Death Throes of the Monster Chimerica

“Chimerica” describes the combination of the Chinese and America economies, which when the term was coined had become the driver of the global economy. In an article in The Weekend Australian over the weekend (21-22 November 2009) authors Niall Ferguson and Moritz Schularick discuss how the past structure of this relationship needs to die a peaceful death for sake of the global economy.

I recommend this article to you if you are interested in how the financial decisions of nations interact and impact on the global economy. (You could call this macro-economics).

Read “Death Throes of A Monster” here. (If that link to the original source has expired read the article here.)

If your only tool is a hammer

You may be familiar with the adage that to a person with a hammer every problem looks like a nail.

This is very applicable in the world of financial advice and many clients are not aware of it.

Unfortunately, when you don’t know any different you are often also oblivious to the consequences, which include:

  • Missed opportunity
  • Higher stress from strategies and products that don’t ideally suit your personality and needs
  • Higher costs and lower value-for-money
  • Missed lifestyle goals

Example Hammers in The World of Financial Advice

A tax accountant thinks a Self Managed Super Fund is the answer to getting control over your superannuation.

Why? Because they’re not licensed to recommend other off-the-shelf products. (Which, by the way give you great control without the legal responsibility of a SMSF.) And because they’re not licensed to give such advice they naturally wouldn’t spend any professional development time researching alternate options.

A stockbroker thinks owning direct shares is the best way to create wealth.

While a real estate agent or property developer thinks residential investment property is the best way.

And your mates and colleagues think the best way is the way they are doing it!

Why? Because it’s probably the only way they know. (Plus you doing what they suggest sub-consciously validates their decisions. It’s a psychological phenomenon of herding or “group think.)

(Apologies to readers in the above professions who cleverly operate outside the above generalisation. Keep it up!)

Ask Yourself

Since so many types of professions can call themselves “financial advisers” ask yourself which tool is the focus of their tool box?

You Need A Team with a Tool Box

The truth is that there is no one best way and no single tool that will be all you need through your life.

Almost everything in life requires money to facilitate it. So your financial planning and management needs to be as deep and broad as your life.

That’s a life long job that requires a diverse tool box.

Rather than doing and knowing it all yourself you outsource some of that planning and management to the financial professions.

Your best solution is to build a team of experts.

Your Team

Your primary contact when managing your finances should be a comprehensive financial planner.

True financial planners have a tool box full of various tools. They assess the problem/goal and then select the right combination of tools.

Taking the metaphor deeper, true financial planners may not actually swing all the tools themselves. After identifying the right tools they may recommend specialists for certain tools that you need.

This is illustrated in the image below:

Who to call

So when you have a financial problem or a decision you are mulling over don’t just speak to your accountant or investment adviser. They may not have the right tool for the job.

Instead speak to your financial planner who has a comprehensive, contextual view of both your situation and the world of financial strategies.

And if you don’t yet have a big picture person in your team then call me today.

What do you think?

Share your thoughts about this perspective in the comments below. I’d love to know:

  • How do you currently solve the bigger picture aspect of your financial decisions?
  • Who do you turn to for help?
  • Who are valuable categories of advice professionals in your team?

And what financial decisions are occupying your mind right now? Complete the survey here

Try to make your passion a business

Today, KPMG partner Bernard Salt is a well known commentator in the media as a perceived expert on demographics, especially in relation to its impact on property.

In his article in The Australian today Bernard Salt shares some of his lessons from his media journey, which started twenty years ago at the age of 32. It may seem glamorous but it has not always been easy and has taken “perseverance” in the face of well meaning advice from other “experts”.

 I strongly believing in identifying, pursuing and profiting from your passions so I recommend you read Salt’s article “Try to make your passion a business“.

(If the direct link has expired you can read the article here.)

To Fix Interest Rates or Not?

With two interest rate rises already under our belts more people are asking me if they should be fixing their rates. Read on to discover the pros and cons and if fixing your interest rates may be right for you.

With two interest rate rises already under our belts more people are asking me if they should be fixing their rates.

You give up flexibility for certainty plus you often pay more.

 The initial attraction to fix rates is often primal – we hate to miss an opportunity to save money. With more rate rises forecast that’s precisely what people think they’ll be doing if they fix rates.

Most get it wrong

The reality is somewhat different for most. Research has shown that over half of people who fix their rates end up worse off financially. They pay more interest and repayments than if they’d left their loans variable.

For a personal illustration of that just ask anyone who fixed their rates two years ago when there was still talk of rates going higher. That crystal ball was clearly broken.

The Rate You’ll Be Paying

One belief is that you can fix your rate at the current variable rate, so as soon as rates go up you’re in front. That is not the case. Fixed rates are set taking into consideration the lender’s forecast of rates during the fixed period.

The following table summarises rates as at 7th November 2009 from the four biggest lenders:


 


Std

Var


Basic Var

1
Year Fixed

2
Year Fixed

3
Year Fixed

5
Year Fixed


ANZ

6.31

5.61

6.50

7.34

7.69

8.04



CommonwealthBank

6.24

5.48

6.64

7.34

7.74

8.04


nab

6.24

5.74

6.59

7.29

7.59

7.89

Westpac

6.31

5.61

6.54

7.19

7.59

7.94

Source: Cannex

Ponder This: If you fix your rates now how high do variable rates need to go before you break even overall?

For and Against

Why Fix

  • You can’t keep food on the table if your repayments go much higher
  • Your mindset is that certainty is a very high priority. (Any control freaks reading this article?)

Downside Trade-offs:

  • You immediately pay a higher interest rate and higher repayments, which impacts your cash flow
  • You are very restricted on the amount of additional repayments you can make, meaning you can’t ahead as quickly as you may like.
  • There can be a break fee if you need to refinance during the fixed term (usually when your fixed rate is higher than the variable rate, like now.)

Things To Consider

What are your life plans over the next three or five years?

Your financial decisions today impact on the options you will have available to you tomorrow, next year and five years from now. If you’re not well informed some decisions you make can shut out important life choices you would like to make in coming years.

For example, let’s say you plan to upgrade your home in the next few years. If you have a fixed rate you may be liable for a large break cost. At the time the cost may be so high that you can’t afford it and end up not being able to move as desired.

Maybe you don’t plan to for certain, but maybe it’s an above fifty percent possibility. If so, wouldn’t you like to keep the option flexibly open to you?

Before fixing your rates write down all the things you think you may like to do in the coming years. Project out as far ahead as the period for which you are planning to fix your rates.

Pay rises

Right now you may not have the cash flow to make high additional repayments but keep in mind the pay rises and bonuses you may receive over the next two to three years. Wouldn’t you love to be able to use them to nail your mortgage?

Cash flow control

Remember that if your cash flow is hyper-sensitive to increased repayments then fixing rates will immediately increase your pressure. Instead, over the next few months redirect that same amount into getting some cash flow coaching. You’ll discover ways to save money that’ll actually decrease your sensitivity to rate rises.

Call or e-mail me now to enquire about my Cash Flow Coaching program.

Still Unsure?

On thing you can do is hedge your bets by splitting your loan into a variable and a fixed portion. It doesn’t need to be an even split.

If you’d like some assistance in making the decision then book a meeting with me. I’m confident you’ll have a clear decision in under an hour.

Please Share This

If you found this article to be useful please forward it to your friends who have mortgages.

An example of how DIY is costly

Do-it-yourself financial planning can be costly because often you don’t know what you need to know.  With a litte more knowledge you would make a more informed financial decision that can both save and make you money.

This was clearly illustrated in my conversation just now with one of the other tenants in my office building. Let’s call him John…

John’s DIY Superannuation Strategy

John mentioned that about 18 months ago he had cancelled his salary sacrifice into superannuation because, with markets falling the value of his contribution reduced soon after being made. Now that markets have recovered substantially he is going to restart his salary sacrifice.

That all sounds reasonable, right?

Well it was a costly decision and not because of the market movements.

The bit John overlooked…

One of the main benefits of salary sacrifice to superannuation is that you save tax on your gross income. By cancelling your salary sacrifice you end up paying more tax.

I asked John “did you know you could’ve directed your superannuation contributions into a cash investment rather than your former investment option?” Clearly he didn’t know that.

John could’ve kept saving tax by continuing to salary sacrifice to superannuation. In addition he could have avoided losing money on the contributions by directing them to a cash option.

Asking a smart financial adviser before changing his strategy would’ve meant John was wealthier already. The advice fee would’ve been quickly covered by avoiding a costly outcome.

If you, like John, didn’t know you could do that in your superannuation then I am pleased you have read this article. Ponder this: is it possible there are other things about superannuation you perhaps do not know that could be making you wealthier?

If you don’t know how, just ask

Perhaps the next questions that may pops into your head is “how?” How do you direct your contributions into cash but keep your existing balance invested and positioned for recovery?

Well, there are plenty of low cost, value-for-money superannuation products that have that facility. (Hint: they are generally not the industry funds who spend your money on advertising.)

Just ask your financial planner to review your superannuation account. Call me for a low-cost quick super review to see if there are better value-for-money accounts available to you.

John may also have benefited by pondering this before he acted: by what percentage does your investment in superannuation need to fall so that your “loss” equals the extra tax you would pay at your marginal tax rate (by keeping the contribution outside of superannuation)?

Do-it-yourself financial planning can be costly. Great financial planning advice will minimise your downside as much as maximising your upside. You’ll only know when you give it a proper go by hiring a true financial planner (like me, of course. 🙂 )

Latest Research: You Save More by Paying For Financial Advice

Want to save more money? Then pay for financial advice. That is the one of the findings revealed in this latest research by KPMG/IFSA. Clients of financial planners on average save over $2,400 per year more.

To some people it is a statement of the bleeding obvious to say that getting financial advice is an investment not a cost; you make more than you pay.

However, I know from talking to people after my seminars that when they are struggling to save money they also mentally struggle to pay for support in creating better behaviours.

What we professionals and our clients have know for decades has today been confirmed by research – clients of financial planners save and invest more for their future lifestyle.

On average clients “save an additional $2,457 each year, compared to a similar individual who does not have a financial planner.”

Source: KPMG Econtech research for IFSA (Investment and Financial Services Association).

Personally, I charge less than that amount for my Cash Flow Coaching program, which is just like having a personal trainer for your saving. Clients typically get control of where their money goes, accelerate their debt repayment and start saving for important lifestyle goals.

When you consider how much interest you save on your credit card and other debts then cash flow coaching delivers a very immediate return on investment by boosting your savings.

So if you are a little financially unfit enlist in a boot camp for your saving. Call or e-mail me now to join my cash flow coaching program.

Product Aligned Advice is (Mostly) Irrelevant

SMH article: “Finance advisers mostly a sales force, report says” is wrong and potentially more misleading to you than product-aligned advice.

The Sydney Morning Herald will have you falsely believe that “the financial advice industry has been dealt a blow with evidence that some of its biggest names – AMP, Colonial, and BT – are mostly telling clients simply to buy products offered by their parent companies.” Read the original SMH article.

That conclusion is wrong. Believing it will cause you unnecessary stress and probably lose you money.

The reality is that this product focus is stressing about the detail and missing the big picture.

For example, product focus is like stressing about finding the best pair of mountain climbing shoes.

  • What if you’re never quite sure you’ve got the best shoes so you never set off on your trek up the mountain? (Behaviour and delay)
  • What if you set off but you’re on the wrong mountain? You get to the top and you look across and realise you actually wanted to summit a different mountain? (Life goal clarity)

The greatest cost in wealth creation is behavioural. The long term lifestyle cost of a slightly more expensive product to get you from A to B is minimal when compared to the cost of delay.

Don’t allow worry about product-aligned financial advice to cause you to procrastinate from taking positive action with your finances. The procrastination will be far costlier to your short and long term lifestyle.

Further the product has nowhere near the impact of getting the right strategy and being clear on your goals. And since goals clarification and strategy selection are the steps before product selection all good financial planners will advise you on that irrespective of them being tied to product provider. That is the true value of planinng your finances.

Stop worrying about finding the best investment product and just take positive action today towards your personal clearly defined goals.

If you need greater clarity of your goals and you need support to consistently take action then hire a financial planner to guide and suport you. They’re like a personal trainer for you and your money.

P.S. Just in case you’ve assumed I am tied to a product provider – I’m not. I deliberately choose my licensee to ensure I can recommend an extremely broad range of products across many providers. I am aligned to your best outcome not to a product. (Just ask my clients.)