment, saving tax is no longer a big draw card for prospective property investors. This is a good thing as you should never invest predominantly to generate tax benefits. However, if you were banking on your property investments helping you reduce your tax liabilities, think again.Don't use your own moneyIn a low interest rate environment, using your own cash carries with it a higher opportunity cost. That is, you must consider what investment returns you can generate by investing your cash elsewhere (and using borrowed funds instead). If you believe you can achieve an investment...

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 expect an extended period of low interest rates." Many commentators have suggested that interest rates may not increase materially for a decade or longer. Japan, for instance, has been stuck on zero interest rates for 20 years. But the banks need to charge at least 2% A measure called the 'net interest margin' is the gross profit a bank makes from lending money to its customers. The net interest margin must cover all the banks costs and still deliver a healthy net profit. In Australia, the major banks net interest margin is approximately 2%. Therefore, even if Australia's cash rate fell to zero, it is unlikely that variable mortgage rates would fall below 2%, as the banks would seek to maintain their profit margins. Of course, a negative RBA cash rate, which exists in some countries in Europe, could push variable mortgage rates below 2%. Bye, bye negative gearing tax benefits for property investors The most obvious consequence of low interest rates for property investors is that it significantly reduces negative gearing tax benefits. When interest rates were 7% p.a., property investors where crystallising large income losses. That is because the interest costs and property expenses were a lot more than the property's rental income. The investor could offset this loss against employment income and enjoy a sizable tax refund (which is referred to as negative gearing). According to CoreLogic, Australia's gross rental yield is 4.1% p.a. Compare that to the current interest only investment mortgage rate of circa 4.5% p.a. and you will see why an investment property's income loss today is only 40% what it was when interest rates were much higher. As a result, taxation benefits derived from borrowing to invest in property are consequently 60% lower. In a low interest rate environment, saving tax is no longer a big draw card for prospective property investors. This is a good thing as you should never invest predominantly to generate tax benefits. However, if you were banking on your property investments helping you reduce your tax liabilities, think again. Don't use your own money In a low interest rate environment, using your own cash carries with it a higher opportunity cost. That is, you must consider what investment returns you can generate by investing your cash elsewhere (and using borrowed funds instead). If you believe you can achieve an investment...

How will zero interest rates affect investors?

How to get more control over how your super is invested and the fees you pay (and lower fees)Accountants often recommend establishing a Self Managed Super Funds (SMSF) as the best way to gain full control over how your super is invested. But most people don't want the responsibility and compliance headaches that a SMSF can create.A wrap platform is an excellent alternative to a SMSF. In fact, they are simpler, don't come with any compliance obligations and are often lower cost. But they still give investors a lot of control over where and how their super is invested.Steer clear of retail super fundsIn my 17 years of experience in reviewing super funds, I have found that retail funds (e.g. AMP, BT, Colonial, MLC, etc.) invariably charge high fees and deliver very poor investment returns. This was confirmed by the Productivity Commission's recent report into super. Therefore, if you are in a retail super fund, it's almost certain that you would be better off switching (but you must consider any ancillary benefits and/or insurance before you do).Concerns with industry super fundsI have written about my concerns with industry super funds in the past. I summarise my main concerns below:§ Firstly, trade unions have a lot of control over the industry super funds, how they are operated and ultimately their lack of productivity. This 'influence' was highlighted during The Royal Commission into Trade Union Governance and Corruption.§ Secondly, I am concern but the amount of money paid to trade unions and I am concerned that there aren't enough checks-and-balances. A report in 2017 highlighted that trade unions received over $18 million from industry super funds over a 4 year period. Here's another article from January this year stating that KPMG calculated that Cbus paid over $7 million to unions over a four year period ending in 2014. The operation of (1) trade unions and (2) investing people's retirement savings are two separate activities and should be completely independent.§ Thirdly, they lack a lot of transparency and accountability with respect to investment performance as I have written about here.§ And finally, given their scale, they should be reducing fees, not increasing them - a point which the Productivity Commission has made in its recent investigation.Having said all that, industry funds are much better than retail funds. And if you are not going to use a wrap account (or SMSF), then they are the best solution for your super. Hostplus, Cbus and AustralianSuper tend to be the best performers in terms of investment returns. AustralianSuper has the lowest fees out of the three (by a reasonable margin) so its typically my preferred option.What is a wrap platform?A wrap platform is a portal (super account) that helps you invest your super. It provides you with access to...

How to get more control over how your super is invested and the fees you pay (and lower fees) Accountants often recommend establishing a Self Managed Super Funds (SMSF) as the best way to gain full control over how your super is invested. But most people don't want the responsibility and compliance headaches that a SMSF can create. A wrap platform is an excellent alternative to a SMSF. In fact, they are simpler, don't come with any compliance obligations and are often lower cost. But they still give investors a lot of control over where and how their super is invested. Steer clear of retail super funds In my 17 years of experience in reviewing super funds, I have found that retail funds (e.g. AMP, BT, Colonial, MLC, etc.) invariably charge high fees and deliver very poor investment returns. This was confirmed by the Productivity Commission's recent report into super. Therefore, if you are in a retail super fund, it's almost certain that you would be better off switching (but you must consider any ancillary benefits and/or insurance before you do). Concerns with industry super funds I have written about my concerns with industry super funds in the past. I summarise my main concerns below: § Firstly, trade unions have a lot of control over the industry super funds, how they are operated and ultimately their lack of productivity. This 'influence' was highlighted during The Royal Commission into Trade Union Governance and Corruption. § Secondly, I am concern but the amount of money paid to trade unions and I am concerned that there aren't enough checks-and-balances. A report in 2017 highlighted that trade unions received over $18 million from industry super funds over a 4 year period. Here's another article from January this year stating that KPMG calculated that Cbus paid over $7 million to unions over a four year period ending in 2014. The operation of (1) trade unions and (2) investing people's retirement savings are two separate activities and should be completely independent. § Thirdly, they lack a lot of transparency and accountability with respect to investment performance as I have written about here. § And finally, given their scale, they should be reducing fees, not increasing them - a point which the Productivity Commission has made in its recent investigation. Having said all that, industry funds are much better than retail funds. And if you are not going to use a wrap account (or SMSF), then they are the best solution for your super. Hostplus, Cbus and AustralianSuper tend to be the best performers in terms of investment returns. AustralianSuper has the lowest fees out of the three (by a reasonable margin) so its typically my preferred option. What is a wrap platform? A wrap platform is a portal (super account) that helps you invest your super. It provides you with access to...

How to get more control over how your super is invested and the fees you pay (and lower fees)

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 contextLast 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&amp;6bfec1Perhaps 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 termThe 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 valuationIf 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...

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. <a href="https://www.prosolution.com.au/wp-content/uploads/2019/10/VIX.png?6bfec1&amp;6bfec1" rel="nofollow" target="_blank">https://www.prosolution.com.au/wp-content/uploads/2019/10/VIX.png?6bfec1&amp;6bfec1</a> 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...

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

The ALP's proposed ban on negative gearing has been well publicised and debated. However, its proposed changes to Capital Gains Tax (CGT) have received far less attention. I suspect that this is because investors tend to overestimate short-term consequences and underestimate more significant long-term outcomes. But, since most of us are long-term investors, I'd suggest that we should adopt a more balanced view.How does capital gain tax currently work?At the moment, only 50% of the net capital gain is included with your other taxable income (except for companies which are not entitled to the 50% discount) if you have owned the asset for more than 12 months. The net capital gain (or loss) is calculated as follows:Net sale proceeds - being sale price less any selling costs including agent fees and so on.LessWritten-down acquisition cost - including purchase price, stamp duty, buyers' agent fees, legal fees, inspection fees and so on; less any depreciation claimed in prior years.EqualsNet gross capital gain (or loss). This amount is discounted by 50%. The discounted amount is then added to your income and taxed according to individual marginal rates.What has the ALP proposed to change?The ALP has announced that if it wins the election on 18 May, it will halve the CGT discount from 50% to 25%. This effectively increases that amount of tax you'll pay by 50%.For example, under current arrangements, only $50 of a $100 capital gain would be added to your taxable income. If you are on the highest marginal tax rate of 47%, you would pay $23.50 in tax. However, under the ALP's proposed arrangement, $75 would be added to your taxable income and your tax payable would increase to $35.25 - an additional $11.75 or 50%.These CGT changes apply to investments, including property and shares, purchased on or after 1 January 2020 (for property, this is likely to be based on contract date, not settlement date). All investments made prior to 1 January 2020 will be fully grandfathered and entitled to continue to claim the 50% CGT discount.High growth assets will be impacted the mostUnlike the changes to negative gearing, these changes to CGT will impact property and share investors to a similar extent.And investments that provide the majority of their total return in capital growth rather than income will be impacted the most by these changes. The two most popular (common) major asset classes are:Direct propertyAccording to REIA data, the average compounding capital growth rate of Australia's five largest capital cities since 1980 is 7.2% p.a. Investment-grade properties should generate a higher growth rate (than the median).However, property tends to generate only a small amount of income. Whilst gross rental yields can range from 2% and 5% p.a., after an investor pays for expenses such as management fees, maintenance, insurance, water and so on, the net rental yield is a lot lower - probably under 2% p.a. in most circumstances. In summary, property typically provides circa 80% of its total return in capital appreciate and 20% in income.International sharesInternational equities also provide most of its return in capital growth. The MSCI World Index has appreciated in value by 7.83% between December 1987 when it began and March 2019. The average annual dividend yield of this index is currently only slightly above 2%. So, international investments also provide 80% of total return in growth and 20% in income.It is interesting to note however that Australian shares generate a lot more income. Almost 50% of their total...

The ALP's proposed ban on negative gearing has been well publicised and debated. However, its proposed changes to Capital Gains Tax (CGT) have received far less attention. I suspect that this is because investors tend to overestimate short-term consequences and underestimate more significant long-term outcomes. But, since most of us are long-term investors, I'd suggest that we should adopt a more balanced view. How does capital gain tax currently work? At the moment, only 50% of the net capital gain is included with your other taxable income (except for companies which are not entitled to the 50% discount) if you have owned the asset for more than 12 months. The net capital gain (or loss) is calculated as follows: Net sale proceeds - being sale price less any selling costs including agent fees and so on. Less Written-down acquisition cost - including purchase price, stamp duty, buyers' agent fees, legal fees, inspection fees and so on; less any depreciation claimed in prior years. Equals Net gross capital gain (or loss). This amount is discounted by 50%. The discounted amount is then added to your income and taxed according to individual marginal rates. What has the ALP proposed to change? The ALP has announced that if it wins the election on 18 May, it will halve the CGT discount from 50% to 25%. This effectively increases that amount of tax you'll pay by 50%. For example, under current arrangements, only $50 of a $100 capital gain would be added to your taxable income. If you are on the highest marginal tax rate of 47%, you would pay $23.50 in tax. However, under the ALP's proposed arrangement, $75 would be added to your taxable income and your tax payable would increase to $35.25 - an additional $11.75 or 50%. These CGT changes apply to investments, including property and shares, purchased on or after 1 January 2020 (for property, this is likely to be based on contract date, not settlement date). All investments made prior to 1 January 2020 will be fully grandfathered and entitled to continue to claim the 50% CGT discount. High growth assets will be impacted the most Unlike the changes to negative gearing, these changes to CGT will impact property and share investors to a similar extent. And investments that provide the majority of their total return in capital growth rather than income will be impacted the most by these changes. The two most popular (common) major asset classes are: Direct property According to REIA data, the average compounding capital growth rate of Australia's five largest capital cities since 1980 is 7.2% p.a. Investment-grade properties should generate a higher growth rate (than the median). However, property tends to generate only a small amount of income. Whilst gross rental yields can range from 2% and 5% p.a., after an investor pays for expenses such as management fees, maintenance, insurance, water and so on, the net rental yield is a lot lower - probably under 2% p.a. in most circumstances. In summary, property typically provides circa 80% of its total return in capital appreciate and 20% in income. International shares International equities also provide most of its return in capital growth. The MSCI World Index has appreciated in value by 7.83% between December 1987 when it began and March 2019. The average annual dividend yield of this index is currently only slightly above 2%. So, international investments also provide 80% of total return in growth and 20% in income. It is interesting to note however that Australian shares generate a lot more income. Almost 50% of their total...

Changes to capital gains tax are 5 times more costly than negative gearing

For many Australian's, their home loan is their largest expense. And property investors should seek to minimise their borrowing costs (interest) as it's one of the top three factors that directly impacts investment success as outlined in this blog. With this in mind, I thought it was timely to look at the current opportunities in the mortgage/interest rate market.What the "market" is expectingAs the chart below illustrates, the implied yield on 30-day cash rate futures suggests that the market expects the cash rate to be 0.25% lower in the second half of 2019. These future contracts are used primarily by large institutions and banks and essentially represent the consensus view on the direction of interest rates in the short term (i.e. next 18 months). Of course, the market is not always right - it's only one indicator.https://www.prosolution.com.au/wp-content/uploads/2019/03/cash-rate-futuresv2.jpgEconomist predictionsBill Evans, the Chief Economist for Westpac, was the first to predict that the RBA will cut its cash rate twice in 2019 (0.25% in August and then again in November). Since making this prediction on 20 February 2019, many other economists have joined him. Mr Evans was the first economist to correctly predict the start of the RBA's easing cycle in 2011 - so he has good form.Mr Evans cited weaker than expected GDP growth, the "wealth effect"[1] associated with a softer property market and an expected increase in our savings rate as the main reasons for forming his view.What would have to happen for the RBA to cutThe RBA has previously said on a number of occasions that it is not concerned by the falling house prices. This commentary has never made sense to me because a falling property market definitely impacts on consumer confidence - look at what happened in the USA when the GCF hit. Perhaps the RBA was hoping its positive rhetoric would persuade Australian's to ignore the wealth effect. However, in the last few weeks the RBA has changed its tune and acknowledge the risk that a soft property market might have on the wider economy.Also, the RBA has downgraded its GDP growth forecast. I think the RBA would need to see an increase in the unemployment rate before it would be willing to cut the cash rate. Australia's unemployment rate is still relatively low at 5.1% as illustrated in the chart below.https://www.prosolution.com.au/wp-content/uploads/2019/03/unemployment-rate.pngWill the banks pass it on?Of course, if the RBA does cut the cash rate below its current level of 1.5% p.a., the big question is; will the banks pass all of the reduction onto borrowers?On one hand, given the scrutiny and negative publicity generated by the recent Royal Commission, you would think they would have to be very brave (read stupid or arrogant) to not pass it all on.That said, a few small lenders have increased variable rates this year (e.g. ING) which suggest funding costs have been on the rise. Perhaps the banks will use this opportunity to improve their...

For many Australian's, their home loan is their largest expense. And property investors should seek to minimise their borrowing costs (interest) as it's one of the top three factors that directly impacts investment success as outlined in this blog. With this in mind, I thought it was timely to look at the current opportunities in the mortgage/interest rate market. What the "market" is expecting As the chart below illustrates, the implied yield on 30-day cash rate futures suggests that the market expects the cash rate to be 0.25% lower in the second half of 2019. These future contracts are used primarily by large institutions and banks and essentially represent the consensus view on the direction of interest rates in the short term (i.e. next 18 months). Of course, the market is not always right - it's only one indicator. <a href="https://www.prosolution.com.au/wp-content/uploads/2019/03/cash-rate-futuresv2.jpg" rel="nofollow" target="_blank">https://www.prosolution.com.au/wp-content/uploads/2019/03/cash-rate-futuresv2.jpg</a> Economist predictions Bill Evans, the Chief Economist for Westpac, was the first to predict that the RBA will cut its cash rate twice in 2019 (0.25% in August and then again in November). Since making this prediction on 20 February 2019, many other economists have joined him. Mr Evans was the first economist to correctly predict the start of the RBA's easing cycle in 2011 - so he has good form. Mr Evans cited weaker than expected GDP growth, the "wealth effect"[1] associated with a softer property market and an expected increase in our savings rate as the main reasons for forming his view. What would have to happen for the RBA to cut The RBA has previously said on a number of occasions that it is not concerned by the falling house prices. This commentary has never made sense to me because a falling property market definitely impacts on consumer confidence - look at what happened in the USA when the GCF hit. Perhaps the RBA was hoping its positive rhetoric would persuade Australian's to ignore the wealth effect. However, in the last few weeks the RBA has changed its tune and acknowledge the risk that a soft property market might have on the wider economy. Also, the RBA has downgraded its GDP growth forecast. I think the RBA would need to see an increase in the unemployment rate before it would be willing to cut the cash rate. Australia's unemployment rate is still relatively low at 5.1% as illustrated in the chart below. <a href="https://www.prosolution.com.au/wp-content/uploads/2019/03/unemployment-rate.png" rel="nofollow" target="_blank">https://www.prosolution.com.au/wp-content/uploads/2019/03/unemployment-rate.png</a> Will the banks pass it on? Of course, if the RBA does cut the cash rate below its current level of 1.5% p.a., the big question is; will the banks pass all of the reduction onto borrowers? On one hand, given the scrutiny and negative publicity generated by the recent Royal Commission, you would think they would have to be very brave (read stupid or arrogant) to not pass it all on. That said, a few small lenders have increased variable rates this year (e.g. ING) which suggest funding costs have been on the rise. Perhaps the banks will use this opportunity to improve their...

Where are interest rates heading and what should you do?

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 keyAll 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 uncomfortableWhilst 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 propertiesSome 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 levelThe 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....

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....

How should your split your wealth between shares and property?

If you are contemplating investing in property, should you buy now or wait? What if prices fall further this year? Maybe you would be better off waiting?As my analysis below reveals, buying for less than market value or at the bottom of the market (i.e. buying well), has very little impact. The price we pay for a property has little impact on success as investors. So, the desire to buy below market is probably driven more by ego more than fundamentals.Timing the market is a flawed strategyNo one in the world has developed a reliable system for predicting how asset classes will change in the short term. As Mr Buffett says; "forecasters will fill your ears but never your pockets". Therefore, if you think you can implement a strategy that involves picking the bottom of the market, think again! Not only is it impossible to do, but many of the indicators used to measure the health of the property market are lag indicators. That is, by the time the indicators change, prices would have already rebounded somewhat.How important is it to buy well?This is a good question and one that I have spent a lot of time analysing. I financially modelled a $750,000 property investment and measured the sensitivity to the following factors/assumptions: •Capital growth - this is the average rate of appreciation in value over the next 20 years. My base case assumption is a nominal rate of 7% p.a. (assuming an inflation rate of 2.5% p.a.). The range I used was 4% (being only 1.5% above inflation) and 10% (which I have observed in blue-chip locations over the past 30 years). •Buying above or under fair market value - I measured the impact of buying 10% below market value versus over-paying by 10%. •Capital gains tax (CGT) - I measured the impact of paying no CGT (e.g. owning in a SMSF) versus paying the maximum CGT (e.g. the ALP's policy is to halve the CGT discount). The midpoint I assumed is based on current laws at a tax rate of 39% p.a. •Interest rates - my midpoint is 6% but I sensitised using a range of 4% to 8% p.a. •Rental yield - this is the amount of gross rental income you will receive compared to the properties value (expressed as a percentage). I have assumed a normalised mid-point of 3% but then also tested a range of 2% to 5%. •Rental growth rate - this is how much the rent will increase by on average each year. I have used a growth rate range of 3% - being slightly above CPI and 7% - which is relatively high. •Negative gearing - as has been well publicised, the ALP will ban negative gearing on existing properties (if you own existing investments, these are excluded, so you won't be impacted). As such, I sensitised the impact of negative gearing on an investment. I compared no negative gearing versus maximal benefit at tax rate of 47%. The midpoint was 39%.What I did is held all factors that same (i.e. at the midpoint/base case) and changed one variable from high to low to measure the impact on after tax cash (assuming you hold the investment property for 20 years and then sell it). This included the cash flow cost plus the after-tax sale proceeds.And the winner is...As the chart below illustrates, buying under fair market value has very little impact on the success of your investment. A property's capital growth rate is by far the most important factor. A distant second is capital gains tax, then interest rate and finally rental income.Download chart here: https://www.prosolution.com.au/wp-content/uploads/2019/02/market-timing.pngWhat steps should you take as a result of this?If you are investing in property, forget...

If you are contemplating investing in property, should you buy now or wait? What if prices fall further this year? Maybe you would be better off waiting? As my analysis below reveals, buying for less than market value or at the bottom of the market (i.e. buying well), has very little impact. The price we pay for a property has little impact on success as investors. So, the desire to buy below market is probably driven more by ego more than fundamentals. Timing the market is a flawed strategy No one in the world has developed a reliable system for predicting how asset classes will change in the short term. As Mr Buffett says; "forecasters will fill your ears but never your pockets". Therefore, if you think you can implement a strategy that involves picking the bottom of the market, think again! Not only is it impossible to do, but many of the indicators used to measure the health of the property market are lag indicators. That is, by the time the indicators change, prices would have already rebounded somewhat. How important is it to buy well? This is a good question and one that I have spent a lot of time analysing. I financially modelled a $750,000 property investment and measured the sensitivity to the following factors/assumptions: •Capital growth - this is the average rate of appreciation in value over the next 20 years. My base case assumption is a nominal rate of 7% p.a. (assuming an inflation rate of 2.5% p.a.). The range I used was 4% (being only 1.5% above inflation) and 10% (which I have observed in blue-chip locations over the past 30 years). •Buying above or under fair market value - I measured the impact of buying 10% below market value versus over-paying by 10%. •Capital gains tax (CGT) - I measured the impact of paying no CGT (e.g. owning in a SMSF) versus paying the maximum CGT (e.g. the ALP's policy is to halve the CGT discount). The midpoint I assumed is based on current laws at a tax rate of 39% p.a. •Interest rates - my midpoint is 6% but I sensitised using a range of 4% to 8% p.a. •Rental yield - this is the amount of gross rental income you will receive compared to the properties value (expressed as a percentage). I have assumed a normalised mid-point of 3% but then also tested a range of 2% to 5%. •Rental growth rate - this is how much the rent will increase by on average each year. I have used a growth rate range of 3% - being slightly above CPI and 7% - which is relatively high. •Negative gearing - as has been well publicised, the ALP will ban negative gearing on existing properties (if you own existing investments, these are excluded, so you won't be impacted). As such, I sensitised the impact of negative gearing on an investment. I compared no negative gearing versus maximal benefit at tax rate of 47%. The midpoint was 39%. What I did is held all factors that same (i.e. at the midpoint/base case) and changed one variable from high to low to measure the impact on after tax cash (assuming you hold the investment property for 20 years and then sell it). This included the cash flow cost plus the after-tax sale proceeds. And the winner is... As the chart below illustrates, buying under fair market value has very little impact on the success of your investment. A property's capital growth rate is by far the most important factor. A distant second is capital gains tax, then interest rate and finally rental income. Download chart here: <a href="https://www.prosolution.com.au/wp-content/uploads/2019/02/market-timing.png" rel="nofollow" target="_blank">https://www.prosolution.com.au/wp-content/uploads/2019/02/market-timing.png</a> What steps should you take as a result of this? If you are investing in property, forget...

How important is it to buy a property at the bottom of the market?

The ALP announced on Friday (29/3/19) that it will ban negative gearing from 1 January 2020 if it wins the election next month. I wrote an article for The Australian newspaper over the weekend which addresses the steps property investors can take to fortify their investments (which I list below). A number of people have asked me whether they should invest in property prior to 1 January 2020. I discuss this too.We still have a long way to goOf course, the ALP has to win the election before it can ban negative gearing. I acknowledge that virtually every poll predicts an ALP victory. But John Howard didn't poll very well leading up to his 1996 election win. And who would have thought Mr Trump would become President of the USA! So, anything can happen.Secondly, it will depend on how strong their win is and whether they have a large majority or not. If it's a tight win, they may have to negotiate with minor parties to get its law enacted and, as a result, water down its change to negative gearing e.g. limit it rather than an outright ban.And finally, we have not seen the draft legislation yet. All the ALP has said is they will be negative gearing if people invest in established property or shares after 1 January 2020. Back in 1985 when the Hawke government banned negative gearing, people used unit trusts to invest in property. They borrowed to buy the units and as such were able to continue to negatively gear the property. So, there could be workarounds.What should (existing) property investors consider doing?There is a risk that the ban on negative gearing will put further downward pressure on property values in 2020. Owning an investment property in a falling market can be a double-whammy. Not only is your asset value falling, but you have to put your hand in your pocket each month to contribute towards the holding costs (if the net rental income isn't enough to meet the loan repayments). Here are some of the steps you can consider taking:1. Reduce holding costs - fix your interest rateMany lenders are offering 3 years fixed rates at levels below variable interest rates, particularly if your loan repayments are structured as interest only. This may help reduce the monthly holding costs and you could still be better off on a fixed rate because, even if the RBA does cut rates this year, there's no guarantees the banks will pass it on. See more from my blog a few week's ago.2. Make any changes to mortgages prior to 2020If values do fall further as predicted, now might be a good time to lock in access to available equity. This involves increasing your loan's credit limit to up to 80 percent of the current value of your investment property. This will give you access to additional credit for emergencies (i.e. a financial buffer) or future investment purposes. This equity may not be available in the future if bank valuations fall after 1 January 2020.3. Divest of underperforming properties in 2019I expect that some property types and locations will be more exposed to changes in negative gearing. For example, locations or buildings that are dominated by investor-owners could be at greater risk compared to locations with a more normalised number of owner-occupiers. In addition, the types of properties that have historically been marketed to investors primarily because of the tax benefits they generate (such as depreciation and negative gearing) will almost certainly be negatively impacted.If you own a property...

The ALP announced on Friday (29/3/19) that it will ban negative gearing from 1 January 2020 if it wins the election next month. I wrote an article for The Australian newspaper over the weekend which addresses the steps property investors can take to fortify their investments (which I list below). A number of people have asked me whether they should invest in property prior to 1 January 2020. I discuss this too. We still have a long way to go Of course, the ALP has to win the election before it can ban negative gearing. I acknowledge that virtually every poll predicts an ALP victory. But John Howard didn't poll very well leading up to his 1996 election win. And who would have thought Mr Trump would become President of the USA! So, anything can happen. Secondly, it will depend on how strong their win is and whether they have a large majority or not. If it's a tight win, they may have to negotiate with minor parties to get its law enacted and, as a result, water down its change to negative gearing e.g. limit it rather than an outright ban. And finally, we have not seen the draft legislation yet. All the ALP has said is they will be negative gearing if people invest in established property or shares after 1 January 2020. Back in 1985 when the Hawke government banned negative gearing, people used unit trusts to invest in property. They borrowed to buy the units and as such were able to continue to negatively gear the property. So, there could be workarounds. What should (existing) property investors consider doing? There is a risk that the ban on negative gearing will put further downward pressure on property values in 2020. Owning an investment property in a falling market can be a double-whammy. Not only is your asset value falling, but you have to put your hand in your pocket each month to contribute towards the holding costs (if the net rental income isn't enough to meet the loan repayments). Here are some of the steps you can consider taking: 1. Reduce holding costs - fix your interest rate Many lenders are offering 3 years fixed rates at levels below variable interest rates, particularly if your loan repayments are structured as interest only. This may help reduce the monthly holding costs and you could still be better off on a fixed rate because, even if the RBA does cut rates this year, there's no guarantees the banks will pass it on. See more from my blog a few week's ago. 2. Make any changes to mortgages prior to 2020 If values do fall further as predicted, now might be a good time to lock in access to available equity. This involves increasing your loan's credit limit to up to 80 percent of the current value of your investment property. This will give you access to additional credit for emergencies (i.e. a financial buffer) or future investment purposes. This equity may not be available in the future if bank valuations fall after 1 January 2020. 3. Divest of underperforming properties in 2019 I expect that some property types and locations will be more exposed to changes in negative gearing. For example, locations or buildings that are dominated by investor-owners could be at greater risk compared to locations with a more normalised number of owner-occupiers. In addition, the types of properties that have historically been marketed to investors primarily because of the tax benefits they generate (such as depreciation and negative gearing) will almost certainly be negatively impacted. If you own a property...

5 things you can do to prepare for the negative gearing ban (and should you invest before 2020?)

I'm a huge fan of Seth Godin's work. He's a presenter, author and entrepreneur and if you have any interest in marketing or business, you must subscribe to his daily blog. Anyway, his recent blog about the difference between an amateur and professional got me thinking. I think many of us could benefit from approaching our finances more professionally.The different between a professional and amateurOften, a professional investor such as a fund manager approaches investing a lot differently than an amateur investor. I have listed some of these differences below to highlight this point.Professional- Understands that making investment decisions requires experience, education and understanding the market- Seeks out experts in their field and is willing to pay a fair fee for their advice- Will have a methodology for hiring and firing advice professionals - a clear list of things they want and want to avoid, thorough methodology, etc.- Will hold their advisors accountable for producing results- Won't try and take on a task that is outside their sphere of experience- They make investment decisions on a daily basis- Will take almost any steps to ensure the risk of losing capital is low or non-existent.Amateur- Has no metric or methodology for measuring the value of advice- Asks friends or colleagues for advice- Is prepared to have a go at trying to do it themselves before asking for help- Considers it a saving if he works it all out himself and therefore don't need to pay anyone for advice- To some extent, is guided by emotions e.g. it feels right, falls in love with the potential returns, etc.- Gets seduced by investment returns and doesn't adequately consider (and mitigate) investment risks- Doesn't realise the danger of their lack of experience- Makes a handful (or less) of investment decisions over their lifetime.- Its prepared to make a mistake i.e. learn through trial and error.But we don't compromise on some things...Imagine how you would react if your friend told you that he did his spouses dentistry work. Or wrote their own will. Almost all of us understand the perils (stupidity) of this and wouldn't even consider trying. Instead, we find a professional than we respect and trust because we have what phycologists refer to as conscious incompetence. That is, we know that we have a deficit of knowledge and experience to do it ourselves.Your responsibility is to manage the people that manage the moneyJust because you can do your own financial planning, taxation, loan structuring - it doesn't mean you should. More importantly, maybe you have misunderstood your role. Your role is to not figure it all out yourself. That is potentially way too costly in the long run. Instead, your role is to hire the best people you can afford to help you make the smartest possible decisions. It's what we all do in other areas of our life. It's what successful professional investors do too.Use a professional lends when selecting the right people to have on your teamIn order to do this successfully, you have to have a robust methodology for selecting the right professionals. Here are some of the things I consider when selecting other professionals that help my clients.1. How do they make money?It's important that I work with...

I'm a huge fan of Seth Godin's work. He's a presenter, author and entrepreneur and if you have any interest in marketing or business, you must subscribe to his daily blog. Anyway, his recent blog about the difference between an amateur and professional got me thinking. I think many of us could benefit from approaching our finances more professionally. The different between a professional and amateur Often, a professional investor such as a fund manager approaches investing a lot differently than an amateur investor. I have listed some of these differences below to highlight this point. Professional - Understands that making investment decisions requires experience, education and understanding the market - Seeks out experts in their field and is willing to pay a fair fee for their advice - Will have a methodology for hiring and firing advice professionals - a clear list of things they want and want to avoid, thorough methodology, etc. - Will hold their advisors accountable for producing results - Won't try and take on a task that is outside their sphere of experience - They make investment decisions on a daily basis - Will take almost any steps to ensure the risk of losing capital is low or non-existent. Amateur - Has no metric or methodology for measuring the value of advice - Asks friends or colleagues for advice - Is prepared to have a go at trying to do it themselves before asking for help - Considers it a saving if he works it all out himself and therefore don't need to pay anyone for advice - To some extent, is guided by emotions e.g. it feels right, falls in love with the potential returns, etc. - Gets seduced by investment returns and doesn't adequately consider (and mitigate) investment risks - Doesn't realise the danger of their lack of experience - Makes a handful (or less) of investment decisions over their lifetime. - Its prepared to make a mistake i.e. learn through trial and error. But we don't compromise on some things... Imagine how you would react if your friend told you that he did his spouses dentistry work. Or wrote their own will. Almost all of us understand the perils (stupidity) of this and wouldn't even consider trying. Instead, we find a professional than we respect and trust because we have what phycologists refer to as conscious incompetence. That is, we know that we have a deficit of knowledge and experience to do it ourselves. Your responsibility is to manage the people that manage the money Just because you can do your own financial planning, taxation, loan structuring - it doesn't mean you should. More importantly, maybe you have misunderstood your role. Your role is to not figure it all out yourself. That is potentially way too costly in the long run. Instead, your role is to hire the best people you can afford to help you make the smartest possible decisions. It's what we all do in other areas of our life. It's what successful professional investors do too. Use a professional lends when selecting the right people to have on your team In order to do this successfully, you have to have a robust methodology for selecting the right professionals. Here are some of the things I consider when selecting other professionals that help my clients. 1. How do they make money? It's important that I work with...

The importance of becoming more professional with your approach to investing

Understanding how property growth behaves is critical when making buy, hold or sell investment decisions. Unfortunately, I have seen lots of people make terrible decisions based on misinformation or misunderstanding. Therefore, if you are a property investor, you must understand this concept. And if you are an investor with a low asset base, you can use this knowledge to your advantage.History always leaves cluesI'm a big proponent of evidence-based investing because it removes a lot of risk. Evidenced-based investing involves only adopting methodologies, approaches or investing in assets where there is overwhelming evidence that demonstrates it works. No throwing darts. Only invest in sure-things.Below I have set out a few examples of property growth both for individual properties and markets.Individual examples of property growthThe chart below (click to enlarge) sets out the sales of an apartment in Richmond, Victoria between 1985 and 2019. As you can see, there was very little growth between 1985 and 1997 and very strong growth between 1997 and 2010. The average growth over the whole 25 years period averages out at over 8.8% p.a. - which is pretty respectable. This is a very good example of how property behaves i.e. it grows in cycles lasting 5 to 10 years followed by a flat cycle. Click here for an example of a house in Carlton that I cited in another blog that also illustrated this concept.&lt;&lt; Chart - click here &gt;&gt;I appreciate that this data isn't statistically significant, because it's only a couple of properties. However, after 17 years of looking at property growth on almost a daily basis, I can assure you that this growth is indicative of how the vast majority of investment-grade property behaves over long period of time.Example of state-based growthThe chart below (click to enlarge) sets out the distribution of median house price growth since 1980. You will notice that a growth cycle typically lasts 7 to 10 years. And a growth phase is typically followed by a period of (7-10 years) of little growth. The average growth rate over the past 38 years of each capital city ranges between 7.30% and 7.96% p.a. That is, in the long-run, there is not a large variation.&lt;&lt; Chart - click here &gt;&gt;Understanding the market and its performanceWhen assessing an investment property's historical performance, it is important to ascertain whether it is due to asset-specific or market-wide influences. For example, I know that investment-grade apartments in Melbourne have not performed well over the past 7 to 10 years - as perfectly depicted by the Leslie Street chart above. Therefore, investors must consider this when assessing the performance of their assets. For example, if you purchased a quality apartment in Melbourne 5 years ago and haven't enjoyed much capital growth, it is possible that you have a perfect (investment-grade) asset, but you just haven't held it long enough yet. That is, no growth is a market-wide phenomenon, not asset-specific.But you can't have blind faith in the headline numbers. You must understand what has driven performance. Using investment-grade apartments in Melbourne as an example, these are some of the things I would consider when looking at recent growth and forming a view ...

Understanding how property growth behaves is critical when making buy, hold or sell investment decisions. Unfortunately, I have seen lots of people make terrible decisions based on misinformation or misunderstanding. Therefore, if you are a property investor, you must understand this concept. And if you are an investor with a low asset base, you can use this knowledge to your advantage. History always leaves clues I'm a big proponent of evidence-based investing because it removes a lot of risk. Evidenced-based investing involves only adopting methodologies, approaches or investing in assets where there is overwhelming evidence that demonstrates it works. No throwing darts. Only invest in sure-things. Below I have set out a few examples of property growth both for individual properties and markets. Individual examples of property growth The chart below (click to enlarge) sets out the sales of an apartment in Richmond, Victoria between 1985 and 2019. As you can see, there was very little growth between 1985 and 1997 and very strong growth between 1997 and 2010. The average growth over the whole 25 years period averages out at over 8.8% p.a. - which is pretty respectable. This is a very good example of how property behaves i.e. it grows in cycles lasting 5 to 10 years followed by a flat cycle. Click here for an example of a house in Carlton that I cited in another blog that also illustrated this concept. &lt;&lt; Chart - click here &gt;&gt; I appreciate that this data isn't statistically significant, because it's only a couple of properties. However, after 17 years of looking at property growth on almost a daily basis, I can assure you that this growth is indicative of how the vast majority of investment-grade property behaves over long period of time. Example of state-based growth The chart below (click to enlarge) sets out the distribution of median house price growth since 1980. You will notice that a growth cycle typically lasts 7 to 10 years. And a growth phase is typically followed by a period of (7-10 years) of little growth. The average growth rate over the past 38 years of each capital city ranges between 7.30% and 7.96% p.a. That is, in the long-run, there is not a large variation. &lt;&lt; Chart - click here &gt;&gt; Understanding the market and its performance When assessing an investment property's historical performance, it is important to ascertain whether it is due to asset-specific or market-wide influences. For example, I know that investment-grade apartments in Melbourne have not performed well over the past 7 to 10 years - as perfectly depicted by the Leslie Street chart above. Therefore, investors must consider this when assessing the performance of their assets. For example, if you purchased a quality apartment in Melbourne 5 years ago and haven't enjoyed much capital growth, it is possible that you have a perfect (investment-grade) asset, but you just haven't held it long enough yet. That is, no growth is a market-wide phenomenon, not asset-specific. But you can't have blind faith in the headline numbers. You must understand what has driven performance. Using investment-grade apartments in Melbourne as an example, these are some of the things I would consider when looking at recent growth and forming a view ...

Understanding property growth, markets and being strategic

Different professionals are able to give advice about a specific field - but who's taking responsibility for looking at the big picture? How do you know if opportunities are slipping between the gaps? What if you have an issue/problem/question that bleeds over a few different fields?Firstly, it is important to understand the what different professionals can and cannot talk about (by law).Mortgage adviceTo give advice about a mortgage, borrowing capacity, interest rates, products and so on the professional must hold an Australian Credit License (or be an authorised representative of an ACL holder). You can search ASIC's register of credit representatives here.Tax adviceAnyone that provides tax agent services (tax advice, lodge tax returns, etc.) for a fee must be registered with the Tax Practitioners Board. You might find that some well-meaning professionals (such as mortgage brokers or buyer's agents) offer you tax advice or express an opinion about how an item should be treated for taxation purposes, but you should always confirm this advice with a Registered Tax Agent. You can search the Tax Agents register here.Financial adviceTo be able to provide financial advice, you must hold an Australia Financial Services License (AFSL) or be an authorised representative of a holder. Financial advice includes cash flow management/budgeting, investing in shares, superannuation, retirement planning, estate planning, risk management and so on. I have written previously about the importance of selecting a truly independent advisor. You can search the AFSL register here.Property adviceA person cannot recommend and help you purchase a property unless they are a licensed real estate agent. Licensing is State based and this page provides a good summary including links to registers. General property investment advice is completely unregulated and I have written about why this is a problem in The Australian here. Therefore, if you are paying for property advice, be very careful.Insurance adviceMany financial advisors also provide insurance advice. However, sometimes professionals are insurance advisors only i.e. they have a limited AFSL.What can and cannot be covered...Therefore, mortgage brokers can only give advice about credit (mortgage) products, not cash flow or taxation matters.Tax agents can only give you tax advice and cannot comment on cash flow, investments, mortgages, superannuation and so on.A financial planner can't talk about tax consequences or give you borrowing advice unless they hold the appropriate licenses.The problem is many financial decisions are interrelatedMany financial decisions cross over multiple fields and require input from various professionals to ensure you arrive at a thoroughly well-considered conclusion. Take the decision to upgrade or downsize your family home for instance. Whether to do this and at what budget would include borrowing considerations (mortgage broker), cash flow and retirement planning (financial...

Different professionals are able to give advice about a specific field - but who's taking responsibility for looking at the big picture? How do you know if opportunities are slipping between the gaps? What if you have an issue/problem/question that bleeds over a few different fields? Firstly, it is important to understand the what different professionals can and cannot talk about (by law). Mortgage advice To give advice about a mortgage, borrowing capacity, interest rates, products and so on the professional must hold an Australian Credit License (or be an authorised representative of an ACL holder). You can search ASIC's register of credit representatives here. Tax advice Anyone that provides tax agent services (tax advice, lodge tax returns, etc.) for a fee must be registered with the Tax Practitioners Board. You might find that some well-meaning professionals (such as mortgage brokers or buyer's agents) offer you tax advice or express an opinion about how an item should be treated for taxation purposes, but you should always confirm this advice with a Registered Tax Agent. You can search the Tax Agents register here. Financial advice To be able to provide financial advice, you must hold an Australia Financial Services License (AFSL) or be an authorised representative of a holder. Financial advice includes cash flow management/budgeting, investing in shares, superannuation, retirement planning, estate planning, risk management and so on. I have written previously about the importance of selecting a truly independent advisor. You can search the AFSL register here. Property advice A person cannot recommend and help you purchase a property unless they are a licensed real estate agent. Licensing is State based and this page provides a good summary including links to registers. General property investment advice is completely unregulated and I have written about why this is a problem in The Australian here. Therefore, if you are paying for property advice, be very careful. Insurance advice Many financial advisors also provide insurance advice. However, sometimes professionals are insurance advisors only i.e. they have a limited AFSL. What can and cannot be covered... Therefore, mortgage brokers can only give advice about credit (mortgage) products, not cash flow or taxation matters. Tax agents can only give you tax advice and cannot comment on cash flow, investments, mortgages, superannuation and so on. A financial planner can't talk about tax consequences or give you borrowing advice unless they hold the appropriate licenses. The problem is many financial decisions are interrelated Many financial decisions cross over multiple fields and require input from various professionals to ensure you arrive at a thoroughly well-considered conclusion. Take the decision to upgrade or downsize your family home for instance. Whether to do this and at what budget would include borrowing considerations (mortgage broker), cash flow and retirement planning (financial...

The importance of receiving advice without boarders

CBA Economics stated last week that property price declines are "inevitable". It has forecast that prices will fall by circa 10% in Melbourne and Sydney over the next 6 months. It cited many reasons for this forecast including higher unemployment, lower economic activity, lower mortgage volumes, falling rents and fewer overseas buyers.I wanted to take some time to look at this forecast and provide my commentary. This exercise serves as reminder that all forecasts are inherently uncertain and tend to have limited application for investment decisions.Relationship with unemployment and property growthSimple logic would suggest that if less people are employed, fewer people will be able to purchase a property and some may need to sell their properties. As such, if demand for property falls, prices may follow. That's the basic laws of supply and demand.However, the chart below doesn't support this hypothesise. We should see the green line (average house price growth for subsequent 3-year period) increase when the blue line (unemployment) falls. That is not always the case. In fact, the data suggests there's a very weak relationship between property growth and unemployment.CWhat happened during the last recession?Let's look at Australia's last recession as an example (i.e. the "recession we had to have"). Between 1990 and 1992, unemployment rose from 5.85% to 11.2%. During this period, the subsequent rolling 3-year annual property growth ranged between 1.1% p.a. and 3.4% p.a. Inflation was circa 1.5% p.a. during this period, so in real terms, property prices were flat.What happened was there was very strong price growth between 1985 and 1988 (i.e. over 20% p.a.) and property prices started falling from early 1989. Unemployment started to rise in early 1990. Therefore, property price falls actually proceeded a rise in unemployment, not the other way around.Why might there be a weak link between unemployment and price growth?I can't offer a definitive answer, of course. But I think a large part of the answer lies in two factors being (1) the fact we all need somewhere to live and (2) the housing market is close to equilibrium in terms of demand and supply i.e. most Australian's have somewhere to live.For there to be large falls in prices, there needs to be more sellers than buyers i.e. mass selling. That can happen in the share market (and other asset classes) with limited practical consequences. However, that is more difficult to do with property, because we all need somewhere to live. Of course, investors and holiday homeowners have the discretion to sell, but in the main, these people tend to have a stronger financial position than the average Australian.And the average unemployment period will likely be shortThe important distinction that makes this situation unique is this current recession was caused by a contraction in supply, not a fall in demand. Normally, an economic slowdown is caused by a fall in consumer spending (demand for goods and services) and that can take longer to recover. Today, most consumers are happy to spend (a visit to Bunnings will prove that). It's just we are not allowed to venture outside our homes to do so (and otherwise viable businesses have been forced to cease trading). Once restrictions have been lifted, demand will likely return at a faster rate compared to a demand-driven recession.Westpac projects that unemployment will peak at 9% this year but reduce to 5.6% by the end of 2021 (i.e. only slightly above what it was at the beginning of this year). Most of the...

CBA Economics stated last week that property price declines are "inevitable". It has forecast that prices will fall by circa 10% in Melbourne and Sydney over the next 6 months. It cited many reasons for this forecast including higher unemployment, lower economic activity, lower mortgage volumes, falling rents and fewer overseas buyers. I wanted to take some time to look at this forecast and provide my commentary. This exercise serves as reminder that all forecasts are inherently uncertain and tend to have limited application for investment decisions. Relationship with unemployment and property growth Simple logic would suggest that if less people are employed, fewer people will be able to purchase a property and some may need to sell their properties. As such, if demand for property falls, prices may follow. That's the basic laws of supply and demand. However, the chart below doesn't support this hypothesise. We should see the green line (average house price growth for subsequent 3-year period) increase when the blue line (unemployment) falls. That is not always the case. In fact, the data suggests there's a very weak relationship between property growth and unemployment. C What happened during the last recession? Let's look at Australia's last recession as an example (i.e. the "recession we had to have"). Between 1990 and 1992, unemployment rose from 5.85% to 11.2%. During this period, the subsequent rolling 3-year annual property growth ranged between 1.1% p.a. and 3.4% p.a. Inflation was circa 1.5% p.a. during this period, so in real terms, property prices were flat. What happened was there was very strong price growth between 1985 and 1988 (i.e. over 20% p.a.) and property prices started falling from early 1989. Unemployment started to rise in early 1990. Therefore, property price falls actually proceeded a rise in unemployment, not the other way around. Why might there be a weak link between unemployment and price growth? I can't offer a definitive answer, of course. But I think a large part of the answer lies in two factors being (1) the fact we all need somewhere to live and (2) the housing market is close to equilibrium in terms of demand and supply i.e. most Australian's have somewhere to live. For there to be large falls in prices, there needs to be more sellers than buyers i.e. mass selling. That can happen in the share market (and other asset classes) with limited practical consequences. However, that is more difficult to do with property, because we all need somewhere to live. Of course, investors and holiday homeowners have the discretion to sell, but in the main, these people tend to have a stronger financial position than the average Australian. And the average unemployment period will likely be short The important distinction that makes this situation unique is this current recession was caused by a contraction in supply, not a fall in demand. Normally, an economic slowdown is caused by a fall in consumer spending (demand for goods and services) and that can take longer to recover. Today, most consumers are happy to spend (a visit to Bunnings will prove that). It's just we are not allowed to venture outside our homes to do so (and otherwise viable businesses have been forced to cease trading). Once restrictions have been lifted, demand will likely return at a faster rate compared to a demand-driven recession. Westpac projects that unemployment will peak at 9% this year but reduce to 5.6% by the end of 2021 (i.e. only slightly above what it was at the beginning of this year). Most of the...

Will property prices fall by 10% because of higher unemployment thanks to COVID-19

If there is one certainty in life, it's that there's always going to be some uncertainty.Of course, there are times in our lives where there's higher levels of uncertainty, which can be very stressful. But, to a degree, we all have to become comfortable with some level of 'uncertainty' and learn how to dance with it.This is especially true with financial decisions. Markets never exhibit zero risk (i.e. no uncertainty). This blog considers how to financially navigate uncertain times, much like we are experiencing today.Uncertainty can exist in three ways being (1) personal circumstances, (2) domestic uncertainty and (3) global uncertainty. Each is different and requires a different approach.Personal uncertaintyPersonal uncertainly relates to your personal financial position. This can include things such as the risk of a change in your income, losing your job, unexpected bills, relationships and so on.How to deal with personal uncertaintyWhen it comes to personal uncertainty, the best thing is to put all material financial decision making on hold. Typically, the uncertainty resolves itself within a few months or possibly a year. That is, your fears are either realised, or the risk evaporates. Either way, it is likely that sometime in the near future you will be able to resume normal decision making (management).Remember, investing and building wealth is a marathon, not a sprint. There's no need to put yourself under any undue time pressure. Instead, you must make deliberate and well thought out decisions - there's no need to rush. However, of course, at the same time, you must consciously avoid unnecessarily procrastinating too.It is possible (although rare), that the passage of time does not in fact eliminate the uncertainty. An example of this is when one of my clients was facing the prospect of his employer cancelling his project (i.e. redundancy) for many years. In this situation, we just had to accept this higher risk and proceed with implementing his financial plan. We held larger than usual cash buffers to mitigate some of these risks. In the end, the redundancy did eventuate, but not for many years.Domestic uncertaintyDomestic uncertainty relates to matters that are unique to Australia. These can include things such as changes to taxation rules or economic health. A recent example of domestic uncertainty arose during last year's Federal election campaign where the Labor government proposed making changes to negative gearing and capital gain tax. Remember that? That was less than a year ago!How to deal with domestic uncertaintyTax and superannuation rules are everchanging. Economies move in cycles (although it has been almost 29 years since Australia's last recession - although we have almost certainly broken that streak already). Most of these risks (or uncertainties) are cyclical and will continue to be present for the foreseeable future.The best way to deal with domestic uncertainties is through your investment strategy formulation. For example, you must have sufficient diversification in regard to items such as investable asset classes and ownership structures so that you are not 'single point sensitive' to a change in tax law. You must ensure your property investments are of a sufficiently high quality, so they are able to absorb the impact of a tax hike and still remain viable.Put differently, your investment strategy shouldn't fail just because of a change in law or the end of an economic cycle. For long term investors, these events should not be unexcepted.Another approach is to price the risk into the transaction you are contemplating. For example,...

If there is one certainty in life, it's that there's always going to be some uncertainty. Of course, there are times in our lives where there's higher levels of uncertainty, which can be very stressful. But, to a degree, we all have to become comfortable with some level of 'uncertainty' and learn how to dance with it. This is especially true with financial decisions. Markets never exhibit zero risk (i.e. no uncertainty). This blog considers how to financially navigate uncertain times, much like we are experiencing today. Uncertainty can exist in three ways being (1) personal circumstances, (2) domestic uncertainty and (3) global uncertainty. Each is different and requires a different approach. Personal uncertainty Personal uncertainly relates to your personal financial position. This can include things such as the risk of a change in your income, losing your job, unexpected bills, relationships and so on. How to deal with personal uncertainty When it comes to personal uncertainty, the best thing is to put all material financial decision making on hold. Typically, the uncertainty resolves itself within a few months or possibly a year. That is, your fears are either realised, or the risk evaporates. Either way, it is likely that sometime in the near future you will be able to resume normal decision making (management). Remember, investing and building wealth is a marathon, not a sprint. There's no need to put yourself under any undue time pressure. Instead, you must make deliberate and well thought out decisions - there's no need to rush. However, of course, at the same time, you must consciously avoid unnecessarily procrastinating too. It is possible (although rare), that the passage of time does not in fact eliminate the uncertainty. An example of this is when one of my clients was facing the prospect of his employer cancelling his project (i.e. redundancy) for many years. In this situation, we just had to accept this higher risk and proceed with implementing his financial plan. We held larger than usual cash buffers to mitigate some of these risks. In the end, the redundancy did eventuate, but not for many years. Domestic uncertainty Domestic uncertainty relates to matters that are unique to Australia. These can include things such as changes to taxation rules or economic health. A recent example of domestic uncertainty arose during last year's Federal election campaign where the Labor government proposed making changes to negative gearing and capital gain tax. Remember that? That was less than a year ago! How to deal with domestic uncertainty Tax and superannuation rules are everchanging. Economies move in cycles (although it has been almost 29 years since Australia's last recession - although we have almost certainly broken that streak already). Most of these risks (or uncertainties) are cyclical and will continue to be present for the foreseeable future. The best way to deal with domestic uncertainties is through your investment strategy formulation. For example, you must have sufficient diversification in regard to items such as investable asset classes and ownership structures so that you are not 'single point sensitive' to a change in tax law. You must ensure your property investments are of a sufficiently high quality, so they are able to absorb the impact of a tax hike and still remain viable. Put differently, your investment strategy shouldn't fail just because of a change in law or the end of an economic cycle. For long term investors, these events should not be unexcepted. Another approach is to price the risk into the transaction you are contemplating. For example,...

How to make financial decisions in times of high uncertainty

Given many people are worried about the unknown consequences of the Coronavirus, I thought it was timely for me to share my thoughts and advice. Like in all 'crises', it is important to not let emotion or fear drive your responses. 'A steady hand on the tiller' is the best approach when navigating any storm.I acknowledge that the Coronavirus may have caused significant emotional and heath distress to people around the world. I fully empathise and understand this situation and do not seek to downplay its impact. But it is important for me to stipulate that my comments below are only about the financial impacts and considerations, not any health concerns.We've heard it all before! Don't get sucked in.Financial markets are closed.All banks are going bust.The way we conduct global business has changed forever and will never be the same again.Property markets will take decades to recover.I heard all of the above statements during 2008 and 2009 when I was glued to the TV late at night throughout the GFC. They are all alarmist predictions and have all been proven to be wrong.The human race (and economy) is incredibly resilient and innovative. We have faced many challenges and prevailed. This will be no different. In respect to the financial impact on the vast majority of people in the long run, just like with the GFC, I suspect it won't be that significant.Once the coronavirus risk passes, I'm sure Australian's will start spending again to get the economy back to its normal level. I anticipate that our spending decisions will be directed towards the most effected industries such as hospitality and tourism, with the same community mindedness that was evident during the recent bushfires.Our lives are filled with predictions and usually most extreme ones get the most airtime. Try not to get sucked in. The best approach is to carefully avoid the mainstream media. Worrying has never made any problem better.Short term thinking creates anxietyWhen it comes to money and investing, short term thinking has always created anxiety. This is even more true when markets are volatile. Short term thinking does not serve you well. It promotes you to either be too greedy (when markets are high) or too fearful (when markets are low).Instead, a far superior and more comfortable approach is to play the long game. Consider what actions you can take today so that you will be better off in 5, 10 and 15 years. That puts things in perspective and helps you avoid many of the common financial mistakes that people make. And realise that sometimes the most intelligent thing to do is nothing.The impact of coronavirus on the economy and share markets is temporary, not permanent. Whether it takes 6 months, 1 year or up to 2 years to recover, only time will tell. However, history tells us that its impact will not impact on investment returns over the long run. Your decisions and actions will.Supermarkets are a perfect reflection of share marketA walk down the aisle of your local supermarket is a sobering indication of the level of hysteria impacting the Australian and international share markets. As I write this blog, the Australian market has fallen 27% since 21 February 2020 and international and US markets have fallen by circa 20%.But that doesn't really tell the full story because it's the level of volatility that has been causing the most newspaper headlines. The Australian volatility index (A-VIX) has ranged between 10% and 20% over the past decade. This week it has peaked at 55%, which is similar levels to the...

Given many people are worried about the unknown consequences of the Coronavirus, I thought it was timely for me to share my thoughts and advice. Like in all 'crises', it is important to not let emotion or fear drive your responses. 'A steady hand on the tiller' is the best approach when navigating any storm. I acknowledge that the Coronavirus may have caused significant emotional and heath distress to people around the world. I fully empathise and understand this situation and do not seek to downplay its impact. But it is important for me to stipulate that my comments below are only about the financial impacts and considerations, not any health concerns. We've heard it all before! Don't get sucked in. Financial markets are closed. All banks are going bust. The way we conduct global business has changed forever and will never be the same again. Property markets will take decades to recover. I heard all of the above statements during 2008 and 2009 when I was glued to the TV late at night throughout the GFC. They are all alarmist predictions and have all been proven to be wrong. The human race (and economy) is incredibly resilient and innovative. We have faced many challenges and prevailed. This will be no different. In respect to the financial impact on the vast majority of people in the long run, just like with the GFC, I suspect it won't be that significant. Once the coronavirus risk passes, I'm sure Australian's will start spending again to get the economy back to its normal level. I anticipate that our spending decisions will be directed towards the most effected industries such as hospitality and tourism, with the same community mindedness that was evident during the recent bushfires. Our lives are filled with predictions and usually most extreme ones get the most airtime. Try not to get sucked in. The best approach is to carefully avoid the mainstream media. Worrying has never made any problem better. Short term thinking creates anxiety When it comes to money and investing, short term thinking has always created anxiety. This is even more true when markets are volatile. Short term thinking does not serve you well. It promotes you to either be too greedy (when markets are high) or too fearful (when markets are low). Instead, a far superior and more comfortable approach is to play the long game. Consider what actions you can take today so that you will be better off in 5, 10 and 15 years. That puts things in perspective and helps you avoid many of the common financial mistakes that people make. And realise that sometimes the most intelligent thing to do is nothing. The impact of coronavirus on the economy and share markets is temporary, not permanent. Whether it takes 6 months, 1 year or up to 2 years to recover, only time will tell. However, history tells us that its impact will not impact on investment returns over the long run. Your decisions and actions will. Supermarkets are a perfect reflection of share market A walk down the aisle of your local supermarket is a sobering indication of the level of hysteria impacting the Australian and international share markets. As I write this blog, the Australian market has fallen 27% since 21 February 2020 and international and US markets have fallen by circa 20%. But that doesn't really tell the full story because it's the level of volatility that has been causing the most newspaper headlines. The Australian volatility index (A-VIX) has ranged between 10% and 20% over the past decade. This week it has peaked at 55%, which is similar levels to the...

What financial actions should you take in response to coronavirus?

Over the last few weeks, lenders have aggressively cut fixed rates, particularly for investors that borrow on an interest only basis. Three and five year fixed rates now range between 3.18% and 3.40% p.a. This means the cost to hold an investment property is as low as it's ever been.This doesn't mean we all should run out and buy an investment property.The cost to hold a median propertyThe graph below charts the annual after-tax holding cost of a median value house (average of Melbourne &amp; Sydney) expressed in today's dollars. As you can see, a property's after-tax holding costs have typically ranged between $10,000 and $30,000 per annum over the past 40 years.https://www.prosolution.com.au/wp-content/uploads/2020/02/holding-costs.png?189b78&amp;189b78The red line is the estimated annual after-tax holding costs based on current fixed rates.A $800k apartment will cost $500 per month to holdLet's look at the cost to hold an $800,000 investment property (apartment) using actual data as an example.https://www.prosolution.com.au/investment-property-holding-costs/Therefore, this property, for example will cost you circa $505 per month (after-tax) to hold.Low rates will likely inflate property valuesIt is a commonly accepted economic principal that lower interest rates typically lead to an increase in asset values (i.e. the value of equities and property rise). The reason being is that the lower cost of debt means higher profits to owners which means assets are worth more.The graph below charts three variables:§ The rolling average capital growth rate over 20 years for median houses in Melbourne and Sydney; and§ The cost to hold an investment property (as charted above). This is calculated as the annual after-tax holding cost of a median house based on prevailing interest rates at that time, expressed in today's dollars; and§ The average rolling 20 year growth rate between 2000 and end of 2019.https://www.prosolution.com.au/wp-content/uploads/2020/02/cash-flow-and-growth.png?189b78&amp;189b78This chart demonstrates that periods of higher capital growth have tended to follow periods of time where holding costs were below average.It may cost you less cash flow to generate similar capital growth ratesAs you can see from the chart above, the rolling 20 year capital growth rates have ranged between 4% p.a. and 9% p.a. It's a big range because of the particular periods of time. For example, the low growth in 2009 measures how property values changed just prior to the early 1990's recession and during the midst of the GFC - two unfortunate points in history. Similarly, the peak in 2003 measures growth from the early 1980's when property boomed.Perhaps the best long-term indicator is the average rate of 7% p.a. The average inflation rate since year 2000 is circa 2.5% p.a., so the real growth rate (i.e. excluding inflation) has been 4.5% p.a. In today's terms, that equates to a growth rate of circa 6% p.a., assuming inflation will continue to hover at around 1.5% p.a.Investing in an asset that generates a growth rate of 6% p.a. that only costs $500 per month to hold could produce tremendous financial outcomes.§ Cost flow cost in today's dollars over 20 years =...

Over the last few weeks, lenders have aggressively cut fixed rates, particularly for investors that borrow on an interest only basis. Three and five year fixed rates now range between 3.18% and 3.40% p.a. This means the cost to hold an investment property is as low as it's ever been. This doesn't mean we all should run out and buy an investment property. The cost to hold a median property The graph below charts the annual after-tax holding cost of a median value house (average of Melbourne &amp; Sydney) expressed in today's dollars. As you can see, a property's after-tax holding costs have typically ranged between $10,000 and $30,000 per annum over the past 40 years. <a href="https://www.prosolution.com.au/wp-content/uploads/2020/02/holding-costs.png?189b78&amp;189b78" rel="nofollow" target="_blank">https://www.prosolution.com.au/wp-content/uploads/2020/02/holding-costs.png?189b78&amp;189b78</a> The red line is the estimated annual after-tax holding costs based on current fixed rates. A $800k apartment will cost $500 per month to hold Let's look at the cost to hold an $800,000 investment property (apartment) using actual data as an example. <a href="https://www.prosolution.com.au/investment-property-holding-costs/" rel="nofollow" target="_blank">https://www.prosolution.com.au/investment-property-holding-costs/</a> Therefore, this property, for example will cost you circa $505 per month (after-tax) to hold. Low rates will likely inflate property values It is a commonly accepted economic principal that lower interest rates typically lead to an increase in asset values (i.e. the value of equities and property rise). The reason being is that the lower cost of debt means higher profits to owners which means assets are worth more. The graph below charts three variables: § The rolling average capital growth rate over 20 years for median houses in Melbourne and Sydney; and § The cost to hold an investment property (as charted above). This is calculated as the annual after-tax holding cost of a median house based on prevailing interest rates at that time, expressed in today's dollars; and § The average rolling 20 year growth rate between 2000 and end of 2019. <a href="https://www.prosolution.com.au/wp-content/uploads/2020/02/cash-flow-and-growth.png?189b78&amp;189b78" rel="nofollow" target="_blank">https://www.prosolution.com.au/wp-content/uploads/2020/02/cash-flow-and-growth.png?189b78&amp;189b78</a> This chart demonstrates that periods of higher capital growth have tended to follow periods of time where holding costs were below average. It may cost you less cash flow to generate similar capital growth rates As you can see from the chart above, the rolling 20 year capital growth rates have ranged between 4% p.a. and 9% p.a. It's a big range because of the particular periods of time. For example, the low growth in 2009 measures how property values changed just prior to the early 1990's recession and during the midst of the GFC - two unfortunate points in history. Similarly, the peak in 2003 measures growth from the early 1980's when property boomed. Perhaps the best long-term indicator is the average rate of 7% p.a. The average inflation rate since year 2000 is circa 2.5% p.a., so the real growth rate (i.e. excluding inflation) has been 4.5% p.a. In today's terms, that equates to a growth rate of circa 6% p.a., assuming inflation will continue to hover at around 1.5% p.a. Investing in an asset that generates a growth rate of 6% p.a. that only costs $500 per month to hold could produce tremendous financial outcomes. § Cost flow cost in today's dollars over 20 years =...

The cost to hold an investment property hits an all-time low

An independent financial advisor does a lot more than just tell you how to invest your money. In fact, a lot of the work they do is 'behind the scenes' so I thought it was a good idea to share this information in a blog. This will give you a better idea of what a financial advisor does, and therefore whether you might benefit from having one.Develop a long-term strategy for youOne of the predominant reasons people engage a financial advisor is to help them map out a long-term investment strategy to work out how they will achieve their financial and lifestyles goals. This includes what to invest in, how and how much, also when and similar considerations. I believe that adopting a holistic approach will reveal the most efficient and effective strategy because it considers all facets including super, property and shares, tax minimization and so on.A long-term strategy must be robust enough to accommodate expected market and situational changes. However, it may be necessary to make small changes to the strategy as time elapses.Engaging the services of a professional advisor to help you with this will yield numerous benefits including reassuring you that you are taking the right approach, ensuring you don't waste time and money pursuing the wrong strategy, making sure that you have considered various strategies (e.g. an advisor might recommend an approach you have never thought of).Research investment options and strategiesThe financial services industry is very dynamic and always changing. Fund managers are busily working hard to find an edge, a strategy that will help them produces better returns. Also, academic and peer research is published at an increasing rate - again, trying to identify the factors and market forces that will drive future returns.All advisors must keep on top of these new advances. More importantly, an advisor must work diligently to separate fundamentally sound strategies and products from "marketing". A fund managers job is to develop products to attract investors' funds. Sometimes, they pursue this goal at the cost of quality i.e. develop products that sound sexy but lack fundamentals and substance. Such products must be given a wide berth.I guestimate that I probably only use 1 out of every 50 to 100 products or strategies that I investigate. There's a lot of rubbish out there so 'buyer beware' is a good mantra to live by.Keep up to date with all changesIt's not news to anyone that tax, super and compliance laws are constantly changing. So, it is very important that an advisor keeps on top of all these changes. For example, every month I spend 2 hours in a classroom learning about all the recent tax changes (I must admit, it's not the highlight of my month!). In addition, I attend numerous half and full-day events to keep on top of markets, products, strategies, credit policies, superannuation and so on. This is in addition to regular one-on-one meetings with fund managers and reading lots of blogs and listening to podcasts.If you don't use the services of an advisor, you must consider the opportunity cost of doing so, what are you missing out on?Make sure you don't make any mistakesOften, investing is very simple, but it's not always easy. The best evidence of this is that most Australians fail to accumulate enough wealth to enjoy a (self-funded) comfortable retirement.It is easy to get distracted by shiny objects. Or react to fear (tons of negative newspaper articles or hysterical predictions). And it's often tempting to try and take short cuts.But none of these actions will produce wealth in the long run. In fact, the best case is that will waste time. Worse case is...

An independent financial advisor does a lot more than just tell you how to invest your money. In fact, a lot of the work they do is 'behind the scenes' so I thought it was a good idea to share this information in a blog. This will give you a better idea of what a financial advisor does, and therefore whether you might benefit from having one. Develop a long-term strategy for you One of the predominant reasons people engage a financial advisor is to help them map out a long-term investment strategy to work out how they will achieve their financial and lifestyles goals. This includes what to invest in, how and how much, also when and similar considerations. I believe that adopting a holistic approach will reveal the most efficient and effective strategy because it considers all facets including super, property and shares, tax minimization and so on. A long-term strategy must be robust enough to accommodate expected market and situational changes. However, it may be necessary to make small changes to the strategy as time elapses. Engaging the services of a professional advisor to help you with this will yield numerous benefits including reassuring you that you are taking the right approach, ensuring you don't waste time and money pursuing the wrong strategy, making sure that you have considered various strategies (e.g. an advisor might recommend an approach you have never thought of). Research investment options and strategies The financial services industry is very dynamic and always changing. Fund managers are busily working hard to find an edge, a strategy that will help them produces better returns. Also, academic and peer research is published at an increasing rate - again, trying to identify the factors and market forces that will drive future returns. All advisors must keep on top of these new advances. More importantly, an advisor must work diligently to separate fundamentally sound strategies and products from "marketing". A fund managers job is to develop products to attract investors' funds. Sometimes, they pursue this goal at the cost of quality i.e. develop products that sound sexy but lack fundamentals and substance. Such products must be given a wide berth. I guestimate that I probably only use 1 out of every 50 to 100 products or strategies that I investigate. There's a lot of rubbish out there so 'buyer beware' is a good mantra to live by. Keep up to date with all changes It's not news to anyone that tax, super and compliance laws are constantly changing. So, it is very important that an advisor keeps on top of all these changes. For example, every month I spend 2 hours in a classroom learning about all the recent tax changes (I must admit, it's not the highlight of my month!). In addition, I attend numerous half and full-day events to keep on top of markets, products, strategies, credit policies, superannuation and so on. This is in addition to regular one-on-one meetings with fund managers and reading lots of blogs and listening to podcasts. If you don't use the services of an advisor, you must consider the opportunity cost of doing so, what are you missing out on? Make sure you don't make any mistakes Often, investing is very simple, but it's not always easy. The best evidence of this is that most Australians fail to accumulate enough wealth to enjoy a (self-funded) comfortable retirement. It is easy to get distracted by shiny objects. Or react to fear (tons of negative newspaper articles or hysterical predictions). And it's often tempting to try and take short cuts. But none of these actions will produce wealth in the long run. In fact, the best case is that will waste time. Worse case is...

What does (should) a financial planner do for you?

Personal insurances such as Income Protection, Life insurance and Total and Permanent Disability (TPD) are becoming impossible to get unless you are in perfect health. This change has occurred gradually over the past few years but has now reached the point that it's become a real concern. This has a number of consequences which I discuss below.Insurers have a bad nameWe heard some shocking stories last year via the Banking Royal Commission about insurance companies including questionable and even unethical sales tactics, unreasonably denying paying claims and so on. I'm not sticking up for the insurance companies. Their tactics are boarding on criminal. However, also, a big contributor towards these problems is that people don't understand what they are buying.When it comes to insurance cover, the advantage of "no questions asked" might seem convenient, but it just isn't in your favour. You want to ensure the insurer comprehensively underwrites your cover before they put the cover into force. This includes asking you questions, undertaking medical checks, reviewing medical history and so on. Doing so leaves them less room to use the excuse of a "pre-existing condition" to deny any future claim.Also, it's important to understand the quality of the policy. Quality refers to the terms and conditions and definitions within a policy document. These all impact how comprehensive the cover is. If you get these two things right (i.e. quality and underwriting), you are much less likely to experience problems or nasty surprises down the track.What has changed?It is the underwriting and assessment process that has changed over the past few years. Insurers are, in our opinion, being over-stringent.Normally, if an insurer believes that you have a pre-existing health condition, they can take one of four actions:1. Approve the cover anyway (this is very unlikely); or2. Add an exclusion on the policy (meaning that you are not covered if that health concern causes you problems); or3. Add a loading onto the premium (i.e. charge a higher premium); or4. Decline the cover.A policy exclusion or outright decline are the most common outcomes - even for minor, inconsequential, asymptomatic health conditions! Lately, it seems that unless you are in absolutely perfect health, it is difficult to obtain exclusion-free insurance cover.Do health concerns have to be major?In short, no. This is what is so frustrating i.e. getting a decline or exclusion for a minor past medical condition. Some examples include:§ A back exclusion for a client that liked to get relaxation massages spasmodically.§ An elbow exclusion because a client had a once-off tennis elbow injury caused by a lot of typing during an intense study period. The jury was not ongoing, and clients was symptom free.§ Spine exclusion based on regular chiropractic visits for preventative reasons only (client plays a lot of sport) - no injury treatment.§ An insurer limited the clients benefit period to 5 years (period usually expires at age 65) plus added a 75% premium loading because the client worked long hours and had a high cholesterol reading.Mental health has become a 'challenge'In Australian, mental health conditions are the third most common cause of TPD claims, and the second most common cause of income protection claims. As such, insurers are becoming more conscious of these risks and mental health exclusions (and even declines) are becoming more common.We have had situations where a client has...

Personal insurances such as Income Protection, Life insurance and Total and Permanent Disability (TPD) are becoming impossible to get unless you are in perfect health. This change has occurred gradually over the past few years but has now reached the point that it's become a real concern. This has a number of consequences which I discuss below. Insurers have a bad name We heard some shocking stories last year via the Banking Royal Commission about insurance companies including questionable and even unethical sales tactics, unreasonably denying paying claims and so on. I'm not sticking up for the insurance companies. Their tactics are boarding on criminal. However, also, a big contributor towards these problems is that people don't understand what they are buying. When it comes to insurance cover, the advantage of "no questions asked" might seem convenient, but it just isn't in your favour. You want to ensure the insurer comprehensively underwrites your cover before they put the cover into force. This includes asking you questions, undertaking medical checks, reviewing medical history and so on. Doing so leaves them less room to use the excuse of a "pre-existing condition" to deny any future claim. Also, it's important to understand the quality of the policy. Quality refers to the terms and conditions and definitions within a policy document. These all impact how comprehensive the cover is. If you get these two things right (i.e. quality and underwriting), you are much less likely to experience problems or nasty surprises down the track. What has changed? It is the underwriting and assessment process that has changed over the past few years. Insurers are, in our opinion, being over-stringent. Normally, if an insurer believes that you have a pre-existing health condition, they can take one of four actions: 1. Approve the cover anyway (this is very unlikely); or 2. Add an exclusion on the policy (meaning that you are not covered if that health concern causes you problems); or 3. Add a loading onto the premium (i.e. charge a higher premium); or 4. Decline the cover. A policy exclusion or outright decline are the most common outcomes - even for minor, inconsequential, asymptomatic health conditions! Lately, it seems that unless you are in absolutely perfect health, it is difficult to obtain exclusion-free insurance cover. Do health concerns have to be major? In short, no. This is what is so frustrating i.e. getting a decline or exclusion for a minor past medical condition. Some examples include: § A back exclusion for a client that liked to get relaxation massages spasmodically. § An elbow exclusion because a client had a once-off tennis elbow injury caused by a lot of typing during an intense study period. The jury was not ongoing, and clients was symptom free. § Spine exclusion based on regular chiropractic visits for preventative reasons only (client plays a lot of sport) - no injury treatment. § An insurer limited the clients benefit period to 5 years (period usually expires at age 65) plus added a 75% premium loading because the client worked long hours and had a high cholesterol reading. Mental health has become a 'challenge' In Australian, mental health conditions are the third most common cause of TPD claims, and the second most common cause of income protection claims. As such, insurers are becoming more conscious of these risks and mental health exclusions (and even declines) are becoming more common. We have had situations where a client has...

Warning: Personal insurance is becoming impossible to get!

With the 2019 calendar year quickly drawing to a close, I thought it would be good to have a look at what next year might bring in terms of investment risks and opportunities.Over the years, I found that its best to form opinions on the economy by reading analysis/insights and attending economic briefings, whilst being careful to not overindulge. Too many opinions and viewpoints can confuse and sometimes send you down a rabbit hole. This should be complimented with real-world observation such as taking notice of retail traffic conditions, anecdotal discussions with businesspeople and so on. This approach has served me pretty well over the past few decades.The economy and the risk of recessionThere has been a bit of press lately about the risk of Australia and other developed economies (including the US) slipping into a recession.Australia is now in its 28th year of uninterrupted economic expansion - which is a world record for a developed economy. But all records must end someday. That said, population growth and raw-material (iron ore) exports have been big contributors to our economy over recent decades. I don't see that changing anytime soon. However, some sectors of the economy have been really struggling. For example, retail trade has been flat in the year to September 2019. Retail weakness has mainly manifested in household goods (probably impacted by the property market slowdown) and department store sales (thanks to online competition). Wage inflation has also been low with the Wage Price Index recently coming in at 2.2%. Prior to early 2013, the index used to always be above 3% (and peaked at 4% just prior to the GFC). But this phenomenon isn't unique to Australia - all developed economies around the world are struggling to generate wage inflation.In terms of globally, the US deserves the most attention because it's the largest developed economy by far. The Fed Reserve has been cutting rates to keep the economy growing. President Trump has called for more rate cuts (even negative rates) and for them to recommence quantitative easing. Lower rates in the US are expected to depreciate the US dollar which should add some more fuel for the economy.On the whole, I think a recession in Australia or in the US is unlikely in 2020. Of course, both economies are getting closer to an economic slowdown as each month passes. Barring any unforeseen circumstances, I think these economies will keep ticking along albeit at a slower rate.Interest ratesInterestingly, in a speech on Tuesday night (26/11/19), the Reserve Bank Governor suggested that it would prefer to cut rates two more times before implementing quantitative easing, which I was personally pleased to hear.I normally defer to Westpac's chief economist Bill Evens for interest rate forecasts, as I have found he's been consistently the most accurate over the years. Bill is forecasting only one more rate cut which is predicted to occur in the first quarter of 2020. But the big question is how much will the banks pass on? I suspect that they will continue with what they have done the last few times i.e. pass on circa 0.15% of the cut onto most borrowers but the full 0.25% for interest only investment loans.After the interest rate cutting has finished, it will then be up to the government to loosen fiscal policy and increase its spending to further stimulate growth. Thankfully, Australia's low debt levels relative to other developed countries...

With the 2019 calendar year quickly drawing to a close, I thought it would be good to have a look at what next year might bring in terms of investment risks and opportunities. Over the years, I found that its best to form opinions on the economy by reading analysis/insights and attending economic briefings, whilst being careful to not overindulge. Too many opinions and viewpoints can confuse and sometimes send you down a rabbit hole. This should be complimented with real-world observation such as taking notice of retail traffic conditions, anecdotal discussions with businesspeople and so on. This approach has served me pretty well over the past few decades. The economy and the risk of recession There has been a bit of press lately about the risk of Australia and other developed economies (including the US) slipping into a recession. Australia is now in its 28th year of uninterrupted economic expansion - which is a world record for a developed economy. But all records must end someday. That said, population growth and raw-material (iron ore) exports have been big contributors to our economy over recent decades. I don't see that changing anytime soon. However, some sectors of the economy have been really struggling. For example, retail trade has been flat in the year to September 2019. Retail weakness has mainly manifested in household goods (probably impacted by the property market slowdown) and department store sales (thanks to online competition). Wage inflation has also been low with the Wage Price Index recently coming in at 2.2%. Prior to early 2013, the index used to always be above 3% (and peaked at 4% just prior to the GFC). But this phenomenon isn't unique to Australia - all developed economies around the world are struggling to generate wage inflation. In terms of globally, the US deserves the most attention because it's the largest developed economy by far. The Fed Reserve has been cutting rates to keep the economy growing. President Trump has called for more rate cuts (even negative rates) and for them to recommence quantitative easing. Lower rates in the US are expected to depreciate the US dollar which should add some more fuel for the economy. On the whole, I think a recession in Australia or in the US is unlikely in 2020. Of course, both economies are getting closer to an economic slowdown as each month passes. Barring any unforeseen circumstances, I think these economies will keep ticking along albeit at a slower rate. Interest rates Interestingly, in a speech on Tuesday night (26/11/19), the Reserve Bank Governor suggested that it would prefer to cut rates two more times before implementing quantitative easing, which I was personally pleased to hear. I normally defer to Westpac's chief economist Bill Evens for interest rate forecasts, as I have found he's been consistently the most accurate over the years. Bill is forecasting only one more rate cut which is predicted to occur in the first quarter of 2020. But the big question is how much will the banks pass on? I suspect that they will continue with what they have done the last few times i.e. pass on circa 0.15% of the cut onto most borrowers but the full 0.25% for interest only investment loans. After the interest rate cutting has finished, it will then be up to the government to loosen fiscal policy and increase its spending to further stimulate growth. Thankfully, Australia's low debt levels relative to other developed countries...

2020 Vision: What investment risks and opportunities will next year bring?

According to global bank Standard Chartered, the Chinese and Indian economies are expected to more than triple between 2017 and 2030. In fact, China's Gross Domestic Product (a measure of a country's economic output) is predicted to be more than double the USA. This is because the International Monetary Fund predicts that emerging economy growth rates will be nearly three times higher than developed economies. However, investing in emerging markets is not for the fainthearted.Developed versus emerging marketsStock markets are typically classified as either developed or emerging markets. Developed markets have a robust and reliable financial system. The country must be open to foreign ownership, ease of capital movement, and efficiency of market institutions. As such, the governments disclosure and regulatory regime is aimed at providing investors with reliable and trustworthy information. The largest developed economies include USA (accounts for 62.8% of all developed markets), Japan (8.4%), UK (5.5%), France (3.8%) and 19 other smaller countries including Australia.However, emerging markets are less developed. Their financial systems do not have the same level of transparency, accountability and regulatory oversight. The largest emerging markets include China (33%), Korea (13%), Taiwan (11.4%) and India (9%) plus 22 additional countries.Indexing doesn't work as well If you have been a reader of this blog for some time, you would be well aware by now that I'm a strong believer in passive (index) investing. Passive investing is low-cost, very diversified way of investing in a particular market or asset class. It only employs rules-based methodologies - meaning that you don't pay for expensive fund managers and we can back-test results (i.e. work out what the results would have been if you employed the same rules-based approach over the past 20 years for example). There's overwhelming evidence that confirms passive investing produces higher returns in the long run. For example, based on data prepared by S&amp;P Dow Jones Indices, only 16% of active fund managers have beaten the Australian index (ASX200) and less than 11% have beaten the US index (S&amp;P500) over the past 15 years. But this data is a bit deceptive, because its not the same fund managers for the whole period. In fact, any out-performance rarely persists for more than a couple of years - which means you need a crystal ball to work out which active fund manager to switch to every few years. This is a flawed strategy in my opinion - which is why rules-based, passive investing is superior.However, when it comes to investing in emerging markets, indexing doesn't always perform as well as it does in developed markets.When investing in developed markets, many studies show that the key is to diversify your portfolio as much as possible. Of course, you should employ various value-based indexing strategies, particularly in this market. Lack of diversification is the number one cause of poor returns. So, a blanket-based approach works best.However, when investing in emerging markets, the key is to avoid the poor-quality companies and over-valued companies. Yo...

According to global bank Standard Chartered, the Chinese and Indian economies are expected to more than triple between 2017 and 2030. In fact, China's Gross Domestic Product (a measure of a country's economic output) is predicted to be more than double the USA. This is because the International Monetary Fund predicts that emerging economy growth rates will be nearly three times higher than developed economies. However, investing in emerging markets is not for the fainthearted. Developed versus emerging markets Stock markets are typically classified as either developed or emerging markets. Developed markets have a robust and reliable financial system. The country must be open to foreign ownership, ease of capital movement, and efficiency of market institutions. As such, the governments disclosure and regulatory regime is aimed at providing investors with reliable and trustworthy information. The largest developed economies include USA (accounts for 62.8% of all developed markets), Japan (8.4%), UK (5.5%), France (3.8%) and 19 other smaller countries including Australia. However, emerging markets are less developed. Their financial systems do not have the same level of transparency, accountability and regulatory oversight. The largest emerging markets include China (33%), Korea (13%), Taiwan (11.4%) and India (9%) plus 22 additional countries. Indexing doesn't work as well If you have been a reader of this blog for some time, you would be well aware by now that I'm a strong believer in passive (index) investing. Passive investing is low-cost, very diversified way of investing in a particular market or asset class. It only employs rules-based methodologies - meaning that you don't pay for expensive fund managers and we can back-test results (i.e. work out what the results would have been if you employed the same rules-based approach over the past 20 years for example). There's overwhelming evidence that confirms passive investing produces higher returns in the long run. For example, based on data prepared by S&amp;P Dow Jones Indices, only 16% of active fund managers have beaten the Australian index (ASX200) and less than 11% have beaten the US index (S&amp;P500) over the past 15 years. But this data is a bit deceptive, because its not the same fund managers for the whole period. In fact, any out-performance rarely persists for more than a couple of years - which means you need a crystal ball to work out which active fund manager to switch to every few years. This is a flawed strategy in my opinion - which is why rules-based, passive investing is superior. However, when it comes to investing in emerging markets, indexing doesn't always perform as well as it does in developed markets. When investing in developed markets, many studies show that the key is to diversify your portfolio as much as possible. Of course, you should employ various value-based indexing strategies, particularly in this market. Lack of diversification is the number one cause of poor returns. So, a blanket-based approach works best. However, when investing in emerging markets, the key is to avoid the poor-quality companies and over-valued companies. Yo...

How to invest in Emerging Markets such as China and India

I have written about cash flow management a couple of times previously (here and here) because it is the most important thing to master in order to build wealth. It is also the reason that most people fail to build wealth. In fact, I have never met a wealthy person that doesn't have good cash flow management. That is not to say they don't spend money on luxury items. They only spend on luxury items that matter to them.The purpose of this blog is to show you how to master cash flow management in a very simple, easy to follow way. You don't have to become super-tight or track every cent you spend. You just need to become a 'conscious spender'.Money just goes... if you let itThere's a saying that "a vacuum always fills" and this applies to cash flow too. I notice that with most people, living expenses rise in line with income increases. And most people spend whatever they earn. There is always something to spend money on. A better home, better clothes, better schools, better holidays, better restaurants - and the list goes on! Our ego wants us to spend all our money on "better stuff". We tell ourselves we are worth it. We've worked hard so we deserve these "better things". But don't let the ego win! Ego really is the enemy of successful wealth accumulation.The difference between people that have successfully built wealth and those that have not is that wealthy people are very deliberate about their expenditure. They don't waste money. They think about everything they spend money on and if it's something that is not important to them, they will find the cheapest option or eliminate the expenditure in full. It's all about value for money. Very few things are purchased on impulse. If it's something that is important to them, they are happy to pay a premium (luxury price). However, in reality, there are few items that meet this definition. In short, wealthy people are smart with their money. It is not smart to buy something you aren't going to care about in a few weeks' or months' time - irrespective of whether you have the money or not.Rich people know they can buy everything they wantSometimes people spend money on items to make themselves feel special, successful or even rich. For example, only a small percentage of the population can spend $700 on a pair of shoes, so "I must be rich" they tell themselves.However, rich people tend to operate differently. Rich people want to feel smart about their spending. They know they can buy all the brand names they want - there are few limits. So, its not about whether they can afford it. Therefore, it tends to come down to only two questions; (1) do I really need or want this item and (2) is it good value-for-money? Rich people know that's what sets them apart from the vast majority of people i.e. they know how to be smart with their money. It has nothing to do with proving they are rich (by buying more stuff).Therefore, change the story in your head. Tell yourself that you are rich. That you can afford to buy whatever you want if you really wanted to. But the desire to feel smart with money is stronger than the desire to feel rich.Why is a cash flow surplus so important?If we spend all our income, we will have nothing left over to save for tomorrow (retirement). However, if we save a bit and spend a bit, we can enjoy life today and feel comfortable that we're building wealth for tomorrow. In essence, you need to spend less than you earn and invest the difference on a regular and consistent basis. If you can't achieve that, it's very...

I have written about cash flow management a couple of times previously (here and here) because it is the most important thing to master in order to build wealth. It is also the reason that most people fail to build wealth. In fact, I have never met a wealthy person that doesn't have good cash flow management. That is not to say they don't spend money on luxury items. They only spend on luxury items that matter to them. The purpose of this blog is to show you how to master cash flow management in a very simple, easy to follow way. You don't have to become super-tight or track every cent you spend. You just need to become a 'conscious spender'. Money just goes... if you let it There's a saying that "a vacuum always fills" and this applies to cash flow too. I notice that with most people, living expenses rise in line with income increases. And most people spend whatever they earn. There is always something to spend money on. A better home, better clothes, better schools, better holidays, better restaurants - and the list goes on! Our ego wants us to spend all our money on "better stuff". We tell ourselves we are worth it. We've worked hard so we deserve these "better things". But don't let the ego win! Ego really is the enemy of successful wealth accumulation. The difference between people that have successfully built wealth and those that have not is that wealthy people are very deliberate about their expenditure. They don't waste money. They think about everything they spend money on and if it's something that is not important to them, they will find the cheapest option or eliminate the expenditure in full. It's all about value for money. Very few things are purchased on impulse. If it's something that is important to them, they are happy to pay a premium (luxury price). However, in reality, there are few items that meet this definition. In short, wealthy people are smart with their money. It is not smart to buy something you aren't going to care about in a few weeks' or months' time - irrespective of whether you have the money or not. Rich people know they can buy everything they want Sometimes people spend money on items to make themselves feel special, successful or even rich. For example, only a small percentage of the population can spend $700 on a pair of shoes, so "I must be rich" they tell themselves. However, rich people tend to operate differently. Rich people want to feel smart about their spending. They know they can buy all the brand names they want - there are few limits. So, its not about whether they can afford it. Therefore, it tends to come down to only two questions; (1) do I really need or want this item and (2) is it good value-for-money? Rich people know that's what sets them apart from the vast majority of people i.e. they know how to be smart with their money. It has nothing to do with proving they are rich (by buying more stuff). Therefore, change the story in your head. Tell yourself that you are rich. That you can afford to buy whatever you want if you really wanted to. But the desire to feel smart with money is stronger than the desire to feel rich. Why is a cash flow surplus so important? If we spend all our income, we will have nothing left over to save for tomorrow (retirement). However, if we save a bit and spend a bit, we can enjoy life today and feel comfortable that we're building wealth for tomorrow. In essence, you need to spend less than you earn and invest the difference on a regular and consistent basis. If you can't achieve that, it's very...

You can't earn your way to financial freedom

The best podcast episodes about true crime. For any thrill seeking podcast listeners who just can't get enough of the captivating stories of murderers and criminals. This topic has all the best episodes from many different true crime podcasts.  Add episodes you're interested into your queue below!

Best True Crime Podcasts

The best podcast episodes on Startups. For anyone working in a startup, or anyone interested in the incredible stories behind how people built companies like Instagram, and Facebook. Offering both practical advice and insights, as well as the stories for how many of the biggest startups got to where they are today. Add episodes you're interested into your queue below!