In Investing, It’s When You Start And When You Finish

Is investing about timing the market or time in the market or…?

Ed Easterling of Crestmont Research has produced a very interesting illustration of your average annual return depending on when you bought and when you sold your investment. The chart is based on the Standard & Poor’s 500-stock index for the United States of America and goes back as far as 1920 (i.e. before the Great Depression.)

The  New Yorks Times have republished the chart here.

Not surprisingly using long term average returns is very deceiving. Your wealth creation will be greatly affected by the sequence of returns during your investment time frame.

For me this illustration reinforces the importantance of annually reviewing your progress and making adjustments to your strategy and saving rate.

It also reinforces the folly of blindly ‘investing‘ in the share market with a short term view, expecting to make great returns. Short-term trading is for professionals and those playing with loose change from their deep pockets.

(Thanks to loyal reader Gihan for alerting me to this illustration.)

Flood insurance

The flooding in Queensland, New South Wales and Victoria has highlighted to many the devastating consequences of natural disaster. For many the likelihood may be low but when the consequence is so high it is worth considering the plans you have in place to protect your family’s lifestyle and dreams if misfortune strikes.

Insurance can be one tool for minimising the impact of natural disaster.

To learn more about flood insurance read this edition of Consumer Tips published by The Insurance Council of Australia.

The Herald Sun also published an easy-to-read overview of insurance cover for floods. (18 Jan 2011)

Choice also provided a flood update in to their guide on choosing home and contents insurance. It is a worthwhile read. (14 Jan 2011).

How to make smart financial choices

A scan of the many surveys about New Year’s resolutions reveals that it is common for people to set a goal to improve their financial situation. This may include saving more, repaying more debt or even investing more wisely.

How do you choose what financial actions you take?

To achieve a goal of improving your financial situation means you will need to make even smarter financial decisions that you have in the past.

Some typical decision making types that I come across are described below. Do you recognise yourself in one or more?

Fashionista

Follows the glitz and glamour of the latest trend. They end up changing frequently with the fashion rather than sticking at things. You can pick them as they always have an engaging investment story to tell at the barbeque or in the office kitchen. On the surface they appear active and ‘with-it’ but zoom-out and their progress is minimal.

“Have you heard about…?”

Champion

The champion likes to stand atop the dais. They are persistently hunting for the approach with the potentially best return or fastest way to get rich but give minimal consideration to the effort and knowledge required to achieve it.

“I’ve heard you get better returns if you…”

Paralysed Analyser

Detail oriented lover of spread sheets who easily gets lost diving down yet another rabbit hole so ends up taking very little action.

“I’ve just got a few more calcs I want to do”

The Ostrich

Listening to all the options described by the Fashionista and Champion overwhelms the Ostrich. They find deciding a bit too hard so instead procrastinate and hope that it will all work out.

“Meh, I don’t think about money”

The Groupie

Like the Ostrich, the Groupie finds it hard to make a decision but still wants to take action. They comfort themselves by doing what they see everyone else doing and then hope for the best. Often that will be what they heard from the Fashionista or Champion – after all they seemed to know what they were talking about.

“Well that’s what everyone else was doing”

My guiding principles for making financial decisions

Back when I was a graduate engineer I was a blend of the Paralysed Analyser and the Groupie with my financial decisions. I eventually found it so overwhlemelming analysing direct shares that the first share I ever bought was on the recommendation of the Human Resources officer whose office was next to mine. (I used to hear him on the phone to his stock broker so assumed he knew what he was talking about.)

In the ten years since I changed careers from engineering to financial planning I have evolved some principles that guide my own financial decisions and the actions I recommend to clients. The principles are as strongly influenced by my (growing) knowledge of human behaviour as they are of my financial knowledge.

I share these guiding principles with you in brief and hope they will help you make the right financial choices for you right now.

Overall philosophy

Money management and wealth creation are not about the money. They are about the life experiences money helps facilitate.

Money is just one resource required to facilitate the experiences in a fulfiling life. You also need to nurture you mind, body and soul and prioritise your time.

In short money is one means to an end.

Further, most people have better things to do than labour over managing their money and creating wealth.

When to start

Take action now since delay is the greatest cost in wealth creation.

Inaction is more costly than steady progress.

That said inaction or “pause” is often better than ill-informed knee-jerk action. To start it doesn’t have to be the best it just has to be good.

For example, just because you don’t know the best way to create wealth for retirement doesn’t mean you can’t start today to put away an extra 10% of your gross income into a cash savings account.

Where to start

Start by learning about and fully understanding what you have already got. For example:

  • the different types of bank accounts for cash savings
  • credit cards, loans and the best way to get out of debt fast
  • superannuation

How to filter possible actions into the right next actions for you

1. First pursue the high impact low effort actions

I am ambitious by nature with lots I want to achieve. So I am constantly open to more efficient and effective ways to get things done. I am seeking the sweet spot of outcome for effort required.

In regards to money that often translates to finding the lowest effort way to get a good enough outcome. You just need enough money to facilitate the experiences that matter most, whilst ensuring you have time left for those experiences.

It’s like filtering your actions based on Pareto’s 80-20 rule.

I often ponder “is there a simpler to understand and easier to implement way of achieving a similar financial and lifestyle outcome?”

As an example of a high impact low effort strategy, rather than busily trying to scoop more money into your money pot first plug the leaks – leaks such as high loan interest and duplicate fees on multiple superannuation accounts.

2. Learn and evolve incrementally by shifting one dimension at a time

(This principle requires a full article to explain but here it is in overview)

Some of the dimensions for wealth creation are:

  1. The source of funds (yours, a lender’s, other people)
  2. The entity structure (your own name, partner’s name, trust, company, superannuation)
  3. Direct or indirect (e.g. direct ownership or via a managed fund)
  4. Asset class (equities, property, fixed interest, cash etc.)

When you start out with a simple route you may start by investing:

  • with your own money
  • within the superannuation entity structure
  • indirectly through a managed fund
  • that is invested in a diversified portfolio of asset classes

At each evolution of your strategy you can ease the amount of knowledge you need to acquire by incrementally changing one of those dimensions at a time.

For example let’s assume you started by understanding your existing superannuation. To evolve you could just change the entity structure from superannuation to investing in your own name. You would invest in the twin sibling managed fund to the one you chose in your superannuation account.

(If you are just starting out then I understand if that explanation lost you. Tackle the earlier principles first.)

Coming up

In future articles I will describe some more processes to help you laser in on the best place to start for you right now. You’ll assess where you are in the Six Stages of Wealth Creation.

I am very interested in your thoughts and reactions on my guiding principles. Please share them in the comments below.

Latest retirement cost statistics

For those thoroughly planning for their retirement you may be interested in the latest statistics of the actual amount spent by current retirees.

Previously I’ve written a more detailed article about retirement planning and this statistic – this article just advises you of the latest update.

The Westpac ASFA Retirement Standard for the September 2010 quarter shows that a couple wanting a comfortable lifestyle in retirement need to target to be able to afford to spend approximately $53,729 per year.

The Westpac-ASFA Retirement Standard reports that the detailed budgets for various households and living standards as at September Quarter 2010 are:

Modest lifestyle

– single

Modest lifestyle

– couple

Comfortable lifestyle

– single

Comfortable lifestyle

– couple

Housing – ongoing only $55.60 $53.39 $64.46 $74.72
Energy $30.36 $40.32 $30.81 $41.78
Food $71.20 $147.49 $101.71 $183.09
Clothing $17.97 $29.17 $38.89 $58.34
Household goods and services $26.18 $35.50 $73.65 $86.27
Health $33.51 $64.67 $66.48 $117.34
Transport $88.41 $90.92 $131.76 $134.26
Leisure $72.87 $108.56 $220.82 $302.61
Communications $9.15 $16.02 $25.15 $32.01
Total per week $405.26 $586.03 $753.73 $1,030.42
Total per year $21,132 $30,557 $39,302 $53,729

The Westpac ASFA Retirement Standard assumes the retirees own their own home. It defines a modest retirement lifestyle as “better than the Age Pension, but still only able to afford fairly basic activities.”

A comfortable retirement lifestyle is defined as: “enabling an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.”

Property prices do go down

Do you or someone you know hold beliefs like “property is safe”, “property doesn’t go down”, “you can’t lose money on property” and “property is the best investment”. If so, you may be a victim of our natural tendency to confirmation bias. Read this article to boost your robust decision making.

A couple of weeks ago someone was telling me about their recent investment property purchase. They had borrowed the full property price plus purchase costs. Their strategy was to hold it for about 3 to 4 years and then sell it for a substantial profit.

Alarm bells were already ringing for me – then they came out with “the worst that could happen is we sell it for what we bought it for.”

I do not have a bias for or against any particular type of investment asset, although some may interpret that I do. I favour robust decision making where the outcome is selecting the right strategies and assets for you right now. What is appropriate for you will be fluid and change over time as your situation evolves.

When it comes to residential property too often I encounter beliefs and decision making that is far from robust.

I hear phrases like “property is safe”, “property doesn’t go down”, “you can’t lose money on property” and “property is the best investment”.

Smart people believe weird things because they are skilled at defending beliefs they arrived at for non-smart reasons.”
— Michael Shermer

Naturally deceptive

Confirmation bias is one of our natural tendencies where we selectively focus on and easily recall information that reinforces our existing beliefs. At the same time we selectively ignore and forget information that would challenge that belief.

When people talk to me about residential property they seem to always have a toolkit of anecdotes they can roll-out to prove their point. Often they can’t recall knowing anyone who has lost money, or reading any news about property loses.

I know a lot of people have made good money investing in residential property in the past decade. But I also know people who have lost money, sometimes lots. And I also see the more scientific statistics of movement in real estate indices (and the indices of other asset types.)

“…thinking anecdotally comes naturally, whereas thinking scientifically does not.”
— Michael Shermer

Evidence to help you

In the interests of supporting you in making more robust decisions I am starting to collate and publish evidence to challenge the common misconception that property does not go down. Here is the first:

House prices tipped to slip in year ahead

The Weekend Australian, January 1-2, 2011 reported “…a national fall in house prices with further declines likely over the year ahead.” Read the article here

I live in the “boom town” of Perth where optimism about property investment is astounding. Yet even in Perth property does go down as reported by The Weekend Australian:

“The Rismark-RP Data house price index shows the market is weakest in Perth, where average prices have fallen by 4.9 per cent, or almost $25,000, since May.

Average apartment prices in Perth are down $44,000. Home buyers in Perth have seen no capital appreciation since August 2007.”

(emphasis added by me.)

Wow, two whole years where investors potentially had no capital appreciation to compensate them for negative cash flow (from rent not covering interest).

Selling your property for what you bought it for is certainly not the worst that could happen!

Ensure you are scientific in your research and make robust decisions about what is right for you right now.

When the best policy is actually necessary

In November we decided to replace our second car after the old one was sentenced to death row during a regular service.

In researching new (small) cars I noticed that many of the modern popular features are not available in the base/lower versions of several models. You need to buy the higher version to get those features.

For example:

  • Side and curtain airbags to elevate the model from a 4 to 5 star ANCAP safety rating
  • Bluetooth connectivity (for your phone and/or MP3 player)
  • Rear electric windows
  • Cruise control

I don’t consider such features as luxurious bells and whistles. To me they should be standard based on the way many in the western world are living our lives right now.

So going for the premium version of a model doesn’t just get you sexier exterior and interior trimmings plus a more powerful stereo – things you may not really need. You need to upgrade to the premium version just to get the 5 star safety rating – a really valuable feature to all.

Similarly for personal insurance

I have noticed a similar trend in personal insurance following the recent season of product upgrades.

In the case of car buying our extensive driving experience makes us better equipped to identify and assess the value of the extra features in the premium versions of models.

Not so with personal insurance where many of us have no direct experience.

With personal insurance going for the Premier or Plus version of a policy doesn’t just get you a bunch of lovely ancillary benefits that may aid your comfort when you claim.

Increasingly I am noticing that you need the top version to get the more generous definitions of core policy terms – the terms that will affect whether you can successfully claim at all.

A disability example

For example, the definition of disability will affect whether you are considered sufficiently disabled such that you can claim under your income protection or total & permanent disability (TPD) policy. It is a core policy term and you want a generous definition that increases the scope of situations in which you could receive a benefit. A narrower definition may mean that even though you are unable to earn at full capacity you don’t receive any insurance benefit.

With some income protection and TPD policies I have noticed you need to select the Premier/Plus version to get the market-leading generous policy definition of disability.

Similarly with trauma insurance policies the top versions have the market-leading definitions for core (the most common) illnesses such as cancer, heart attack and stroke.

How do you know?

You’ll only realise this if you take the time to read the Product Disclosure Statement (PDS). You won’t realise this if you are just ringing around getting quotes and making a decision on premium price under the assumption that most products are similar.

What you should do

In the past I’ve often recommended you don’t just choose the cheapest insurer because they usually are cheaper due to being stricter with their policy terms.

Now I am extending that to explicitly recommend you don’t just choose the base/cheapest version of an insurer’s policy. The premium version may offer market leading terms for core features – a bit like the 5 star versus 4 star safety rating in cars.

Take the time to read the Product Disclosure Statement and understand the core differences between basic and premium policy versions.

And if you don’t have the knowledge and/or time to make that thorough comparison then outsource to a qualified, experienced financial planner or insurance broker. Their fee will be worth its weight in gold in ensuring you purchase a good value-for-money policy.

Best place to start a business in 2011

Do you dream of self-employment? Are you contemplating starting your own business next year?

If so check out this report from industry researchers IBISWorld Australia for their predictions of the best and worst industries for start-up businesses in 2011.

…the news is positive for trades and professional services, [but] the picture is not quite as optimistic for service oriented businesses.

Guide for landlords

If you have an investment property then you may be interested in the Landlords Pack from the W.A. Department of Commerce.

The pack contains many useful guides and links to other relevant information to property investors, including:

  • Renting Out Your Property – An Owners Guide
  • Information on new smoke alarm requirements
  • Information on requirements for Residual Current Devices (RCDs)
  • Links for useful forms for things like rent increases, inspections, lease agreements and termination of agreements

Even if you don’t yet have an investment property but are considering one you should visit the site to better inform yourself prior to making your investment decision.

An updated wealth creation rule of thumb

You may have heard the rule of thumb that you should save and invest about 10% of your income. I think it originated from the book “The Richest Man in Babylon” by George S. Clason.

I’m often asked if that is before or after tax saving.

More importantly, is it even close to right?

If it was close to being accurate then in Australia the 9% compulsory employer superannuation contributions should get people close enough. Sadly it is widly accepted that the 9% is nowhere near enough.

Last month the Financial Services Council released research by RiceWarner Actuaries that estimated the average retirement savings gap per person was about $88,000. That is the extra amount they need to have an adequate retirement lifestyle.

How much you need to save

If you are currently in your 20s or 30s RiceWarner estimated you’ll need to save and invest (for retirement) approximately an extra 11% per year of your after-tax income, in addition to the 9% employer superannuation.

If you’re already in your 40s you’ll need to save an extra 12% per year after-tax.

If you’re already in your 50s it’s about 15% extra per year.

So really the rule of thumb should actually be that you need to save a total of at least 20%-25% or more (not 10%) of your after-tax income over your entire working life to come close to an adequate retirement lifestyle.

(Note the actual figures in the research are split by gender and 5 year age brackets. For simplicity I have approximated an average. See table 3 on page 6 of the report if your brain wants greater precision.)

Important assumptions

Definition of an adequate retirement lifestyle

The model assumes that you can have an adequate retirement lifestyle if you receive about 62.5% of your gross pre-retirement income. This is estimated to enable you to have about 75% of your pre-retirement expenses. (Assuming you have no debts left in retirement.)

Most people I meet do not want to decrease their lifestyle in retirement. So if that includes you then you need to consider that you may need to:

  • Save a higher percentage;
  • Invest more aggressively;
  • Do a bit of both

If the prospect of saving that much and/or investing aggressively scares you then meet with a great financial planner who can guide on a smart wealth creation strategy that suits you.

You may live longer

One of the assumptions is that you need the retirement lifestyle under the average life expectancy. The reality is that half of the population live past that point. So if you rely on this updated rule of thumb be prepared to live on just the Age Pension past your life expectancy.

The better way to calculate how much you need to save

Rules of thumb can be nice short cuts but when it comes to money there is no substitute for proper planning and purposeful action.

The best way to work out how much you need to save is to:

  1. Define the lifestyle choices you’d like to have in retirement
  2. Estimate how much those choices would cost right now
  3. Define when you want to make work optional (“retire”)
  4. Define how long you want that lifestyle to last (age 83, 90, 100?)
  5. Calculate what lump-sum wealth you’d need at retirement to fund that lifestyle for that long
  6. Calculate the annual savings you need to make from now until retirement in order to accumulate that wealth

There are some calculators available for free on the internet to help you do this calculation yourself.  View a list here.

But if you are not naturally analytical then I recommend you partner with a financial planner to guide you on how much you need to save and the best way to invest that money.

Trading Contracts for Difference

You’ll often see advertisements for courses teaching you how to make a bucket load of money through trading. Trading in Contracts for Difference (CFDs) are one such investment product that have been regularly advertised in recent years.

These publicly-targeted course always concern me and they also concern the regulator, ASIC. ASIC are so concerned they’ve published a very useful guide to trading CFDs.

I am concerned because I see that our human nature ticks us into focusing on the glamorous headlines of potential returns whilst blinding us to the complexity of the strategies and products. They require a great deal of expertise to make the potential high returns, plus they come with higher risk. Many people don’t fully grasp that.

In publishing the guide ASIC Commissioner, Greg Medcraft, said: “Our research with CFD traders found that many traders don’t know or don’t appreciate key aspects of how CFDs work, despite the fact that they are actively trading them. This guide aims to fill some of these knowledge gaps, especially around the trading risks.”

Key Rule: “First do what you understand”

I agree wholeheartedly with the guideline provided by ASIC that retail investors should consider trading CFDs only if they:

  • have extensive trading experience;
  • are used to trading in volatile market conditions; and
  • can afford to lose all of – or more than – the money they put in.

View the guide on ASIC’s webiste or download a copy of Thinking of trading contracts for difference (CFDs)? here now.

Protect yourself from identity theft

Two months ago my sister, Julia was the victim of identity fraud. Two thousand dollars quickly disappeared from her bank accounts before she detected it.

This week is National Identity Fraud Awareness Week (NIDFAW), so I encourage you to consider how you may be placing yourself at risk of identity fraud. Then act to prevent it.

NIDFAW spokesperson Peter Campbell noted that “potentially, all it could take is a combination of a few carelessly discarded pieces of information such as name, date of birth and bank account details for the fraudsters to have the information they need to attempt to commit identity fraud.”

How my sister was defrauded

  • Offender contacted her bank and changed her phone banking password.
  • Offender ordered a Visa Debit card linked to her savings account.
  • Offender stole the Visa Debit card and PIN from her letter box.
  • Offender withdrew the max $1,000 from ATM using Visa debit card.
  • Offender used phone banking to make a cash advance from her credit card to her savings account.
  • The next day the offender withdrew another $1,000 using the Visa Debit card.
  • That same day my sister detected the fraud and contacted her bank about the missing $2,000. The card was cancelled.

It could easily happen to you

Often we are very conscious of online identity fraud but paper based fraud is still the most common way for an identity to be stolen.

And 75% of Australians put themselves at risk of paper based identity fraud by throwing away highly sensitive information.

Lock away your mail

Needless to say Julia now has a lock on her letter box, as do we. I recommend that you do too.

In fact, some years ago after mail was stolen from the letter box at our old house we decided to get a post office box. If there is a post office convenient to you then a post office box can be a low cost way to help protect your sensitive mail.

A post office box also helps keep your home safe when you are away on holidays by preventing mail accumulating.

Store safely

Physically

For legal reasons it is a good idea to retain copies of your tax returns and related financial statements for around seven years. These documents contain precisely the sensitive information that could enable your identity to be stolen.

To help protect your identity store these records in a lockable filing cabinet. And of course keep the cabinet locked with the key hidden away.

I know that we have so many locks these days that it can be considered inconvenient to lock things and hide the keys. So I was excited recently to find a very affordable small lockable key cabinet at my local hardware store. Yes it is more of a barrier than truly secure, but it is convenient and thieves do first need to find it. Plus it helps keep my young children out of places I don’t want them.

Electronically

Today many of our statements and records may be received electronically and stored on our computers. This is convenient and low cost. But if your computer is stolen or simply accessed while you aren’t around you could be giving up sensitive information.

Protect yourself by:

  • Password protecting your computer.
  • Storing these sensitive records in an encrypted folder on your computer.
  • Automatically locking your smartphone when not in use.
  • Securely erasing disk drives before discarding of old computers and USB drives. (Ask a geeky friend or relative to point you in the right direction.)
  • Create passwords/PINS that are not easily associated with you and your details such as date of birth, phone number and age.
  • Only allow trusted close friends to EFT money directly into your bank account.

Encryption is easier than you may think. Most modern computer operating systems (e.g. Microsoft Windows) have an inbuilt encryption facility that enables you to selectively encrypt folders.

Many of us now have smartphones and use the apps to store documents and access websites that contain sensitive personal information. For convenience often these apps automatically remember your logins and passwords. So ensure that you lock your smartphone when it is not in use.

Update on 2nd April 2011: New research has shown that “over half of secondhand mobile phones retain important personal data of the original owner”. So ensure you  format the phone’s memory and destroy your SIM card before discarding it.

Share birthday wishes privately not publically on Facebook, Twitter and other social media. Even just saying “happy birthday Matt” on Facebook gives away the day and month of my birth. Adding the personalisation of my age is a nice touch, especially on a milestone birthday, but it gives away my entire date of birth.

Shred before discarding

National Identity Fraud Awareness Week promotional flyerDocuments containing the following sensitive information should be shredded before being placed in the rubbish bin:

  • Account details (of anything where money can change hands)
  • Dates of birth
  • Tax file, Centrelink and Medicare numbers

Personally I like to shred statements and letters referencing any account details for anything. This includes all bank, investment, superannuation and insurance products, plus utility bills.

Protect your identity and the environment

If like me you like to recycle paper then I recommend you buy a compost bin. I discovered recently that putting shredded paper into our composter helps to keep it balanced and healthy. Plus composting saves us money.

Other tips from NIDFAW

The partners in National Identity Fraud Awareness Week suggested these additional tips:

  • Check your account statements regularly and look for any unusual or unauthorised activity.
  • Subscribe to an ID theft protection/monitoring service such as Secure Identity that allows you to proactively monitor your credit file for fraudulent activity and be able to react swiftly should you become a target for ID theft.
  • Contact your credit card company and banking institution before departing for travel, or your travel may prompt a block on your account.

For more information on how to protect yourself from identity fraud, and how to cope if you are a victim of ID fraud, visit the official campaign website www.stopIDtheft.com.au or www.crimestoppers.com.au for more information.

Got your own story or extra tips?

Have you been the victim of identity theft or know someone who has? If so, please share your extra tips for how to prevent what happened to you. You can do so in the comments below. (Share it anonymously if you prefer to protect your identity.)

Article sources include:
* National Identity Fraud Awareness Week (NIDFAW) media release.
* Fellowes (2010), Newspoll Survey, Australia – ID Fraud Awareness, conducted on a national online study with a sample of 1211 people aged 18-64 years.

The annual cost of retirement

If you struggle to define your retirement planning target one initial starting point can be to consider how much current retirees spend each year. Here the Westpac ASFA Retirement Standard is helpful, and it has just been updated.

An essential ingredient in successfully creating wealth is your purpose – particularly one that motivates you.

One of the common purposes of wealth creation is to accumulate enough money that you can make work optional (aka “retirement”.) This is your point of financial independence, whether you choose to cease working or not.

In my financial planning experience most people can’t tell me how much money they’d like to be able to spend in retirement. Without a clearly defined target the task of working out how much you need to save each year is quite difficult. And online retirement calculators can’t help you as they require a target input too.

If you struggle to define your retirement planning target one initial starting point can be to consider how much current retirees spend each year. Here the Westpac ASFA Retirement Standard is helpful, and it has just been updated.

Retirement cost of living

As at the end of the June 2010 quarter a couple needed approximately $53,500 per year to live comfortably in retirement (per household). Couples living more modestly survived on approximately $30,400 per year.

A single retiree required approximately $39,000 per year to live comfortably.

The Westpac ASFA Retirement Standard assumes the retirees own their own home. It defines a modest retirement lifestyle as “better than the Age Pension, but still only able to afford fairly basic activities.”

A comfortable retirement lifestyle is defined as: “enabling an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.”

You can obtain detailed budget break downs on the ASFA website. The Westpac ASFA Retirement Standard is updated quarterly.

If you are using this information in a retirement calculator remember to increase the amount each year in line with inflation. Some calculators do this automatically.

Is residential property over, under or fair value?

Graphs, graphs and damn statistics!

There is no shortage of articles quoting one “expert” or another about whether or not Australian residential property is currently in a bubble, ripe to boom again or just fair value. Every article seems to be accompanied by a barrage of graphs and statistical quotations to justify the author’s point of view.

If your eyes glaze over at the detailed graphs don’t worry, you’re not alone, often mine do too. I sometimes wonder (suspect) if the detailed graphs are purposeful anaesthesia to make the reader compliant to the author’s conclusions. (Hmm, I think that sentence may have done the same…)

Overvalued or fair value or…?

Who cares?

Really in the scheme of things if property is over or under-valued matters most if you are taking a short term trader’s view – trying to make money within a short time frame from a volatile asset.

What matters more is that new residential property investors are increasingly reliant on a continuing price boom in order to make a reasonable total return on investment (ROI).

With property prices and rents at current levels residential property investors make significant annual net income losses (even after tax returns). That creates a situation where a high capital growth is required to repay the debt, offset income losses and retain a reasonable return on equity.

Yes, my generation and those with an investing memory of about 15 years may say that residential property does generate really high capital growth. But the fact is that all you can say is that over that period it has done.

Can residential property continue to deliver high annualised capital growth over coming decades?

My helicopter view

Value is in the eye of the beholder. People seem to be willing to pay whatever they can to get something they really want. And Australians really want their own home – and a comfortable one at that.

In the last decade the amount of people bidding for property and their ability to pay has rapidly increased for reasons such as:

  • Ability and willingness to borrow higher percentages of income.
  • Ability to borrow higher percentages of the property value, meaning you needed to have saved less before you could compete in the market.
  • Grants to property purchasers.
  • Commencement of lending to a lot of the population previously shunned (e.g. employed yet unmarried females of baby-making age; and those with limited or mixed financial history.).

Consequently in many of our memories we have seen stellar above-average capital growth.

Can that ability and willingness to pay increase as rapidly over the next 40 years and thereby support continuing stellar capital growth?

It would require 40 years of:

  • Above average wages growth
  • Increased percentage disposable income through reduced lifestyle expenses (less kids and more frugal living – yeah right!)
  • Low interest rates
  • Increased willingness to lend by the banks
  • More crazy Government subsidies

I’m not an economist so I don’t even pretend to have a crystal ball. But my rational mind says that in the long term gravity will kick in and force a return to normal long-term growth rates.

Therefore I expect that at some time there may be a sustained period of sideways or even negative growth (i.e. price declines.)

Predicting when that will occur matters most if you are taking a short term trader’s view.

I welcome your thoughts, reaction and responses to my view which you can in the comments section below.

Introducing the new Australian share volatility index

Are you interested in the expected volatility of the share market? Then get some VIX. From tomorrow a new Australian equity volatility benchmark will be published by Standard & Poor’s (S&P) and the Australian Securities Exchange (ASX). The benchmark will be known as the S&P/ASX 200 VIX (ASX code: XVI). Following are some key highlights from the information provided by S&P and the ASX.

Are you interested in the expected volatility of the share market? Then get some VIX.

From tomorrow a new Australian equity volatility benchmark will be published by Standard & Poor’s (S&P) and the Australian Securities Exchange (ASX). The benchmark will be known as the S&P/ASX 200 VIX (ASX code: XVI).

If you are familiar with share market investing you will note the similarity to the VIX index published by the Chicago Board Options Exchange (CBOE). In fact the Australian index will use the same methodology (under licence of course).

You can learn more about the volatility index and download a fact sheet on the ASX website here.

Following are some key highlights from the information provided by S&P and the ASX. If you get lost in all of this it’s ok – you don’t need to know it to successfully create wealth.

What the VIX is

The index measures the expected volatility of the top 200 shares listed on the ASX. Since it is a forward looking index, in a way it is like trying to put science around a crystal ball.

Expected volatility is calculated using the settlement prices of call and put options, which are derived from expected future prices of the underlying share.

Using and interpreting the volatility index

In regards to using the index I like this quote in the media release from Richard Murphy, ASX General Manager, Equity Markets, who said:

“observers of the index will have insight into the degree of uncertainty among investors and their expectations regarding the magnitude of future movements in the local equity market.”

Also from the media release is this tip on how to interpret the index:

“A volatility index at a higher level generally implies a market expectation of large changes in the S&P/ASX 200 over the next 30 days, indicating that investor sentiment is uncertain. Conversely, a lower volatility index value generally implies a market expectation of little change, suggesting greater levels of investor confidence.”

Should you care about the volatility index?

The index looks forward 30 days so it is very short term. That really is only of interest to short term traders and anyone contemplating making a purchase or sale of a direct share during that period. If you are investing for the long term you can probably ignore it and focus on enjoying the other elements of your life.

Further the index is non-directional – volatility is both ways. You don’t know if investors expect the fluctuations to be mostly up or down. So you can’t really interpret from the index that the market will go up or down and therefore you should either buy now or wait, respectively.

So unless you actively trade direct shares you are better off concentrating your energies on other financial elements. (Unless you want to impress people at the next barbecue with comments about how fearful or not investors are.)

Announcing: DIY Wealth Creation Course

Do you want to take more control over the management and investment of your money but are not sure what is right for you? If so, this DIY Wealth Creation course may be on the money for you.

Create your own wealth creation plan

This course will provide you with a detailed overview of the key things you need to know to make smart financial choices that are right for you. As well as discovering what you need to know you’ll also learn how to take action straight away.

As a result of completing the activities during this course you will:

  1. Create a wealth creation plan to achieve your lifestyle goals
  2. Identify how to plug any gaps in your financial foundations
  3. Understand mainstream investment, superannuation and insurance structures
  4. Understand the appropriate next steps you need to take in wisely managing your money

It will be hands on with activities for you to complete each week as you construct your personal financial plan.

I am presenting this seven week course  as part of the regular Adult Community Education courses offered by the Challenger Institute of Technology (formerly called Challenger TAFE). It will be held at their Heathcote campus in Applecross, Perth.

Learn more about the course and how to enrol here.