Tales of Magic, Unicorns and Wizards

magic, unicorns, and wizards

It was a few years ago now, sitting in lecture theaters being educated in financial and risk management by some of the brightest lecturers in this field. The classroom teaches us many things, some things however can’t be taught in the classroom they say, and must be learnt in the real world. Sure – I have no doubt this is true. But the real world has been known to influence us a little further from the truth – persuading us to indulge in fantasies and tales of magic, unicorns and wizards.

Unknowingly, you too may have been persuaded.

Here’s Professor Fama, professor at University of Chicago Booth, American economist and Nobel laureate in Economics, on how markets really work.

Sometimes we need to revisit what we learnt at school to bring us back to the real world.

Three things to consider when hiring a financial adviser.

interview financial adviser

So you’re looking to hire a financial adviser? You’ve probably got your bank hassling you, some guy on LinkedIn, or a stock broker you met at a cocktail function. There is certainly no shortage of people offering to help you with your finances. Before hiring a pro to help you, here are three factors to consider before you decide who the right adviser is for you.

1. The numbers

When was the last time you waited in a long queue for something? Frustrating wasn’t it. This is certainly not the experience you want when working with your adviser. You want your affairs prioritised. You want your adviser to spend as much time as necessary in analysing your options so that you are provided with a well thought out and considered recommendation (not one that is rushed!).

If you’re looking for a service that is attentive and personalised (not ‘off the shelf’), advice that is pro-active and well considered, your adviser should be ideally advising around 55 to 65 families. Any more than this, it is likely that some aspects of your service will be compromised.

So find out…how many clients or families do they advise?

2. Comprehensive planning

If you’re looking to hire a financial adviser, you’re likely to want someone who takes into account your entire situation – even if they don’t provide you with specific advice in every aspect of your affairs. Knowing where you’re at, what you hold and why, is very valuable when making holistic wealth decisions.

Lot’s of advisers will tell you they take your entire situation into account. Don’t just take their word for it, ask them how.

Each decision you make today will have an impact on your tomorrow. Making sure your adviser takes your entire situation into account when providing you with advice and recommendations is crucial. In the end, that’s what your adviser is there to do – bring together all the bits and pieces to put together your financial picture.

3. The investment philosophy

Staying disciplined through the gyrations, and heart-stopping rises and falls of modern markets isn’t always easy, yet it’s crucial for your long-term investment success and is the foundation of a solid investment management process.

Ask your adviser to describe to you, in simple terms, his or her investment approach. And listen to their response. Carefully.

Do they have a structure? Is there a philosophy, a belief? Are they jumbling their words? Do I believe them? If there is a philosophy, is it documented? These are all questions that are likely to go through your mind while your adviser is speaking.

Is your adviser making decisions based on speculation, a ‘gut-feel’, chasing last year’s winners, or based on a ‘buy-list’ of stocks or funds? Maybe they’re buying and selling stocks frequently?

Your adviser should have a clear and simple methodology. One that is structured and systematic. A system that is persistent and pervasive. One that is based on a rigorous due diligence process where research and hard, factual evidence is the foundation of all decision making. Make sure the odds of financial success are in your favour…and not your advisers.

Next time your adviser makes a recommendation, ask them what the purpose or the objective of the investment is, and how it relates to you personally. Their response will give you a good indication of how well they know you and your priorities.

Above all else, you need to find someone you trust, and someone who gives you the information and guidance to make confident decisions. After all, it’s your financial future.

Here Are 3 Ways to Take Advantage of the Budget Changes

Budget 2016

Budget night used to have the all too familiar routine feeling about it. Speculation of dramatic changes being ‘leaked’, Australians hastily making changes to their superannuation plans or corporate structures based on nothing but speculation. Then…the moment arrives…tumbleweed rolling across Parliament House floors.

Was it a little different this time? We think so. Here are three strategies to start thinking about.

1. Balance your balances by splitting your super

With many limitations being placed on the ability to contribute into superannuation, now is the time to start planning ahead. From 1 July 2017, individuals who want to start a pension using their superannuation benefits will be limited to a $1,600,000 lifetime limit. This means if you have $2,000,000 in your superannuation fund, $400,000 will need to remain in accumulation and will attract a tax rate of 15% on earnings (compared to 0% in your pension fund).

Enter super splitting. As you plan ahead for retirement, individuals may consider splitting their superannuation contributions with their spouse. This includes redirecting 85% of your pre-tax superannuation contributions to your spouse’s account, which allows you to build on potentially a lower member balance, in turn, allowing individuals to move a larger sum of funds (in total) from accumulation to pension.

Furthermore, if your spouse has not utilised the $500,000 non-concessional or after-tax contribution cap, you may want to think about withdrawing $500,000 from your pension fund and making a contribution into your spouse’s member account. This will also help move more funds into pension mode.

You should also give some thought to how your portfolio is invested. You may consider holding all your Australian shares and high income paying investments in your pension account, international shares in your superannuation account, and cash and bonds in your personal name in order to better manage the income tax implications.

Finally, you may want to start thinking about when you actually commence your pension. A lower market value allows you to move the same number of shares/units, however at a lower price. Then again, we don’t subscribe to trying to time the market.

2. Manage your tax BEFORE the end of the financial year

Regardless of your employment status, from 1 July 2017, you can make personal superannuation contributions for which you can claim a tax deduction. Let’s say you earn $150,000 per year and your employer makes $14,250 of Superannuation Guarantee payments into your superannuation fund. You can now make concessional or pre-tax contributions of $10,750 (up to the $25,000 limit) before the end of the financial year and claim a tax deduction for it. Previously you may have had to liaise with your HR or payroll team to estimate your salary sacrifice contributions for the remainder of the year and review it again the following year…it was never a pleasant exercise, not to mention how often contributions were tipped over the limit.

This is a very flexible way to manage your personal finances, however, don’t be fooled, it requires planing and discipline.

3. $125,000 tax deduction in one year? Bring it on!

The Government will introduce a ‘catch-up’ program on concessional contributions (limit of $25,000 pa for which you can claim a tax deduction) by allowing unused concessional contributions caps to be carried forward on a rolling basis for up to five years for those with account balances of $500,000 of less. If you know of an upcoming asset sale, or for whatever reason, you expect to earn a much higher level of income in a particular year, think about holding off on those superannuation contributions until that particular financial year. You should have the ability to contribute five years worth of contributions ($125,000) and claim a tax deduction for it. That will certainly come in handy.

Furthermore, you could use part of the sale proceeds to boost your superannuation fund via a non-concessional or after-tax contribution. Remember, you’ll have a lifetime limit of $500,000, so don’t get caught out!

Whatever your situation, there is no doubt that the 2016 Budget has made planning and thinking ahead more important than ever for those managing their finances. Plan ahead, think long-term (not too long-term as the Government will probably change the rules again), and make smart decisions.

You can read more on superannuation and tax here.

(I’m still trying to work out how Prepare-Trial-and-Hire is abbreviated to PaTH).

Happy planning.

I had lunch with a private investor, and here’s what I learnt

financial independence

Last Friday, I had a fascinating conversation over lunch with a private investor, let’s call her Katie, about the financial decisions she’s made during her life, which have now given her what most of us seek – financial independence.

I’ll share with you today the top three things that stood out to me in hope that you can gain some insight into the power of incremental decisions. They really boil down to the one percenters early on in life.

Credit cards are great, as long as you know how to use them

Credit cards are a bad word these days, but they’ve allowed many, including Katie, to fly around the world (business class), multiple times – for free!

The world of banking is a constant battle to win new customers. To win new customers, large ‘sign-on’ bonuses are offered. These offers are seldom made to existing customers, which means in order to be eligible for such offers, you must become a ‘new customer’, that is, cancel your existing card and apply for a new card (preferably one offering the greatest sign on bonuses. They’re called ‘point chasers’. It’s made websites such as Point Hacks a popular stopover (pardon the pun) for point chasers.

As long as you make smart choices with credit, and remain disciplined, it can help you achieve some of your life goals such as travelling, or travelling in a little more comfort.

Live below your means

This is easier said that done (but it needs to be done). As we make more money, we tend to reward ourselves by spending more. It’s called ‘lifestyle creep’, that is, where your lifestyle improves as your discretionary income rises. The ironic thing is that the more money we earn, the greater the opportunity we have to save more.

Fending lifestyle creep can pay off big time over the long run. Here are a few ways to combat lifestyle creep:

  1. Make lump sum payments off any bad/non-deductible debts
  2. Set up a savings or an investment account and let the power of compounding do it’s thing
  3. Increase contributions into a tax friendly account such as your superannuation fund

By making incremental decisions such as these, it gives you so much more flexibility later on in life. We all have the option, take risks now and be comfortable later, or be comfortable now and take risks later, it’s our choice.

Live for today, but please, save for tomorrow

You hear financial advisers always talking about the future, whether it’s upcoming school fees or retirement. Seldom is it about today. You only live once, so please, enjoy it and do the things that truly make you happy. This however, isn’t code for spend every dollar you earn (refer point above). It is possible to balance today’s enjoyment with the priority of putting money away for later. It requires goal setting, patience, and discipline. Warren Buffet once said, “someone is sitting in the shade today because someone planted a tree a long time ago”.

The best thing you can do is take advantages of new deals, set up some sort of investment account, and live a little less rich than before. Happy savings.