Investopoly: Recent Episodes
Stuart Wemyss
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 & Rules of the Lending Game. Stuart writes a weekly blog which is reproduced on this podcast
Eight Rules Revisited is a companion series to Stuart Wemyss's updated book, Wealth by Design, working through each of the original eight golden rules from his 2018 book, Investopoly, one episode at a time. In each episode, Stuart tests his 2018 thinking against eight more years of evidence and client experience, and is upfront about what has changed, what has simply sharpened, and what has held firm all along.
In this final episode of the series, Stuart takes on risk management, the rule underneath all the others, because a strategy that ignores the other seven rules can still survive a bad year, but a strategy with no defence against a foreseeable setback usually cannot. He starts by revisiting what Investopoly actually said in 2018: a four-step process of avoiding, insuring, adjusting or accepting risk, built mostly around personal insurance, income protection, life, total and permanent disability and trauma cover, plus practical detail on cost, quality and how much cover is enough.
He then walks through what has genuinely changed in Wealth by Design, and it's more than a rewording. The insurance-led checklist has been replaced with a structured process that starts by naming the handful of assumptions any plan actually depends on, then sorts everything that can go wrong into four categories: liquidity risk, leverage risk, regulatory and rule-change risk, and behavioural risk. Stuart explains why each category earned its place, including why refinancing and borrowing capacity deserve far more scrutiny than they got in 2018, why regulatory change has become a risk in its own right after nearly a decade of shifting lending rules and tax settings, and why behavioural failure, panic, mistimed decisions, one partner shouldering everything alone, now gets treated as seriously as any product risk. He's candid about where insurance still matters and where its role in the plan has shifted, including one specific change in priority order between total and permanent disability cover and life insurance.
The episode closes with a practical, twenty-minute stress test listeners can run on their own plan this week, four direct questions covering income, interest rates, insurance and household knowledge, designed to surface what would actually break first if life didn't cooperate.
As the last instalment in the series, this episode also closes the loop on all eight rules, a short, honest look at which parts of Stuart's thinking held, which sharpened, and which genuinely changed shape between the two books. Wealth by Design is available now, wherever books are sold.
Our most popular free guides:
Over the years we've written hundreds of articles. These three bring our best thinking together on the topics that matter most right now: choosing a super fund, debt recycling, and navigating the new tax changes.
Download them here
My new book, Wealth by Design, is out now:
Buy online or in bookstores. The ebook is available now, audiobook coming soon.
Got a question for the podcast?
Email us at questions@investopoly.com.au
Interested in working with our team?
Discover how we can work together
Subscribe to my weekly blog:
Stay connected here
Important
This podcast provides general information about finance, tax and credit. It doesn't take into account your specific objectives, financial situation or needs, so you need to assess whether it's relevant to your circumstances before acting on it. If you're not sure, speak to a licensed, trustworthy professional.
Read Full Blog Here
With the negative gearing and CGT changes now law, the property industry is racing to devise workarounds to keep investor interest alive. As a genuinely independent, asset-class-agnostic firm with no bias toward property, Stuart puts six of the most likely strategies under the microscope, because to a man with a hammer, everything looks like a nail.
The starting point: under the new rules, the after-tax internal rate of return on established property falls from around 11% to 8.4%. Can any lever claw that back? Stuart works through chasing a higher rental yield (and why starting gross yield is what matters), gearing less to reach neutral (which, counterintuitively, drags returns lower), and using a company structure to preserve deductions (a Part IVA minefield). He examines new-build dwellings that retain the old concessions, small-scale development, and high-yield specialised property like NDIS and co-living.
His verdict is refreshingly blunt: none of these currently stack up, and commercial property looks overpriced too. The real lesson? When someone promotes a clever workaround, check whether they have a vested interest, and remember property was never the only game in town.
Our most popular free guides:
Over the years we've written hundreds of articles. These three bring our best thinking together on the topics that matter most right now: choosing a super fund, debt recycling, and navigating the new tax changes.
Download them here
My new book, Wealth by Design, is out now:
Buy online or in bookstores. The ebook is available now, audiobook coming soon.
Got a question for the podcast?
Email us at questions@investopoly.com.au
Interested in working with our team?
Discover how we can work together
Subscribe to my weekly blog:
Stay connected here
Important
This podcast provides general information about finance, tax and credit. It doesn't take into account your specific objectives, financial situation or needs, so you need to assess whether it's relevant to your circumstances before acting on it. If you're not sure, speak to a licensed, trustworthy professional.
Four listeners at pivotal moments. "John," 55 and five years cancer-free, has $800k from selling an investment property and a detailed plan for a downsizer contribution, an experiences fund, helping both daughters into homes and one big question: will his super comfortably fund $100k a year in retirement? Stuart stress-tests the numbers and the strategy.
"Chris," 44, lays out a layered plan involving an SMSF property, an investment property and a granny flat, and asks whether it's solid or whether he should be more aggressive now. "Brenton," a high-income earner still driving two ten-year-old Toyotas, poses a refreshingly human dilemma: what financial principles should guide spending on a depreciating-but-essential asset like a car—and how much splurging is genuinely defensible after years of sacrifice?
Finally, "Bob," 38 with strong surplus cash flow, asks three sharp questions many listeners share: should new assets go into his name, his wife's, or a family trust given their income gap? Hold or sell an interstate Queensland property after a strong run? And at his age, gear into undervalued Melbourne property, debt-recycle into ETFs, or simply kill the mortgage first?
Practical, numbers-driven answers throughout.
Our most popular free guides:
Over the years we've written hundreds of articles. These three bring our best thinking together on the topics that matter most right now: choosing a super fund, debt recycling, and navigating the new tax changes.
Download them here
My new book, Wealth by Design, is out now:
Buy online or in bookstores. The ebook is available now, audiobook coming soon.
Got a question for the podcast?
Email us at questions@investopoly.com.au
Interested in working with our team?
Discover how we can work together
Subscribe to my weekly blog:
Stay connected here
Important
This podcast provides general information about finance, tax and credit. It doesn't take into account your specific objectives, financial situation or needs, so you need to assess whether it's relevant to your circumstances before acting on it. If you're not sure, speak to a licensed, trustworthy professional.
Rule 7 in Investopoly was direct: only invest in investment-grade property. Eight years on, the core of that still holds, but Stuart has sharpened the method and genuinely changed his mind about one part of it.
In this episode, he explains why Wealth by Design reframes the rule from "invest in investment-grade property" to something more demanding: own property with enduring, scarce and growing demand. It's a shift from a label to a test—what makes an asset something people will always want, and keep wanting, decades from now.
Stuart is candid about the one 2018 position he's since reversed: the old line that it's "never a bad time to buy." He now believes price and cycle matter more than he once allowed, and explains why. He introduces the idea of buying for the future buyer rather than today's, choosing property whose appeal will still be scarce and sought-after when you eventually sell.
He closes with a simple forced-hold test you can run on any property this week, a quick way to pressure-test whether what you own or are about to buy truly has demand that endures.
Our most popular free guides:
Over the years we've written hundreds of articles. These three bring our best thinking together on the topics that matter most right now: choosing a super fund, debt recycling, and navigating the new tax changes.
Download them here
My new book, Wealth by Design, is out now:
Buy online or in bookstores. The ebook is available now, audiobook coming soon.
Got a question for the podcast?
Email us at questions@investopoly.com.au
Interested in working with our team?
Discover how we can work together
Subscribe to my weekly blog:
Stay connected here
Important
This podcast provides general information about finance, tax and credit. It doesn't take into account your specific objectives, financial situation or needs, so you need to assess whether it's relevant to your circumstances before acting on it. If you're not sure, speak to a licensed, trustworthy professional.
You can download the full report, including the four decision flowcharts and annual review checklist, here: https://prosolution.com.au/best-super-fund-australia/
Most people choose a super fund by looking at which fund produced the highest return last year. But that is the wrong question.
The better question is: which investment strategy and super structure is most likely to deliver the best after-fee, after-tax outcome over the next 20 to 40 years, given your circumstances?
In this episode, I explain why choosing the best super fund involves two separate decisions: how your money is invested and which structure holds those investments. I compare pooled funds, Member Direct options, wrap platforms and SMSFs, and explain how to assess each using four key factors: transparency, tax effectiveness, cost, and flexibility and control.
I also discuss why “Balanced” investment options can be misleading, the risks of excessive exposure to Australian shares and unlisted assets, when greater control may be worthwhile, and the insurance mistake you must avoid before changing funds.
Finally, I explain why this should be an annual review rather than a one-off decision. As your balance, investment horizon, fees and insurance needs change, the best structure for you may change too.
Our most popular free guides:
Over the years we've written hundreds of articles. These three bring our best thinking together on the topics that matter most right now: choosing a super fund, debt recycling, and navigating the new tax changes.
Download them here
My new book, Wealth by Design, is out now:
Buy online or in bookstores. The ebook is available now, audiobook coming soon.
Got a question for the podcast?
Email us at questions@investopoly.com.au
Interested in working with our team?
Discover how we can work together
Subscribe to my weekly blog:
Stay connected here
Important
This podcast provides general information about finance, tax and credit. It doesn't take into account your specific objectives, financial situation or needs, so you need to assess whether it's relevant to your circumstances before acting on it. If you're not sure, speak to a licensed, trustworthy professional.
Three thoughtful listeners, each already doing a lot right and looking for the sharpest next move. A 49-year-old single police officer, no mortgage, $810k in super, a growing ETF portfolio, asks the perennial question: buy an investment property, keep doing what's working, or borrow to invest further in shares? Stuart weighs the options against her plan to retire at 57.
Slav returns with two connected questions. Having ridden the "rising tide" to 40%+ gains on regional Queensland properties and leveraged into a Melbourne outer suburb, he wants to know how you actually track a changing cycle to decide when to sell and reinvest in stronger locations. His second is timely and unsettling: with AI disrupting white-collar work, how sustainable is a 70–80% LVR portfolio if both incomes disappeared for an extended stretch?
Finally, "Celeste," 44 and mortgage-free in Kingscliff, feels stuck in analysis paralysis. Is it too late to buy property, or should surplus keep flowing into ETFs and super? She also asks how to structure children's investment bonds, and whether to draw on ETF income or shift assets into super in retirement.
Grounded, practical answers for real crossroads.
Our most popular free guides:
Over the years we've written hundreds of articles. These three bring our best thinking together on the topics that matter most right now: choosing a super fund, debt recycling, and navigating the new tax changes.
Download them here
My new book, Wealth by Design, is out now:
Buy online or in bookstores. The ebook is available now, audiobook coming soon.
Got a question for the podcast?
Email us at questions@investopoly.com.au
Interested in working with our team?
Discover how we can work together
Subscribe to my weekly blog:
Stay connected here
Important
This podcast provides general information about finance, tax and credit. It doesn't take into account your specific objectives, financial situation or needs, so you need to assess whether it's relevant to your circumstances before acting on it. If you're not sure, speak to a licensed, trustworthy professional.
Pre-order Wealth by Design Here
Golden Rule 6 was simple: invest in the share market using low-cost index funds. Eight years on, that argument has been comprehensively won, arguably too well. Stuart charts the scale of the shift: the ASX ETF market has ballooned from 133 funds to more than 450, and from $36 billion to over $350 billion. Indexing went from contrarian to consensus.
But that very boom created new traps. When everything gets rebranded as an "ETF," the label stops telling you much about what you're actually buying. In Wealth by Design, Stuart tightens the rule from "index funds" to evidence-based investing, a sharper standard for a crowded market.
He explains why not every product wearing the ETF badge deserves your money, and how to interrogate the index sitting underneath a fund before you buy it, since the benchmark quietly determines your returns. He's also candid about two positions he has genuinely reversed since 2018, updating his thinking as the evidence moved.
The episode closes with the five filters every fund in your portfolio should pass, giving you a practical checklist to separate genuinely sound investments from cleverly marketed ones.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read Full Blog Here
Pre-order Wealth by Design Here
You can't build wealth unless you spend less than you earn and invest the difference, which makes cash flow the most fundamental discipline of all. The trouble was always effort. For years, Stuart's method was to hand-categorise three months of transactions a deliberate compromise, since analysing two or three years by hand was simply unrealistic. But three months is a snapshot, not a picture: it misses the annual rhythm of holidays, school fees and insurance renewals, and it can't reveal a trend.
In this episode, Stuart explains how AI has quietly removed that barrier. Using a tool like Claude to categorise transactions turns hours of tedium into minutes, so you can finally see the real shape of your spending, consistency, and the slow "drift" of lifestyle inflation that hides over a single quarter. He shares how his prompt works, plus two things AI still can't do for you, and the privacy step to take before uploading a single line of data.
But knowing your number is only half the job. Insight without structure rarely changes behaviour, so Stuart lays out the three automation principles pay yourself first, isolate discretionary spending, hide your savings, that make good decisions the default and willpower irrelevant.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-order Wealth by Design Here
Five listeners at very different life stages, each wrestling with where to direct capital next. Perth couple "Amelia and Ivan," with two investment properties and a baby on the way, weigh three distinct strategies: hold and sell later to fund a renovation, swap a townhouse for a better-taxed property, or add a third and keep them all. Stuart works through the trade-offs and what a year or two off work really means for the plan.
A 26-year-old in Sydney real estate asks how to play the long game: buy a first home to live in and later upsize, or turn it into a rental? A 40-year-old in Ocean Reef with a healthy offset balance wonders whether an investment property makes sense now, whether to deploy cash or super first, and whether a trust is premature. And "Gus, the country copper," living rent-free with strong super, debates whether to keep funnelling surplus into shares via his trust or gear into another property purely for leverage.
Plus a genuinely useful technical question on inflation: how to treat it in wealth modelling, and whether to convert future assets back into today's dollars to track real progress.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-order Wealth by Design Here
This one is different. Of all the rules in the series, Rule 5 is the first where Stuart admits he has genuinely changed his mind, not refined a nuance, but rethought the core idea.
In Investopoly, he taught the textbook approach: blend negatively correlated assets to smooth out portfolio volatility, the classic diversification playbook most investors are told to follow. Eight years and a lot of evidence later, Wealth by Design makes a different case. The real risk controls, he now argues, aren't clever correlations at all—they're quality and price. Own high-quality assets, avoid overpaying, and you've addressed risk at its source rather than papering over it with offsetting volatility.
He reframes the role of defensive assets too. Rather than acting as a permanent volatility damper that quietly drags on long-term returns, they work best as a targeted one-to-three-year spending buffer, enough to ride out a downturn without being forced to sell growth assets at the wrong time. And he explains why long-term returns are far more predictable from starting valuations than most investors appreciate.
An honest, evidence-driven episode about updating your thinking when the data demands it.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read Full Blog Here
Pre-order Wealth by Design Here
For decades, negative gearing tipped the scales toward borrowing for an investment property over spending more on your home; investment interest was deductible, home loan interest wasn't. But with negative gearing quarantined and the effective capital gains tax rate climbing from around 20% to closer to 30–35% under the post-2027 indexation regime, that old comparison is dead. In this episode, Stuart rebuilds it from scratch.
The new contest: is a high-income household better off borrowing to upgrade the family home, or borrowing to invest in shares? He models two households starting identically, same income, same $1 million of extra debt, same 18-year repayment, and the result genuinely surprised him. Over 10 years, geared shares edge ahead; over 20, it's a dead heat; over 30, the bigger home wins. The reason is tax leakage: once the debt is repaid, the share portfolio's deductible interest shield vanishes while the home keeps compounding tax-free.
Stuart also walks through six things the model can't capture: liquidity, the willingness to downsize, home growth quality, lifestyle, and explains why, with these settings still politically contested, the smartest move may be to preserve optionality and reassess in 12 to 18 months.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-order Wealth by Design Here
Three richly detailed listener situations, three very different crossroads. First, Charles, 51, unemployed, four kids in private school, and a sprawling portfolio spanning a Singapore apartment, an SMSF, regional Queensland property, land parcels and a $500k crypto holding. His question is deceptively simple: in what order should he sell to fund a Melbourne home, and can he actually afford to retire? Stuart untangles the sequencing and confronts the concentration risk head-on.
Next, Matt and his wife in Lugarno, sitting on strong equity after a major renovation but facing single-income pressure with a young family and more children planned. Should they pour surplus into the mortgage, or recommence property investing to ultimately pay the home down faster? We weigh the options against cash flow reality.
Finally, an anonymous single mother of three, a medical professional on the Sunshine Coast, asks how solo parenting reshapes retirement planning. Should she sell underperforming shares into super, lift her contributions, rethink her growth allocation, or consider property despite constrained borrowing capacity?
Honest, numbers-first guidance for anyone wondering whether their strategy genuinely stacks up, and what to prioritise next.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-order Wealth by Design Here
In this episode, Stuart revisits Golden Rule 4 and admits that half of it has changed. In Investopoly, the advice was to build your asset base, then tilt toward income as retirement approached. Wealth by Design confirms the first half but overturns the second. Here's why.
Stuart makes the case that the real objective isn't income at all; it's after-tax total return and liquidity. He explains why the conventional glide path into conservative, income-heavy assets as you near retirement can quietly backfire, amplifying two risks retirees underestimate: inflation eroding your purchasing power, and longevity outlasting your money. The instinct that feels "safe" may actually be the riskier choice over a multi-decade retirement.
The alternative is what he calls a perpetual portfolio: one structured to keep compounding even as it funds your lifestyle, so you're drawing an income without dismantling the engine that generates it. Stuart walks through the total-return decision filters he uses to judge whether an asset earns its place, and how to think about funding spending without reaching reflexively for yield.
He closes with one simple action you can take this week to start reframing your own strategy.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read Full Blog Here
Pre-order Wealth by Design Here
With the government's changes to established residential property now looking likely to become law, the investment case has fundamentally shifted, and those who try to ignore it will be exposed. In this episode, we unpack why quarantining negative gearing losses hits investors so hard: the asset costs materially more to hold each year, yet capital growth potential hasn't budged. We walk through the numbers, showing how an investment-grade property's after-tax internal rate of return could fall from around 11% to just 8.4% a return you might match through superannuation, minus the debt, concentration risk and hassle.
We also explore "livevesting", channelling your capacity into a better-quality home that compounds tax-free, and explain why Melbourne may now offer compelling relative value. Along the way, we sound a warning on the "obvious alternatives": commercial property and new-build packages that are often overpriced, structurally inferior, or both.
Finally, drawing on the 1980s Hawke-Keating reversal and New Zealand's recent backflip, we ask whether these changes will even last—and why the smartest move now is preserving optionality rather than reacting. Tax matters, but a good investment must still stand on its own merits.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-order Wealth by Design Here
In this mailbag episode, we tackle five listener questions spanning some of the trickiest decisions in personal finance. A Brisbane couple in their mid-forties, with strong super balances and a plan to knock down and rebuild, ask whether to ease off super contributions to kill debt faster or keep compounding inside the lower-tax environment and whether debt recycling is their smartest long-term play.
We unpack a thorny capital gains question on the six-year absence rule: can you settle a new home first, then sell the old one, without triggering a double-PPR problem? A high-income Melbourne couple wonder whether $6,800 a year in ongoing financial advice is still worth it, how to untangle from wrap platforms, and whether a coastal second property stacks up given their age and timeline.
A father in St Ives asks whether tipping $2,000 a year into a 20-year-old's super is a gift worth making. And a Perth listener eyeing his neighbour's block wants the unbiased truth on double blocks and subdivisions.
Practical, numbers-driven answers to real situations and the principles behind them.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-order Wealth By Design Here
Episode three of Eight Rules Revisited continues the Thursday series comparing the eight golden rules from Investopoly with the updated versions in Wealth by Design, released 28 July.
Rule 3 — spend less than you earn and invest the difference- is one of the most straightforward principles in personal finance. It is also one of the most reliably ignored. The rule itself hasn't changed since Investopoly. What has changed is how Stuart frames the implementation, moving decisively away from tracking, measurement, and willpower toward an automated banking system that removes the need for daily discipline by making saving the structural default.
The episode examines the behavioural forces that work against consistent saving, the immediate pull of spending versus the distant reward of investing, the social normalisation of lifestyle upgrades, and the way income growth tends to fund consumption rather than wealth accumulation when there is no system in place to redirect it first.
Lifestyle creep receives particular attention. It is not a dramatic failure but a gradual one, the slow expansion of spending that keeps pace with rising income and quietly prevents wealth from compounding the way it should.
Stuart closes with a single practical action: one automatic transfer worth setting up this week that begins shifting savings from intention to habit. The full system and worked examples appear in chapter three of Wealth by Design.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read Full Blog Here
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Both Houses have passed the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026. Royal Assent is pending but considered a formality. For investors, property owners, business owners, and superannuation members, the changes are substantial, and the details matter enormously.
This blog provides a clear, technical breakdown of what the legislation actually does. Negative gearing losses on established residential property purchased after Budget night will be quarantined from 1 July 2027, with existing properties grandfathered under previous rules. The 50% CGT discount is replaced by cost base indexation and a new minimum 30% tax on capital gains, a change that, for long-term investors in assets growing at 7% per annum, lifts the effective tax rate from roughly 20–23% to around 30–35%. SMSFs lose the ability to borrow for residential property, with a commencement date of approximately mid-August 2026. Trust capital gains rules are also changing, though the legislation has not yet been released.
Stuart addresses the government's framing directly: the claim that these changes improve housing affordability is not supported by the Treasury's own modelling, nor by the historical record in Australia, New Zealand, or the United Kingdom. These are tax revenue measures.
The blog also covers the new $250 worker tax offset, the $1,000 instant work-related deduction, important transition rules for existing assets, and why low-income taxpayers with unrealised gains should consider crystallising them before 1 July 2027.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-order Wealth By Design Here
This episode brings together six listener questions that each involve a meaningful financial decision and, in several cases, significant personal uncertainty alongside significant financial capacity.
The first comes from a couple in their late thirties who received a substantial inheritance, now holding $3.6m in cash alongside a share portfolio and three properties. They have developed a dual-trust structure with a corporate beneficiary and are seeking a sense-check on whether the approach is sound and whether property still deserves a place in the plan.
The second involves a newly migrated retiree with no Australian income, substantial overseas cash, and five possible approaches to buying property, each with different stamp duty, CGT, and inheritance implications for her two adult daughters.
The third is a series of practical questions about transition to retirement arrangements, when they make sense, what super balance is needed for a modest 25-year retirement, and the tax implications of transferring an investment property to children.
The fourth comes from a 37-year-old in WA with a fully paid-off home, a first child arriving, and a strong savings rate, asking how to prioritise between investment property, shares, and super contributions from here.
The fifth involves a 35-year-old FIFO worker with $536k in savings and investments, strong borrowing capacity, and genuine uncertainty about whether to buy a Perth home alone, jointly with a partner, or through a leapfrog strategy given where the relationship currently sits.
The sixth is a 45-year-old couple with a $300k inheritance, a nearly paid-off Sydney home, three recently purchased investment properties, and a simple question: is paying off the home loan and topping up super really the best use of the windfall?
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-order Wealth by Design Here
Episode two of Eight Rules Revisited continues the Thursday series comparing the eight golden rules from Stuart's 2018 book Investopoly with the updated versions in his new book, Wealth by Design, released on 28 July.
Rule 2 states that you must know how much income you need and by when. That principle hasn't moved. What has tightened considerably is everything surrounding it. The two goals now have proper names, the freedom number and the freedom date, and the underlying framework has shifted from a single retirement cliff to three distinct phases of working life, reflecting that most people today want to ease off gradually rather than stop abruptly.
Stuart explains why holding too little outside superannuation can quietly lock people into the all-or-nothing retirement they were trying to avoid, and why planning for at least 30 years of post-work life means growth assets need to remain part of the strategy well into retirement. He also breaks down why a $100,000 income target implying $5 million in assets is far less daunting once it's understood there are three separate levers available to pull, not just one.
The episode closes with a one-page exercise listeners can complete this week to produce a first version of their own freedom number and freedom date. The full worksheet and modelling method appear in chapter two of Wealth by Design.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read Full Blog Here
Pre-order Wealth by Design Here
Most people assume building wealth requires making hundreds of good financial decisions. In reality, a small number of choices do almost all of the heavy lifting, and this episode identifies exactly which ones.
The first is the choice of partner, arguably the most important financial decision a person will make. Alignment on spending, saving, and investing dramatically simplifies wealth building, while misalignment creates the stop-start behaviour that derails even well-designed strategies. Divorce, by contrast, is one of the most financially destructive events that can occur, often setting people back further than they can ever fully recover from.
The second is career choice, where lifetime earnings compound dramatically based on income level, and genuine enjoyment of work tends to drive higher earnings over time rather than the reverse. The third is a spending-saving philosophy, not a budget, but a guiding approach that avoids both extremes of overspending and joyless deprivation.
The fourth category covers the tactical decisions that compound over decades: the first property purchased, where the family home is located, how superannuation is invested, the methodology used for investing outside super, and whether to seek professional advice at key decision points.
Notably absent from the list are the decisions the financial media obsesses over: stock picking, market timing, finding the next big winner. The real insight is liberating: get a handful of decisions right, and the rest mostly takes care of itself.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-order Wealth by Design Here
This episode brings together four listener scenarios united by a common theme: significant financial capacity, but genuine uncertainty about which move to make next and in what order.
The first comes from a Sydney couple earning $540k who feel house-poor despite their income carrying a $1.9m mortgage on a home bought partly for its duplex potential, with a medium landslide risk and an $800k–$1m overseas inheritance on the way. The questions span inheritance allocation, debt recycling, cash flow management through private school fees, and how to restructure once the husband's income shifts to lumpy partner distributions.
The second involves a Brisbane couple with a $7.8m property portfolio, strong equity, and a clear land-value-focused investment philosophy, now weighing whether to knock down and rebuild their current home, sell and buy in a premium riverside suburb, or hold a vacant subdivided lot for future development ahead of the Olympics.
The third scenario is a Bondi couple renting in Sydney's Eastern Suburbs, earning up to $440k in a good year, with $630k in combined assets and a first child on the horizon, deciding whether to stretch for a $2–3m home now or continue building an investment portfolio through rentvesting.
The fourth comes from a 49-year-old with a $12m property portfolio, $6.3m in equity, and a 15-year horizon to reach $25–30m in net worth, asking whether to stay the course with leveraged property, recycle equity into ETFs and super, or begin deleveraging for higher passive income.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-order Wealth by Design Here
This episode is the first in Eight Rules Revisited, a Thursday series running alongside the regular podcast. Each week, I take one of the eight golden rules from my 2018 book Investopoly and compare it with the version in my new book, Wealth by Design, out on 28 July. Some rules have changed, some have tightened, and some have simply been confirmed by eight more years of evidence and client experience. I'll tell you which is which, plainly, each week.
We start with Rule 1: think in decades, not days. The rule itself hasn't moved. What has changed is how I think about risk and volatility. In 2018, I told readers to ignore short-term market movements. That was true, but incomplete. I now define risk as the probability of failing to reach your goals, not the chance of watching prices fall. Seen that way, holding too much cash is risky, and refusing to invest in growth assets because they wobble is risky too. Volatility is simply the price of admission for long-term returns, and I put some numbers on how bumpy you should expect the ride to be.
I also share the four-question filter I now apply to every major financial decision, and a short exercise you can do this week on your next three big decisions.
If you find this useful, the full frameworks and worked examples are in chapter one of Wealth by Design. Pre-order before 28 July and you'll also receive the Investopoly Research Assistant, an AI tool trained on a decade of my writing.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read Full Blog Here
Pre-order Wealth by Design Here
Financial advisers often manage their own money quite differently from the clients they advise. After more than two decades of observing both groups up close, those differences have become a reliable indicator of what genuinely good financial decision-making looks like in practice.
In this episode, Stuart shares nine observations drawn from that experience. Most financial advisers hold their superannuation entirely in growth assets, understanding that short-term volatility inside super is largely irrelevant when the money cannot be accessed for decades. They welcome falling markets rather than fear them. They use debt deliberately, neither avoiding it entirely nor using it recklessly, and they invest consistently from surplus cash flow rather than waiting for the right moment that rarely arrives.
Their household finances follow a clear structural discipline: invest first, then spend what remains. They track their net worth regularly and understand what the numbers actually mean. They treat superannuation as a serious wealth-building vehicle from early in their careers, often choosing wrap platforms or SMSFs for the control and transparency they provide. And they largely ignore the daily noise of market movements, checking their own portfolios far less frequently than most people would expect.
Some of these patterns sit at odds with conventional industry practice. That tension is worth examining, both for investors choosing how to manage their own money and for those deciding whether their adviser truly practises what they preach.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-order Wealth by Design Here
This episode brings together four listener questions united by a common challenge: knowing which lever to pull next when the financial position is solid but the path forward feels unclear.
The first comes from a retiree who connected with a recent episode on underspending in retirement, but raises a dimension that wasn't covered how to factor substantial debt-free property wealth, including a principal residence and a beach house, into retirement income planning. The question is whether to sell, rent, or consider a reverse mortgage to unlock equity before those assets simply pass to the next generation.
The second involves a 60-year-old about to access a $2.1 million superannuation pension, with a part-time working wife five years from her own preservation age. The question is whether additional contributions to her fund over the next two years represent the highest-value use of surplus cash flow.
The third is a detailed scenario from a 43-year-old with a $2.65 million home, a Geelong investment property, $200k in shares, and two children in private school asking how to prioritise debt reduction, renovations, asset allocation, and ownership structure across a 20-year runway to retirement at 60.
The fourth involves an SMSF holding a Townsville investment property with a $375k LRBA loan, and the strategic tension between building liquidity inside the fund versus aggressively paying down debt alongside a broader question about whether downsizing the family home should factor into the plan.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read Full Blog Here
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Commercial property is being actively promoted as a compelling alternative to residential investment, particularly as higher interest rates reduce borrowing capacity and tighter tenancy laws make residential property less attractive. On the surface, the pitch is appealing: higher rental yields, tenants paying most outgoings, and the potential for capital growth. But in Stuart's assessment, current valuations make the risk hard to justify.
This episode examines commercial property through a valuation lens, explaining how cap rates work, why current pricing looks stretched relative to historical norms, and how the spread between commercial yields and the 10-year government bond rate has compressed to levels last seen before the GFC. At recent auction prices, some properties are selling on cap rates below the risk-free rate, meaning investors are accepting less income than a government bond while taking on substantially more risk.
The analysis models what happens to investor equity if cap rates revert toward their long-term average of 3.5% to 4.5% above the bond rate. The results are stark: at 70% leverage, a reversion to historical norms could wipe out most or all of an investor's equity.
Stuart also explores why cap rates have stayed compressed despite rising bond yields, and why the structural forces holding valuations up may not last. Commercial property can be an excellent investment, but only at the right price.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-Order Wealth by Design Here
This episode brings together three listener scenarios that each involve genuinely complex financial positions, multiple moving parts, significant income, and decisions where getting the sequencing right matters enormously.
The first comes from a 34-year-old specialist trainee doctor in Sydney, engaged, planning a family, and facing a highly unusual income trajectory, moving from $250k now to as low as $130k during a London fellowship, before returning to Perth as a consultant earning potentially $600k or more. The central question is whether to buy a stepping-stone property in Perth's middle-ring suburbs before income rises, renovate it during an 18-month stay, then rent it out while overseas, or wait, save, and buy a better asset closer to his forever suburbs once borrowing capacity is fully established.
The second involves a 49-year-old earning $475k with seven Melbourne investment properties worth $6.77 million, net debt of just $330k, and $920k in super, but almost no share exposure. She is three years from being able to retire on rental income, but is questioning whether her heavily concentrated, all-property strategy leaves too much on the table in terms of tax efficiency, liquidity, and long-term portfolio resilience.
The third comes from a couple in their early fifties with a nearly paid-off home, a modest investment property in a good school zone, $1.2 million in combined super, and $100k in underperforming shares, asking for honest clarity on whether early retirement is realistic and what the best path forward looks like across property, shares, and super contributions.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-order Wealth by Design Here
Read Full Blog Here
Superannuation's enforced long investment horizon is one of the most underused structural advantages available to Australian investors. This blog examines whether internally geared ETFs have a role to play within super, and backs the analysis with detailed financial modelling rather than theory alone.
The numbers are compelling. A 30-year-old with $200,000 in super, contributing $20,000 per year and investing in a geared diversified ETF via an SMSF, is projected to retire with a balance of approximately $4.3 million, more than 26% higher than an equivalent ungeared strategy in a low-cost industry fund. The benefit is most pronounced for younger investors with larger balances, longer timeframes, and higher contribution rates. As retirement approaches, the case for gearing weakens materially.
But the strategy carries real risks that deserve equal attention. Volatility is amplified; a 50% market fall in a 35% geared ETF produces a balance decline of around 77%. Sequence-of-returns risk can turn a strong strategy into a poor one, depending on when a major correction occurs. And the cost and compliance obligations of running an SMSF add a layer of responsibility that should not be taken lightly.
The blog also surveys the available geared ETF options in Australia, covering diversified and single-market products across a range of gearing levels. The conclusion is clear: gearing inside super can be genuinely attractive, but is best treated as a complement to ungeared strategies rather than an all-or-nothing decision.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-Order Wealth by Design Here
This episode brings together four listener questions that each wrestle with a different dimension of long-term wealth building, from the early decisions that set the trajectory to the late-stage sequencing that determines how comfortably retirement unfolds.
The first comes from a 28-year-old physiotherapist two years into his career, carrying $1.1 million in mortgage debt and a $98k HECS liability, asking whether surplus savings should flow into ETFs or the offset account, and whether his wife's extra super contributions are optimally placed.
The second involves a couple aged 63 and 53 with three beachside properties, $780k in PPOR debt, and a combined income of $150k, working through four possible exit strategies to generate $150k per year in retirement income while preserving as much capital growth as possible for as long as practical.
The third is a thoughtful counter-perspective on Australia's proposed CGT changes, arguing that redirecting capital from residential property into shares could strengthen the nation's productive capacity and reduce its dependence on housing and mining wealth.
The fourth comes from a 44-year-old with three Brisbane investment properties, no shares, and 50% of his super sitting in cash since the GFC, waiting for the next major dip. He asks whether to buy a fourth property or begin tilting toward shares, and whether his cash-timing strategy inside super is sound.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-Order Wealth by Design Here
Read Full Blog Here
Charlie Munger left investors with ten principles that are deceptively simple and take a lifetime to apply well. This blog translates each one into practical, grounded guidance for Australian investors, moving beyond abstract philosophy to the specific decisions, mistakes, and behaviours that shape long-term outcomes in local property and share markets.
The ten principles cover starting every evaluation with downside risk before upside potential; building genuine independence from the conflicted advice that is common in Australian investment markets; preparation as the only real edge available to most investors; intellectual humility as a competitive advantage rather than a weakness; and analytical rigour that insists on evidence over compelling narratives.
The blog also explores capital allocation as the investor's single most important decision, patience as a structural advantage in a media environment designed to provoke action, decisiveness when the setup is genuinely clear, adaptability in the face of unremovable complexity like tax changes and interest rate cycles, and simplicity as the ultimate discipline.
Underlying all ten rules are four behaviours: preparation, discipline, patience, and decisiveness. These are not just investing virtues, they are the foundation of any long-term wealth-building strategy that actually works.
The hard part is never the knowledge. It is doing it consistently while the world tries very hard to distract you.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Pre-Order Wealth by Design Here
This episode brings together five listener scenarios that span the full arc of wealth building, from a 24-year-old taking his first steps to couples approaching retirement with complex, multi-property portfolios and competing priorities.
The first question comes from a 24-year-old earning $80k with $75k across shares and savings, limited borrowing capacity, and a genuine desire to start building wealth deliberately. The question is simple but important: shares or property first?
The second involves a Perth couple in their late forties, accidental investors who now hold four investment properties across Perth, regional NSW, and WA, asking whether their current asset base is enough to deliver $100k in passive income by age 60 and what strategy adjustments might be needed to get there.
The third scenario involves a high-income Sydney couple with a $3.5 million family home and two investment properties, weighing whether to sell a Box Hill property they no longer consider investment-grade to fund a $750k renovation, or hold it and carry a larger debt into their early fifties.
The fourth comes from a couple planning to retire at 55 and live in Asia on $110k per year, with a plan to sell two investment properties and shift proceeds into index funds while renting out their home.
The fifth involves a rural GP with three properties, strong income growth ahead, and a clear plan to purchase in Brisbane, looking for a sense check on sequencing, asset selection, and whether the strategy holds up as family life approaches.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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With 30 June approaching, now is the time to review your superannuation contribution options before the annual window closes. Most of the levers available inside super operate within a tight 12-month period, and several are use-it-or-lose-it; miss the deadline, and the opportunity is gone.
This blog walks through 10 strategies worth considering before the end of the financial year. Concessional contributions remain the most tax-effective way to grow super for most Australians, with the tax saving sharpening significantly at higher income levels. Catch-up contributions deserve particular attention this year: 2025/26 is the final opportunity to use any unused cap from 2020/21, and once that year's unused amount expires, it cannot be carried forward.
Other strategies covered include contribution splitting to equalise balances between spouses, increasingly important in the context of Division 296, non-concessional contributions and the bring-forward rule, government co-contributions for lower-income earners, downsizer contributions for those aged 55 and over, spousal contributions, small business CGT cap contributions, the First Home Super Saver Scheme, and transfer balance cap planning for those approaching or already in retirement.
The blog also covers contribution reserving for SMSF members and includes a practical checklist of steps to complete before 30 June. Contributions must be received and allocated by your fund before the deadline, not simply sent. Acting by 20 June is strongly recommended.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
This episode brings together five listener scenarios united by a common thread: making sound financial decisions under competing pressures: income goals, asset quality, tax reform, and the desire for more time and freedom.
The first comes from a couple, both aged 40, with three investment properties and a growing ETF portfolio, asking what it will take to reach $200k in net annual income and reduce their working days as early as possible.
The second raises a technical but important question: under Division 296, are franking credits effectively taxed twice for those whose super balances exceed $3 million before they can access them?
The third involves a 50-year-old with an underperforming St Kilda East apartment that has delivered modest capital growth, ongoing negative cash flow, and rising body corporate costs, and whether selling and redirecting proceeds into super or a diversified ETF portfolio makes more sense than holding on.
The fourth scenario comes from a high-income couple in their mid-fifties with four investment properties and a fully offset home loan, questioning whether selling their northern Melbourne property could eliminate the need for ongoing contributions and create space to reduce working hours.
The fifth is one of the most complex scenarios the show has received — a self-funded retiree with a $4 million SMSF, a $2.8 million margin loan, and a carefully constructed strategy to reduce super below the Division 296 threshold before the tax takes effect.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
This special episode is a replay of a YouTube presentation which is a calm, numbers-led walkthrough of the 2026 Federal Budget - recorded roughly 40 hours after budget night - focused on the three proposals most likely to affect investors: negative gearing, capital gains tax, and family trusts. The deliberate frame throughout is that nothing is law yet, the political debate is far from settled, and listeners should resist making 20-year decisions on 40-hour-old announcements.
On negative gearing, you and Mena explain that existing properties are grandfathered, with a transitionary window to 1 July 2027 and carve-outs for new builds, commercial property and shares. The modelling is sobering: combining the proposed loss of negative gearing with the higher CGT cuts the after-tax internal rate of return on a typical investment-grade property from around 11% to 8.4% - a 24% drop - raising the question of whether direct residential property still compensates for its risks compared with superannuation.
On CGT, a minimum 30% rate (or an indexation method) applies across all asset classes from 1 July 2027, with cost-base resets, pre-1985 assets and the maths of indexation versus the old 50% discount worked through in detail.
On family trusts, the proposed flat 30% rate on distributions, combined with the loss of franking credit flow-through via corporate beneficiaries, could push effective tax on retained business earnings as high as 60% - the change you both flag as most likely to be wound back.
Other angles include why new house-and-land packages remain a poor investment despite their tax appeal, the likely (modest) aggregate impact on prices and rents, the 15–20% hit to borrowing capacity, bank credit-policy uncertainty, and why the family home and super become even more central wealth vehicles.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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The 2026-27 Federal Budget included some of the most significant proposed tax changes we have seen in many years.
In this episode, I unpack the key announcements affecting investors, property owners, business owners, and families, including proposed changes to capital gains tax, negative gearing, and the taxation of discretionary trusts. I also cover the permanent extension of the $20,000 instant asset write-off, proposed personal tax changes, the return of company loss carry-back rules, start-up loss refundability, and the wind-back of the electric vehicle FBT exemption.
The biggest proposed changes are substantial. The Government has announced a new capital gains tax framework, changes that would limit negative gearing on established residential property, and a 30% minimum tax on discretionary trusts. If legislated in their current form, these measures could materially affect long-term investment decisions, business structures, and family wealth strategies.
But the most important point is this: none of the major reforms has been legislated yet.
Tax announcements often change before they become law, and some never become law at all. So, whilst these proposals deserve close attention, they should not trigger rushed decisions. The prudent approach is to understand the potential implications, monitor the legislation closely, and only act once the final rules are known.
Good financial decisions are rarely made in panic. The aim is to remain calm, informed and strategic.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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This episode brings together four listener questions that each wrestle with some of the most practical and consequential decisions in personal finance: how hard to push for a first home, where to deploy idle equity, when an SMSF makes sense, and how to identify genuinely investment-grade property in a market where houses are out of reach.
A couple in their early thirties transitioning out of academia, with $500k in ETFs and a clear desire to buy a home in Brisbane before starting a family. The question is how much to stretch and whether selling down shares to secure a larger land component in a blue-chip suburb is worth the reduction in leverage and long-term return.
The second involves a high-income investor in the top tax bracket with $250k of usable equity sitting idle in an investment property. With blue-chip Brisbane houses beyond comfortable reach and a preference for liquidity and flexibility, he questions whether a leveraged ETF path is a rational default over further property exposure.
The third question examines whether an SMSF makes sense for a couple with $420k in combined super who plan to invest exclusively in ETFs, weighing the tax drag, administrative burden, and complexity against the simplicity of a choice investment option.
The final scenario tackles how to evaluate land value in investment-grade apartments, using a specific Melbourne listing as a practical case study for a couple priced out of houses but committed to a smart first purchase.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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Tax is psychologically painful, but for investors, over-fixating on it is a genuine risk. The drive to minimise tax can lead to decisions far more costly than the tax itself, and this blog makes the case for keeping it in its proper place.
Using financial modelling across both property and shares, Stuart examines the real impact of capital gains tax on internal rates of return over 30 years. The findings are instructive: CGT changes have a surprisingly modest effect on outcomes. What actually drives returns is gearing and the asset's underlying performance. In fact, modelling a scenario where tax is eliminated produces a lower return, because the negative gearing deductions lost along the way are worth more than the CGT saved at the end.
The blog then works through the decisions that genuinely matter: ownership structure, funding structure, and asset selection. Whether to hold investments personally, through a family trust, or in a company, whether and how much to gear, and how proactively investments are managed, these variables shape the bulk of long-term outcomes before tax planning even enters the picture.
The closing hierarchy is clear: asset quality first, gearing second, structure third, tax optimisation last. By the time investors reach item four, most of the outcome is already determined.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
This episode brings together three listener questions that each wrestle, in different ways, with the tension between financial optimisation and practical simplicity, and whether the most technically efficient strategy is always the right one for a given stage of life.
The first scenario involves a couple in their mid-thirties with a solid net worth of $2.5 million, a newborn, and a clear long-term goal of achieving financial independence by 55. With their forever home complete, the question is whether to retain their investment property and continue debt recycling, or sell, simplify the structure, and redeploy proceeds into a leveraged ETF portfolio trading some long-term upside for meaningfully reduced complexity and stress.
The second scenario involves a Melbourne real estate agent with commission-only income, a young family, and a fully offset investment loan sitting idle. He is weighing three options: do nothing, deploy the loan into a diversified ETF, or use it as a deposit on an investment property, all while preserving flexibility for a planned home upgrade within five to ten years.
The third question shifts to the superannuation structure, exploring platform super vehicles like Netwealth, how they differ from industry funds, what protections investors should understand, and whether a split strategy across fund types can make sense depending on balance and investment goals.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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Australian property investment is facing a structural shift, and regulatory change is at the centre of it. This blog examines how rising holding costs, taxation, and tenancy reform are altering long-term return dynamics for investors, using Melbourne as a detailed case study.
The analysis explores the interaction between subdued capital growth, weakening investor sentiment, and tightening rental supply, alongside broader national trends reshaping the investment landscape. Melbourne's experience is particularly instructive, a market where headline data can mask significant variation at the individual asset level, and where regulatory headwinds have added meaningful complexity to investment decisions that once appeared straightforward.
For many investors, the traditional set-and-forget approach of buying a quality property, holding it long term, and letting time do the work is no longer sufficient on its own. Rising holding costs and shifting tenancy regulations are compressing net returns, while tighter rental supply is creating both risk and opportunity depending on asset quality and location.
The blog makes a compelling case for why value-add approaches, geographic diversification, and higher return thresholds are becoming essential tools for serious property investors. In a more complex regulatory environment, strategy and adaptability matter more than ever.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Through a series of real investor scenarios, this blog examines the structural challenges that emerge when wealth is heavily concentrated in property, particularly as retirement approaches. Common issues explored include liquidity constraints, CGT timing, superannuation optimisation, and the risks of relying on rental income to fund long-term retirement needs.
The discussion unpacks how strategies such as asset reallocation, well-timed disposals, and portfolio diversification can improve financial flexibility and resilience. Each scenario reveals a recurring theme: property-heavy portfolios often look strong on paper but can significantly limit options when circumstances change, or major financial decisions need to be made.
Timing matters enormously in these situations. Selling too early can trigger unnecessary tax; holding too long can lock investors into illiquid positions at precisely the moment flexibility is most valuable. Superannuation, often underutilised in property-focused strategies, emerges as a powerful tool for improving tax efficiency and long-term portfolio balance.
The broader insight is that structure and sequencing are just as important as the assets themselves. For investors approaching retirement or managing multiple competing financial goals, getting these decisions right and early enough can make a material difference to long-term outcomes.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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There are two sensible ways to invest in ETFs: use a diversified, all-in-one fund, or build your own portfolio. Both can work. The difference comes down to control, scale, and behaviour.
In this episode, Stuart explains why simple diversified ETFs are often the right starting point, particularly for smaller balances or investors who value simplicity and discipline. But as portfolios grow, constructing your own ETF portfolio can offer meaningful advantages, particularly around valuation, diversification, and tax efficiency.
The core principle is straightforward: quality first, then price.
Stuart introduces the “Forever Test," a simple filter to identify index exposures you would be comfortable holding for decades, not just for the next cycle. From there, the focus shifts to valuation, and why the price you pay remains one of the most important drivers of long-term returns.
The episode also breaks down where returns actually come from income, earnings growth, and repricing, and how a value-aware approach to ETF selection can improve outcomes across all three.
You’ll also learn the four key ways to tilt a portfolio: geography, index methodology, company size, and emerging markets, and how these levers can be used to build a more considered and flexible portfolio without abandoning diversification.
At its core, this is not about complexity. It is about improving the odds. Because the real edge is not just what you invest in but how you structure it, and whether you can hold it long enough for compounding to do its work.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Real investors rarely face clean, textbook decisions. Portfolios are messy, life changes, and the right move in one context can be the wrong move in another. In this episode, Stuart examines a series of real-world case studies that bring to life the strategic tensions shaping financial outcomes, from navigating leverage and asset concentration to managing liquidity through critical life-stage transitions.
Spanning scenarios across property development, retirement planning, and portfolio structuring, these case studies reveal how disciplined frameworks hold up against the complexity of actual portfolios. The decisions investors face are rarely driven by a single factor. Instead, they emerge from the interplay of competing priorities: growth versus risk, flexibility versus long-term compounding, capital preservation versus opportunity.
When should you redeploy capital? How do you strike the right balance between concentration and diversification? What are the real trade-offs between staying liquid and staying invested? And how do your answers to these questions shift as your financial life evolves?
Campbell works through each scenario with the rigour and clarity that turns complicated, real-world decisions into confident, well-reasoned strategies. If you've ever wondered how sophisticated investors actually think through complexity, this episode offers a rare and practical window into that process.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart breaks down what concentration risk really means and why it is not just about returns, but dependence. From large shareholdings to property and business exposure, he explains how having too much tied to a single asset can increase risk unless it is properly understood in the context of your broader strategy.
Stuart introduces a practical three-step framework to assess concentration risk: evaluating future returns and opportunity cost, testing how dependent your financial plan is on the asset, and comparing the cost of selling versus staying exposed. He also challenges the common tendency to let tax considerations drive decisions, often at the expense of better long-term outcomes.
The episode explores when concentration risk is acceptable, when it should be reduced, and the different ways to do it, from immediate divestment to gradual or opportunistic trimming.
A clear, strategic discussion on how to balance risk, return, and flexibility so your portfolio works for you, not against you.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart tackles four listener questions spanning stock selection, portfolio restructuring, debt strategy, and retirement income planning.
Kyle wants to know how Stuart actually researches stocks, which tools and resources he uses, and what metrics he looks for across different investment types, from growth and defensive plays to income-focused holdings.
Jack is sitting on a mixed SMSF portfolio of around $138K and is about to contribute a further $360K. He's weighing whether to top up his existing holdings or sell everything and start fresh with a cleaner four-ETF structure. With retirement five years away, the balance between growth and income is at the front of mind.
Dave has done his own modelling comparing debt recycling into shares against buying an $800K investment property, and was surprised to find the gap smaller than expected. Stuart works through Dave's assumptions, addresses the flexibility argument, and answers his practical questions about how to correctly structure a mortgage split for debt recycling purposes.
Peter is 59, retiring this year, and holds $2M in super alongside a home, two investment properties, and a part-working spouse. His question: can they sustainably draw $120K a year while preserving the $2.4M super balance as an intergenerational wealth transfer to their sons?
A technically rich episode covering the full spectrum from picking stocks to structuring retirement.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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Investing a large lump sum into the share market can feel risky, but is spreading it out actually safer, or just more comfortable?
In this episode, Stuart revisits his own evolving view on lump sum investing versus dollar cost averaging. Drawing on decades of market research, he explains why lump sum investing has historically outperformed staged investing around two-thirds of the time, and why the real cost of caution is often missed opportunity, not reduced risk.
But this is not just about timing. Stuart explores how the decision should also depend on what you’re investing in, from expensive markets like the Nasdaq to more attractively valued regions globally. He also unpacks the role of cash sitting in offset accounts, and how that changes the equation when comparing guaranteed returns versus market exposure.
The episode dives into the psychology behind staged investing, including loss aversion and the fear of regret, and introduces a practical middle ground: enhanced dollar cost averaging.
Stuart also breaks down common misconceptions around debt recycling, explaining why it does not automatically accelerate home loan repayment—and when it can still make sense.
A clear, evidence-based discussion on balancing logic, emotion, and strategy when investing significant capital.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this week's Q&A episode, Stuart works through real-life scenarios where the challenge isn't finding a good option; it's choosing between several.
A Canberra couple planning a move to Queensland face a layered dilemma: how to fund a $3M home while managing a defined benefit pension, a potential inheritance, and a preference to hold quality assets. Stuart weighs selling, renting, and carrying debt into retirement, and why flexibility may matter more than certainty at this stage.
The episode also covers structuring investments for children (informal versus discretionary trusts), cash flow and loan strategies for business owners and high-income earners, and how to decide whether an underperforming property is worth holding or cutting loose.
Across every case study, the same tension surfaces: flexibility, tax efficiency, and long-term growth rarely all point in the same direction.
A practical, honest episode for anyone navigating big financial decisions where no single path is obviously right.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart explores a lesser-discussed but increasingly important risk in financial planning: not running out of money, but failing to use it when it matters most.
While much of the conversation around retirement focuses on avoiding financial shortfall, this episode flips the script. For those in a strong financial position, the greater danger may be underspending during the early, high-health years of retirement when time, energy, and freedom are at their peak.
Stuart introduces a practical framework for thinking about retirement in two phases: the active “high-health” years and the later, lower-spending phase. He explains why a successful plan often involves intentional drawdown of capital, not just preserving it, and how shifting from accumulation to decumulation is as much psychological as it is financial.
The episode also outlines how to build confidence in spending through simple guardrails dividing wealth into core, contingency, and discretionary capital—and why liquidity and asset structure play a critical role in enabling flexibility.
This is a thoughtful discussion about aligning money with life, permitting yourself to spend, and ensuring that financial success actually translates into a richer, more fulfilling retirement.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
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Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart explores a powerful theme across multiple listener scenarios: is it possible to achieve early retirement without aggressive risk-taking, and what trade-offs does that require?
A couple in their late 40s shares a disciplined, “late starter” journey and a clear downsizing strategy to fund retirement within five years. Stuart unpacks whether their plan to bridge the gap to super using shares and cash flow is realistic, and the key risks that could derail it.
The conversation then broadens to include several compelling case studies: how to allocate proceeds from a property sale when nearing retirement, whether to prioritise super versus accessible investments, and how to structure a portfolio to fund the critical pre-super gap.
Stuart also tackles the psychology of risk: Should wealthier investors take on more growth exposure, or reduce risk as they approach retirement? And for those pursuing early retirement primarily through shares, what are the key considerations when navigating volatility, sequencing risk, and income needs?
This episode is a deep dive into retirement strategy, highlighting that while simple plans can be effective, success ultimately comes down to managing timing risk, maintaining flexibility, and aligning your portfolio with your real-world lifestyle goals.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart challenges the idea that Melbourne property has been a poor performer by digging beneath the median data and uncovering what actually drives outperformance.
While headline figures suggest modest growth since 2010, a deeper look reveals many individual properties have significantly exceeded the average. Stuart walks through 10 real case studies across investment-grade Melbourne suburbs, highlighting the common characteristics that contributed to stronger long-term results even during relatively flat market conditions.
The discussion focuses on key drivers of outperformance, including structural scarcity, walkable lifestyle appeal, strong local demographics, and positioning within tightly held pockets. He also explains why factors like land size and heritage overlays may matter less than investors assume, and how well-executed renovations can enhance both value and buyer demand.
Importantly, Stuart emphasises that property investing is both art and science data can guide decisions, but nuance and local expertise often make the difference.
The episode reinforces a critical message: you don’t need a booming market to achieve strong results. By focusing on high-quality assets with enduring fundamentals, investors can outperform the median and harness the real power of long-term compounding.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart unpacks a complex and relatable dilemma: what happens when your long-term wealth strategy collides with a major lifestyle goal.
A Sydney-based investor with a substantial property portfolio is aiming to retire at 60 with a high passive income. Still, a recent PPOR upgrade and plans for an $800k–$1M knockdown rebuild have put that goal under pressure. With borrowing capacity already stretched and income likely to fall, the question becomes clear: is it possible to fund the build without selling assets, or is compromise unavoidable?
Stuart explores the trade-offs between holding investment-grade property for long-term compounding versus freeing up capital to fund lifestyle decisions today. He also discusses the realities of serviceability constraints, the risks of overextending, and why sometimes even strong portfolios require strategic simplification.
The episode also touches on broader themes, including how to optimise concessional super contributions in retirement, how risk tolerance should evolve as wealth grows, and a fascinating case study involving a farmer weighing up a $11M lump sum versus long-term income from a solar lease.
A thoughtful discussion on balancing ambition, lifestyle, and financial reality when not everything can be optimised at once.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart breaks down the growing political debate around capital gains tax (CGT) and what potential changes could mean for Australian property investors.
Following a Senate committee review, policymakers are now discussing the possibility of reducing the CGT discount and even limiting negative gearing to a small number of properties. Stuart examines the claims behind these proposals, including whether investor tax incentives are really responsible for rising house prices, and why housing supply remains the dominant driver of affordability.
He then walks through modelling that compares three potential CGT systems: the current 50% discount, a reduced 33% discount, and the original inflation indexation model used when CGT was first introduced. Using a 30-year property investment example, Stuart shows how reducing the discount would affect after-tax returns, internal rate of return (IRR), and the overall profit investors might expect from a leveraged property strategy.
The episode also explores how these tax changes could alter the investment landscape. If property tax advantages are reduced, borrowing to invest in shares, particularly tax-efficient global equity portfolios, may become comparatively more attractive.
Finally, Stuart discusses lessons from the UK, where investor-focused tax reforms reduced landlord participation and tightened rental supply, contributing to rising rents.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this Q&A episode, Stuart tackles three complex retirement planning scenarios involving superannuation strategy, debt reduction, and financial independence.
First, a Melbourne couple in their 50s asks whether surplus cash should be prioritised toward their large PPOR mortgage offset or contributed to their SMSF. With significant property exposure and relatively low super balances, Stuart explores how to think about the trade-off between liquidity, tax efficiency, and retirement readiness.
Next, a Sydney couple in their late 40s wonder if it’s still possible to pay off their home loan and retire within 15 years. Stuart examines whether buying an investment property for growth ahead of the Brisbane Olympics is a sensible strategy, or whether a more conservative path, boosting concessional super contributions while paying down their mortgage, may provide a stronger outcome.
Finally, a FIRE-oriented listener asks how to bridge the gap between early retirement and super preservation age when most wealth already sits inside super. Stuart discusses withdrawal rates, sequence-of-returns risk, and how to determine the appropriate level of investments required outside super.
A thoughtful episode on balancing flexibility, tax efficiency, and risk when planning for retirement across different life stages.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart explores what he believes is the single most important principle in long-term investing: choosing assets that are most likely to deliver the highest average return over the next 20–30+ years, and ideally much longer.
He explains why successful investors focus on lifetime compounding rather than short-term market noise, and how the real power of compounding only becomes obvious after decades of patience. Stuart walks through why investment decisions should always be framed around the question: Would I be comfortable owning this asset forever?
The discussion also covers the practical levers investors can control to maximise long-term outcomes. That includes minimising fees and tax drag so more returns can compound, selecting assets where growth is driven largely by unrealised capital appreciation, and structuring ownership correctly from the beginning.
Stuart also highlights the often-overlooked behavioural side of investing. The best investments are not just those with strong fundamentals; they are the ones that require minimal time, emotional energy, and decision-making so investors can stick with them through market cycles.
Finally, he explains how this principle applies across asset classes from ETFs built around durable indexes to investment-grade property in supply-constrained locations, and why resisting short-term “shiny object” strategies is essential for building meaningful wealth over time.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this wide-ranging Q&A episode, Stuart tackles advanced strategy questions across crypto, capital gains tax, debt recycling, super structuring, and long-term portfolio design.
First, he unpacks the tax realities of holding Bitcoin via an ETF versus direct ownership, including whether using Bitcoin as a future currency actually avoids CGT (spoiler: the tax system doesn’t work that way). He also explores custody risk and what “safest” really means when holding digital assets directly.
The episode then shifts to a couple crystallising a large capital gain and weighing up debt recycling, super contributions, and leveraging through NAB Equity Builder. Stuart breaks down the maths of deductible versus non-deductible debt, Div 293 considerations, and how to balance tax efficiency with flexibility and early financial independence.
He also revisits the six-year rule for CGT on former principal residences, clarifying eligibility, deductibility during exemption periods, valuation strategies, and whether banks need to be notified when occupancy changes.
Finally, for a defined benefit member building wealth outside super, Stuart explores portfolio diversification beyond property and how defined benefit interests interact with the $2 million transfer balance cap.
A technical but practical episode focused on sequencing, structure, and preserving optionality on the path to financial freedom.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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The lending landscape has changed dramatically over the past two decades, and the gap between traditional banks and non-bank lenders has never been wider. In this episode, Stuart breaks down the key differences between authorised deposit-taking institutions (ADIs) regulated by the Australian Prudential Regulation Authority (APRA) and non-bank lenders regulated primarily by the Australian Securities and Investments Commission (ASIC) under the NCCP framework.
You’ll learn how banks fund loans using customer deposits protected by the Financial Claims Scheme, while non-banks typically rely on securitisation and bond markets. Stuart explains why non-banks aren’t subject to APRA’s macroprudential limits, including serviceability buffers and debt-to-income caps, and how this can translate into materially higher borrowing capacity.
He also unpacks the important nuances around offset account structures with non-banks, potential risks in a lender failure scenario, and why funding costs can shift independently of the RBA cash rate.
Most importantly, Stuart explores how using a non-bank lender strategically can accelerate wealth creation, particularly in property investing, where access to finance often matters more than marginal differences in interest rates.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this strategic Q&A episode, Stuart explores two thoughtful listener scenarios centred on structure, leverage, and long-term optionality.
First, a high-earning couple in their late 30s with significant cash, shares, super, and a lowly geared investment property wrestle with how much to spend on a future family home. Should they stay underleveraged and preserve their income-producing assets, or sell shares and property to secure a higher-quality principal residence? Stuart unpacks how to think about asset quality, sequencing, tax efficiency, and the hidden opportunity cost of “putting all your eggs” into the family home.
Then, a financially literate PAYG professional navigating redundancy, career reset, and decision fatigue asks the big structural questions: When does a family trust actually make sense? Is there a trigger point for setting up an SMSF? And how do you assess whether financial advice is worth the cost? Stuart walks through the practical thresholds, behavioural considerations, and regulatory realities that should inform those decisions, particularly for single professionals rebuilding momentum.
This episode is about clarity over complexity, understanding when to introduce new structures, when to simplify, and how to align wealth-building decisions with lifestyle, risk tolerance, and long-term independence.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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Why do most diversified Australian portfolios still allocate nearly half of their equity exposure to Australian shares, when Australia represents only around 2% of the global share market?
In this episode, we challenge the traditional 45/55 split between Australian and international equities and examine whether it truly makes sense in today’s global economy.
Campbell breaks down the most common arguments for maintaining a heavy domestic allocation, franking credits, reduced currency risk, higher dividend yields, lower volatility, and familiarity, and tests whether they justify such a significant home bias. While franking credits provide a real and measurable benefit, he explores why that benefit may be meaningful but not transformational. He also unpacks the realities of currency hedging, sector concentration, tax efficiency, and long-term compounding.
Australia’s share market is highly concentrated in banks and miners, with limited exposure to fast-growing sectors like technology. Over the past decade, global markets have outperformed, largely due to stronger earnings growth and broader diversification. Yet over 30 years, returns have been surprisingly similar, which raises a more important question: what does the future likely reward?
Campbell also discusses how the investor stage matters. Retirees seeking income may prefer higher domestic exposure. Accumulators focused on long-term after-tax compounding may benefit from greater global diversification and capital growth orientation.
This episode isn’t about abandoning Australian shares. It’s about thinking more critically about where new investment dollars should go and whether the default allocation most Australians inherit is grounded in evidence, or simply habit.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this strategy-heavy Q&A episode, Stuart tackles sophisticated portfolio questions from high-income earners and mid-life investors recalibrating their next move. A key theme is structure when (and whether) to introduce a family trust, how to think about carried-forward capital losses, and whether tax optimisation today outweighs flexibility tomorrow.
For one couple with substantial capital loss carry-forwards, the discussion explores whether to deliberately realise gains to “use them up” or stay focused on optimal long-term asset allocation. Stuart also weighs in on when advice and trust structures meaningfully add value versus when they add cost and complexity.
Another listener considers transitioning from a property-heavy portfolio into ETFs over the next decade. Stuart unpacks how to diversify intelligently, manage risk sequencing in the final accumulation years, and avoid trying to time the market with lump-sum investments.
The episode also revisits the ever-present PPOR upgrade dilemma: is taking on new debt in your mid-40s worth it if early retirement is within reach? And for younger, debt-free families, does reintroducing leverage via investment property make sense, or is simplicity underrated?
A thoughtful episode on tax, temperament, and structuring wealth for optionality, not just returns.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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AI has moved from buzzword to investment obsession almost overnight. From semiconductors and data centres to software platforms and critical minerals, “the AI trade” has become shorthand for backing the companies expected to benefit most from this technological shift.
But before assuming today’s obvious winners will still look obvious in a decade, it’s worth revisiting the last time a world-changing technology captivated markets.
In this episode, Stuart unpacks what really happened during the dot-com bubble and where investors went wrong. The internet thesis was correct. The valuations were not. Many of the most celebrated companies of 2000 ultimately destroyed long-term shareholder value, despite the technology itself reshaping the world; only a handful adapted and endured.
He explores the parallels with AI today: sky-high expectations, capital flooding into perceived winners, and the growing belief that “this time is different.” We also examine why many of the true long-term winners may not yet exist, and why broad market exposure may already capture much of AI’s eventual impact.
Most importantly, Stuart explains why you don’t need to predict the winners to benefit. History suggests that trying to identify and then time the next dominant technology companies is far harder than it looks. Instead, a rules-based, diversified approach allows markets to sort winners from losers over time.
AI may well be the most significant technological advancement of our generation. But that doesn’t mean your investment strategy needs to change.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart unpacks a series of high-stakes property and borrowing decisions from listeners at very different life stages, from a 24-year-old with rising income and growing capacity, to high-earning families juggling multiple investment properties and eyeing $3–4 million dream homes.
A central theme emerges: just because you can borrow more, doesn’t always mean you should. Stuart explores how to think about deploying large cash reserves, whether selling investment assets to fund a principal residence makes sense, and how to avoid eroding long-term optionality when upgrading lifestyle. He also tackles the “forever home” dilemma: buy now and risk stretching too far, or wait and risk being priced out?
For younger investors, the discussion turns to optimising borrowing capacity early, debt recycling, and the trade-offs between renovating, investing, and preserving flexibility. For established professionals approaching their 50s, Stuart examines timing decisions around relocating, selling the family home, and managing tax efficiency across structures like trusts and SMSFs.
This episode is a deep dive into strategic sequencing, how to align property decisions, leverage, and lifestyle goals without compromising long-term financial independence.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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Financial modelling has become a powerful sales tool across the wealth industry, especially in property investing. In this episode, Stuart unpacks why slick projections and long-term forecasts can look compelling, yet still lead investors in the wrong direction.
He explains a simple but critical truth: models don’t reveal the future, they reflect assumptions. And when the person building the model also benefits if you transact, those assumptions deserve serious scrutiny. He explores how optimistic growth rates, understated costs, and smooth “straight-line” returns can quietly transform modelling from a decision tool into a persuasion tool.
You’ll learn why sequence risk matters more than most projections admit, how rental and cash-flow assumptions are often overstated, and why strategies that rely on early growth are inherently fragile. Stuart also breaks down execution risk, borrowing capacity, credit policy changes, interest-only rollovers, and why many strategies fail not on paper, but in practice.
Finally, he explains how high-quality modelling should really be used: stress-tested, conservative, evidence-based, and compared against credible alternatives. If you’re presented with a model that promises certainty, this episode will help you ask the right questions and avoid buying an outcome that only works in a spreadsheet.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this in-depth Q&A episode, Stuart works through a series of listener questions that all circle the same tension: how to make confident investment decisions when time feels limited and past mistakes still loom large. The discussion spans mid- to late-career investors grappling with whether to buy “one last” investment property, double down on super, or simply focus on debt reduction and lifestyle flexibility.
Stuart unpacks the risks of short investment timeframes, especially when borrowing heavily later in life, and explains why asset quality, structure, and optionality matter far more than chasing growth to make up for lost time. Several listeners reflect on missed opportunities and underperforming assets, prompting a broader conversation about opportunity cost, regret, and how to avoid repeating the same mistakes emotionally rather than strategically.
The episode also explores realistic retirement planning for couples approaching their 50s, including whether investment property still has a role, how to weigh certainty versus upside, and when paying off the family home may be the most underrated investment of all. Across shares, property, and super, Stuart reinforces the importance of aligning strategy with temperament, cash flow resilience, and life goals, not just spreadsheets.
It’s a candid, grounding episode for anyone wondering whether they should take one more swing or finally simplify and consolidate.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
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Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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Conflicts of interest are everywhere in financial services, but the most influential ones are often the least visible. In this episode, Stuart unpacks the hidden incentives that can quietly shape whether investors are steered toward property, shares, or a particular strategy, even when advice is well-intentioned.
He explains why conflicts don’t require dishonesty to matter, how incentives can shape beliefs over time, and why familiarity bias plays a much bigger role in advice than most people realise. Stuart also explores the structural differences between property and share investing, and why those differences can influence whether an adviser benefits from ongoing involvement or not.
You’ll learn how confirmation bias, personal success stories, and business models can all colour recommendations, and why certainty is not always a sign of quality advice. Most importantly, he outlines practical ways investors can recognise potential conflicts, ask better questions, and assess whether advice is genuinely balanced and fit for purpose.
If you’ve ever wondered why different advisers can look at the same situation and recommend completely different paths, this episode will help you understand what’s really going on beneath the surface.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this wide-ranging Q&A episode, Stuart tackles some of the most common and confronting questions listeners face as their wealth grows and decisions become less forgiving. A central theme is how to balance aspiration with financial resilience, particularly when large debts, lifestyle upgrades, and long time horizons collide. Stuart explores how to think about net worth in a practical sense, including whether unrealised tax liabilities and transaction costs should be considered, and how to treat the family home in overall wealth calculations.
The episode also dives into the challenge of upgrading to a better home in expensive markets, unpacking when stretching for a higher-quality asset can make sense, and when it risks undermining long-term flexibility. For listeners worried they may have started too late, Stuart addresses whether meaningful progress can still be made in the final decade before retirement, and how to prioritise between paying down debt, investing, and supporting children.
Throughout the episode, Stuart emphasises clear thinking over rules of thumb, encouraging listeners to focus on asset quality, borrowing capacity as a finite resource, and the trade-offs between comfort, growth, and risk. The result is a grounded discussion aimed at helping households make confident, well-structured decisions in the face of uncertainty.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart takes an evidence-based look at ethical, ESG, and sustainable investing, cutting through the marketing to focus on what really matters: risk, diversification, and expected returns. We explain the critical differences between ethical exclusions, ESG frameworks, and sustainability themes and why confusion between them often leads to poor portfolio decisions.
Stuart also explores why there’s no universal definition of “ethical”, how that affects fund construction, and why two funds with similar labels can behave very differently. You’ll hear why staying close to the parent index matters, how ethical overlays can unintentionally increase concentration risk, and where ethical investing can clash with factor, value, and geographic tilts.
Finally, he examines the real-world performance data, discusses whether ethical companies may attract more capital over time, and outlines a practical way to invest ethically without abandoning disciplined, evidence-based portfolio construction.
If you want to invest responsibly and intelligently without sacrificing long-term returns, this episode will help you think more clearly about the trade-offs involved.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
This Q&A episode steps away from headline strategies and focuses on the decisions real households wrestle with once life, family, and fatigue start to matter as much as optimisation.
We begin with a high-income couple in their 30s trying to balance ambitious early-retirement goals with a mixed portfolio of property, an investment bond, and limited super. Stuart unpacks whether tax-deferred structures like investment bonds genuinely earn their place, how to think about adding more property when cash flow is already tight, and when selling an asset is a strategic reset rather than a failure.
From there, the episode shifts to a listener who describes themselves as the “average punter” asset-rich, tired of maximum leverage, and ready to prioritise cash flow, flexibility, and family time. Stuart walks through the risks of late-cycle property decisions, the trade-offs inside SMSFs, and how to consciously transition from accumulation to balance without sabotaging long-term outcomes.
We also tackle a technical but common mistake around redraw and refinancing. Stuart explains how the ATO’s purpose test really works, why refinancing does not magically cleanse debt, and where investors often assume they’ve fixed a tax problem when they haven’t.
Finally, the episode looks at a couple in their early 50s with a substantial property portfolio, asking the right question: not how to maximise wealth, but how to stop working. Stuart discusses sequencing asset sales, funding a future retirement home, and why buying “the next home” too early can quietly derail an otherwise strong plan.
Across all questions, the theme is consistent: good strategy is rarely about clever tricks. It’s about aligning structure, cash flow, and behaviour with the life you actually want and knowing when enough really is enough.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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If you’re planning to buy, sell, upgrade, or invest in property in 2026, this episode cuts through the noise and focuses on what actually drives prices. Rather than forecasts or headlines, Stuart unpacks the evidence-based factors that matter most, including lending volumes, borrowing capacity, interest rate expectations, interstate migration, and where each capital city sits in its property cycle.
A clear picture is emerging of a two-speed market. More affordable properties are seeing stronger demand and faster growth, while higher-priced and premium stock is struggling to keep pace. He explores why this split is happening, how serviceability ceilings and years of ultra-low interest rates have reshaped buyer behaviour, and why sentiment is playing such a powerful role right now.
You’ll also hear how relative value and mean reversion help explain why some cities are late in their growth cycle, while others may still have years ahead of them. Stuart discusses which markets appear well-positioned for 2026, where caution is warranted, and why patience may be rewarded in areas that have underperformed for a long time.
Whether you’re an owner-occupier, first home buyer, or investor, this episode provides a clear, data-led framework to help you think more clearly about property decisions in 2026, and beyond.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart works through a series of real-world questions that sit right at the intersection of money, lifestyle, and long-term strategy. From couples in their early 50s weighing up a beachside lifestyle purchase versus preserving liquidity for early retirement, to younger families juggling income shocks, property portfolios, and big upcoming capital events, this episode is about decision-making when the stakes are high, and the margin for error is small.
He also unpacks a major trust tax court case currently unfolding and explains, in plain English, why it matters for anyone using family trusts and bucket companies. If you’ve ever wondered whether structures you rely on could change under your feet, this discussion will help clarify the risks and what to watch next.
Along the way, he explores redundancy and retirement uncertainty, how to think about super when balances are uneven between partners, when property becomes a concentration risk, and why borrowing capacity can be both an opportunity and a trap later in life.
This episode isn’t about perfect answers. It’s about frameworks, how to balance logic versus emotion, growth versus safety, and flexibility versus commitment, so you can make decisions that still work when markets, rates, or personal circumstances change.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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Most people chase investment tips; few build the engine that powers every strategy: cash flow and debt discipline. In this final Wealth First Principles instalment, we show why your savings rate beats your stock picks in the early years and how small, repeatable improvements compound into big results. You’ll learn a practical two-account banking setup that makes good behaviour automatic, how to measure spending without micromanaging, and why buffers and automation keep plans on track when life gets lumpy.
Stuart unpacks the difference between deductible and non-deductible debt, how to structure loans for flexibility, and a plain-English walkthrough of debt recycling, turning home-loan debt into productive, tax-effective investment debt over time. We also flag the behavioural traps that quietly erase progress (lifestyle creep, anchoring, false security, underestimating irregular costs) and give you a simple operating system: set a target savings rate, automate transfers and investing, preserve liquidity in offsets, review annually, and adjust as life changes.
Investments are the vehicle; cash flow is the fuel. Build a strong surplus, manage debt intentionally, and let time do the heavy lifting. Do this consistently, and you’ll outperform most investors not through luck or timing, but through process.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this power-packed Q&A, Campbell dives into real scenarios many Aussies face, from managing a $50k inheritance for teens inside a trust (ETF compounding vs pooling for a property deposit) to designing a clear 10-year retirement runway for middle-income couples.
He unpacks whether to prioritise paying off the home, maxing super, or debt recycling into ETFs; how to balance simplicity with diversification in ETF mixes; and when leverage into property actually helps rather than hurts future borrowing capacity.
You’ll also hear a plain-English guide to drawing income from super and ETFs in retirement (and tax treatment), whether to consolidate or split super funds, and what to check before rolling over to an ETF-led option. Practical frameworks, evidence over noise, and step-by-step structure so you can act with confidence.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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Shares play a different role than property, and that’s their superpower. In this third Wealth First Principles instalment, we outline a simple, rules-based framework to build a resilient share portfolio that complements property: liquid, globally diversified, tax-aware, and low-cost. The evidence is clear: most active managers and stock-pickers underperform over time. Instead, capture the market return with index funds or diversified ETFs, then let discipline, not prediction, do the heavy lifting.
We unpack what truly drives returns (the Equity Risk Premium), why volatility is the “price of admission,” and how dividends and franking credits fit into a broader, global allocation. Avoid the big four mistakes: over-trading, timing, performance-chasing, and abandoning strategy in downturns. For investors seeking extra robustness, we discuss rules-based alternatives to plain market-cap indexing (equal-weight, value, quality, factor tilts), useful now given concentration risks.
Because Australia is ~1.7% of developed markets and concentrated in banks/resources, we make the case for meaningful global exposure to technology, healthcare, and leading consumer brands. Finally, a practical blueprint: set goals and allocation, pick low-cost structures (e.g., DHHF, VDAL, or factor-tilted ETFs), rebalance to a written policy, and stay the course. Do this consistently, and shares become a dependable engine alongside property for decades.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A, Campbell tackles four big themes that trip up otherwise savvy investors: structure, borrowing capacity, super strategies, and sequencing. We start with a couple weighing up whether to extract equity from two Newcastle homes to fund an ~$800k investment purchase before kids. Campbell maps the trade-offs: why structure beats rate-shopping, the role of offsets and interest-only, how to protect borrowing capacity for a future PPOR upgrade, and when a buyer’s agent adds real value versus waiting and dollar-cost averaging into ETFs.
Next, we zoom out to a simple roadmap for late starters: build surplus first, automate investing, prioritise asset quality over activity, and use structures (trusts, only when justified) to solve clear tax or estate problems, not to manufacture returns.
On super, he explains capital-loss “harvesting” before starting pension phase, when realising gains to absorb losses makes sense, and what changes once tax on earnings drops to 0% in retirement phase. Finally, he clarifies the two-fund super tactic: separating concessional inflows from future non-concessional contributions to make recontribution strategies cleaner later, plus the frictions and admin worth considering.
The through-line: get the foundations right (cash flow, buffers, structure), buy only investment-grade assets, and sequence decisions so flexibility and optionality stay on your side.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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Most investors rush into property with tactics, not strategy, and pay for it in mistakes that are costly to buy, hold, and unwind. This guide lays out a clear, repeatable framework so you can make property decisions that compound for decades. Start by defining a single objective: long-term growth drives wealth; yield only supports holding costs. Next, build the finance structure first, smart loan splits, offsets, IO vs P&I, no cross-collateralisation, so your cash flow and future capacity are protected. Then buy only investment-grade assets: scarce, land-heavy homes in established, supply-constrained suburbs with deep owner-occupier demand and long growth histories.
Model cash flow conservatively (30% expense allowance, 6.5% rates +1% stress) to avoid both over- and under-investing. Choose the city with the best 10-year prospects, then narrow to the top suburbs. Don’t trade quality for a cheaper price point. Manage risk on purpose: maintain buffers, insure properly, avoid excess leverage, preserve capacity, and diversify gradually. Review every 3–5 years for equity, borrowing power, cash-flow optimisations (including value-add), and asset quality, then scale only when foundations are strong.
Follow this process, and the property becomes a disciplined wealth engine. Ignore it, and you’ll battle avoidable costs, fragile cash flow, and disappointing results.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Stuart runs a strategy clinic on three big crossroads for investors: small-scale development, rent-vesting vs. holding the home, and using debt-recycling into shares when an investment-grade property is out of reach. He breaks down subdivision options (sell land now, build-and-sell, or build-and-hold), explains why GST applies to an “enterprise,” when the 50% CGT discount disappears, and which ownership structures (discretionary trust with bucket company vs. company) suit repeat projects. He also covers feasibility rules of thumb (contingency, funding, pre-sales risk), and whether you can pay yourself for project management.
Next, he tackles rent-investing trade-offs: freeing borrowing capacity, concentration risk, and how to preserve deductible debt with splits and offsets. For households that can’t afford an investment-grade IP today, he maps a debt-recycling pathway P&I on the home, a clean, interest-only investment split, disciplined DCA into broad ETFs, and guardrails (buffers, LVR caps, rebalancing, no margin loans).
Finally, a Sydney case study stress-tests a high-debt, high-income family: IO vs P&I sequencing, daycare-era cash-flow management, super vs. taxable investing, and planning an eventual PPOR upgrade without painting yourself into a DTI corner. Core takeaways: buy only unequivocally investment-grade assets, separate security to avoid cross-collateralisation, keep buffers, and choose the structure and debt settings that protect flexibility while compounding for 10+ years.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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Stuart opens with Wealth First Principles, explaining how real fortunes are built through three key inputs: a durable cash-flow surplus, investment efficiency (quality assets, low costs, smart tax structures, and few behavioral errors), and time (the compounding decade that does most of the work). He separates process from prediction, shows why speculation usually fails, and explains where leverage helps (sensible gearing on high-quality property with buffers) versus where it can harm (aggressive equity leverage). The mindset shift: ignore stories, automate saving, and let compounding do the heavy lifting.
Then he applies the framework to a detailed 10–15-year property plan: upgrading into an Adelaide family home later while renting it first, managing an existing regional PPOR, and deciding whether to sell or hold an inner-metro investment. Stuart stress-tests IO vs P&I for a decade, preserving deductible debt with offsets, optimal ownership splits for tax, and DTI/borrowing-capacity risks. He covers sequencing (buy vs renovate vs super), cash-flow resilience, buffers, and the realities of market timing in Adelaide. Practical guardrails include de-linking securities (avoiding cross-collateralization), structuring loans to maintain flexibility, and using evidence-based criteria to ensure each new asset is unequivocally investment-grade. The takeaway: anchor decisions to surplus, efficiency, and time, and design the debt so your future choices stay open.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A, Stuart unpacks two meaty, real-world dilemmas that many high-earning families face. First: should you prioritise concessional super contributions (carry-forward caps, Div 293 awareness, and long-term compounding) or keep capital outside super for flexibility and early semi-retirement? We explore building a liquid “bridge” portfolio, how to structure debt so renovation and investment loans stay deductible, and why borrowing to fund improvements paired with offset cash preserves future options.
Next, we stress-test a fast-growing portfolio: a dream PPOR on acreage, a premium Geelong West IP, and an impending second purchase in inner-west Melbourne. Stuart tackles sequencing (buy vs renovate vs super), risk concentration at 80% LVR, cash-flow resilience through cycles, and the hidden traps of cross-collateralisation. We also cover trust distributions to a high-income household, return-on-payroll for a construction business, and the checklist for green-lighting IP #2 without jeopardising the 4–5 year, $1–1.5m renovation.
The through-line: optimise for flexibility and durability, use super where it clearly wins on tax and compounding, keep enough liquidity to sleep at night, and make each new asset unquestionably investment-grade.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart makes the case for becoming a value-add property investor when budgets are tight. Rather than stretching for a bigger dwelling in a weaker location, he argues for prioritising high land value in an A-grade area and accepting a tired home you can improve. He outlines the highest-ROI upgrades (kitchens, bathrooms, paint, flooring, efficient heating/cooling; and, where sensible, adding a third bedroom), how these boost rent and reduce vacancy, and the smart way to fund works by borrowing the renovation cost and park cash in an offset to preserve flexibility and deductions. He clarifies the distinction between repairs and improvements (immediate deduction vs. depreciation), why a depreciation schedule is important, and the role of a seasoned local buyer’s agent in avoiding costly missteps.
In the Q&A, Stuart tackles two big listener themes. First: simplifying a messy mix of assets to maximise retirement income, define required spending, prioritise tax-free super income streams, rebalance from low-yield positions to diversified income, and set a clear drawdown plan with adequate cash buffers. Second: navigating a rezoning/subdivision opportunity on a large primary residence, how main-residence CGT rules interact with a prior rental period, when profits can be taxed on revenue account, GST considerations, timing if purchasing another home, and choosing between an outright sale to a developer or a JV. He also lists the advisory bench needed: property accountant, tax lawyer, town planner, valuer, and development project manager.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
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Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart works through a series of nuanced listener questions that all sit at the intersection of tax, structure, and long-term decision making. While the scenarios vary, the common thread is the cost of getting the structure wrong early, and the difficulty of undoing it later.
We begin with a Melbourne couple in their 30s navigating a generous but complex proposal from ageing parents: the potential transfer of an investment property that may become a future family home. Stuart unpacks the trade-offs between gifting now versus inheriting later, the often-overlooked capital gains and stamp duty consequences, and why emotional intent does not override tax law. The discussion highlights how building, ownership, and funding decisions interact over decades, not just at the point of transfer.
Next, Stuart addresses a listener holding a legacy agreed-value income protection policy. With premiums rising sharply, the focus turns to how to think about policy add-ons, what actually protects long-term earning capacity, and why some features feel comforting but deliver little real value relative to their cost.
The episode then shifts to a detailed portfolio question from a high-income family weighing multiple competing uses of surplus cash flow: renovating the family home, upgrading, buying more property, investing in shares, or accelerating super contributions. Stuart reframes the decision away from “which option is best” and towards understanding opportunity cost, borrowing constraints, and the difference between emotional returns and financial ones. Inflation, real versus nominal returns, and the illusion of certainty in long-term projections are all addressed.
We also explore whether recycling equity from investment properties to pay down a principal place of residence actually works in practice. Stuart explains the tax mechanics, where investors commonly trip up, and why some popular strategies sound elegant in theory but are messy or counterproductive in reality.
As always, the episode is less about definitive answers and more about building a framework for making better decisions when the stakes are high, the numbers are large, and the consequences are long-lasting.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart pulls apart the perennial “REITs vs direct property” debate and shows why they’re not substitutes but tools for different jobs. He explains how A-REITs work (structures, stapled securities, payout rules, typical 30–40% gearing) and why their liquidity and ~5% income appeal can be offset by equity-like volatility and index concentration (think one or two giants driving returns). He contrasts this with direct residential property: full control, the ability to gear up to 100%, negative-gearing benefits while working, lower observed volatility, and returns dominated by capital growth, making it a more potent long-term wealth builder when you buy true investment-grade assets. Stuart compares long-run numbers: REITs ~6–8% p.a. with higher year-to-year swings versus quality residential property targeting ~8%+ with smarter selection and sensible leverage. He then reframes their roles: REITs can be an income sleeve (especially when rates are low), while direct property is fundamentally a growth engine. In the listener Q&A, Stuart clarifies tax treatment for “informal trust” share portfolios for minors who are taxed on income, the pitfalls of penal child tax rates, and what actually triggers CGT when transferring to an adult at 18 cutting through conflicting internet guidance so parents don’t make costly ownership-structure mistakes.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart tackles a wide mix of real-world scenarios that highlight a consistent theme: asset quality and long-term strategy matter far more than short-term market noise. We start with a listener holding an underperforming one-bedroom apartment and work through why some assets simply never recover, regardless of broader market conditions. From there, we explore whether trading two good properties for a single premium home makes sense, and why “levelling up” often outperforms spreading capital thinly.
Stuart also digs into the trap of using precious borrowing capacity on mediocre assets (including a candid warning about Geelong’s Corio), the risks of delaying a future move to Melbourne or Sydney, and how to make high-stakes decisions when the path is unclear. Questions from younger investors round out the episode, including whether to buy early or wait for a better asset, plus a deeper discussion about gearing into shares versus property and super strategy for a couple approaching retirement.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
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Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart tackles the perennial question: should you fix your mortgage rate—if not now, when? He reframes “normal” using the RBA’s neutral rate (roughly 3–3.5%) and shows why today’s home loan ranges of ~5–6% (P&I) and ~5.5–6.5% (IO) are sustainable. Drawing on three decades of data, he explains why fixing has left borrowers worse off about two-thirds of the time, and why flexibility (offsets, extra repayments, refinancing, equity access) usually beats chasing a small rate win. He outlines the two defensible reasons to fix when a deal is clearly in your favour (think 2021-style anomalies) and when cash-flow protection matters more than optimisation, and why “right now” doesn’t meet that bar. In the Q&A, Stuart helps “Sam” frame a conversation with his dad about super “inheritance tax” on benefits to non-dependants, covering death-benefit tax, nominations, liquidity, and practical ways to reduce the taxable component over time. He then maps a blueprint for Lauren, who’s inheriting $3 million: building a safety bucket, buying a live-in home near Melbourne, and deploying the remainder via low-cost, rules-based investing and smart ownership structures to target ~$100k p.a. income. A grounded, evidence-first guide to rates, risk, and real-world decisions.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A, Stuart tackles six real-world dilemmas listeners are wrestling with. He opens with superannuation, weighing Hostplus High Growth vs Indexed High Growth and why fees (0.80% vs 0.04%) and an evidence-based tilt often beat glossy promises. For a Brisbane surgeon in training, he maps a “maximum optionality” plan, prioritising cash buffers, offsets, and low-friction, rules-based ETFs while big life variables (city, role, renovation) settle. He then explores whether to buy an “investment” today that could double as a child’s first home tomorrow, and what happens when lifestyle aims conflict with investment-grade selection before unpacking Australia’s size-over-location bias, and if central townhouses may win as cities densify. On “how much is enough?”, Stuart builds a spending-led framework (run-rate needs, sequencing risk, liquidity, giving goals) for a high-spend, asset-rich couple navigating trust/super complexity. He closes with a playbook for 22-year-old beginners: first-home schemes vs waiting, when a broker helps, and simple starting moves, emergency fund, automated DCA, smart super contributions, and only adding property when the numbers and borrowing power say “go.” Clear principles, practical next steps.
My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus
Do you have a question for the podcast? Email us at questions@investopoly.com.au.
If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-services
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode of Investopoly, Stuart unpacks why relying solely on property sales data, no matter how comprehensive, can lead investors astray. While compound annual growth rate (CAGR) calculations are useful, Stuart explains that interpreting them without context can result in serious misjudgements. He walks through the three core attributes of investment-grade property and focuses on why “runs on the board” must be considered alongside timing, capital improvements, zoning, and local knowledge.
Using examples like one-off market shocks, changes to planning overlays, and shifts in buyer sentiment (e.g., towards unrenovated homes), Stuart demonstrates how seemingly strong sales data can be misleading. He also highlights how gentrification, new infrastructure, or school zoning can skew growth trends. Importantly, he emphasises that statistical reliability demands a large enough sample size, 30 to 50 sales minimum, to make meaningful conclusions. But even then, nuances like floorplan flaws or privacy issues can’t be captured in spreadsheets. Stuart’s key message: combine detailed historical data with a buyer’s agent who knows the area inside out. Without deep, local insight, investors risk overpaying or underperforming. If you’re buying, reviewing your portfolio, or relying on sales data to guide your decisions, this episode is essential listening.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
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IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode of Investopoly, Stuart dives into a diverse and thoughtful mix of listener questions, spanning early-stage investing to high-net-worth wealth structuring. He compares Hostplus High Growth vs Indexed High Growth super options, unpacking whether the significantly higher fees are worth it. Stuart also offers strategic guidance to a young couple earning modest incomes but saving aggressively, weighing up whether it’s the right time to jump into property via the First Home Buyer Scheme or stay the course with index fund investing. For a surgeon-in-training, Stuart breaks down whether to hold or sell two appreciating Queensland properties to position for a future $3–4M family home.
He also explores the emotional and strategic factors in choosing an investment property that might double as a home for adult children decades from now, and shares insights into Australia’s unique preference for space over proximity in housing. Finally, Stuart addresses a complex, high-asset retirement scenario—exploring "how much is enough" when spending $450K per year with significant assets in super, a family trust, and a Div 7A loan. Whether you’re just getting started or deep into retirement planning, this episode is packed with practical frameworks and nuanced perspectives for building wealth at every stage.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
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If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this week’s episode, Campbell tackles a variety of complex and timely superannuation and wealth-building questions, starting with the government’s revised $3 million super cap, also known as Division 296. He breaks down what’s changed, what’s stayed the same, and why the new rules are far more balanced than the initial proposal. Campbell also explores what high-balance super fund holders should consider, especially those with illiquid assets, such as property.
Listeners also asked about tough decisions around when to stretch for a principal place of residence, whether to sell shares or an investment property to fund a forever home, and how to balance flexibility with long-term security. On the topic of structures, Campbell clarifies the strategic differences between using a family trust vs a company for share investing, whether the same trust can be used for a business, and how corporate beneficiaries fit into the picture.
Whether you’re navigating changing super tax laws, planning a major home purchase, or managing wealth through trusts and structures, this episode is packed with clarity, insight, and practical advice to help you make smarter long-term decisions. Tune in to get the full breakdown and stay ahead of the curve.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
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If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this week’s Q&A episode of Investopoly, Stuart tackles a wide range of insightful listener questions. Julianne kicks things off by asking for Stuart’s thoughts on the Canberra property market. Shelly seeks guidance on whether to subdivide and sell land to pay down debt or wait until retirement to reduce capital gains tax. Bay raises the question of when (or whether) it makes sense to shift from low-cost index investing to more actively managed super options, especially with international shares at record highs. Stuart shares his perspective on cost vs. value when managing larger balances in superannuation. Alex, a loyal listener, asks whether the priority should be upgrading to a forever home, investing in shares, or securing an investment property first, given income constraints and private school costs. Gavin, rebuilding after a divorce, seeks advice on how to prioritise debt reduction, property consolidation, and retirement goals. Kieran explores three creative options for upgrading his family home using equity and offset accounts. Finally, Andrew asks whether Stuart has recommendations for one-off financial advice, especially for those not ready for ongoing advice. This episode is packed with practical tips and long-term strategy thinking for listeners navigating real-life financial decisions.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
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If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart unpacks why PAYG employees need to approach tax planning differently and why the system is stacked against them. While company owners and investors enjoy structural advantages and deductions, employees often face limited options. Stuart explains why the two main ways for PAYG earners to reduce tax—super contributions and borrowing to invest should be used as part of a long-term wealth strategy, not short-term tax minimisation. He also explores more powerful opportunities: maximising the $2 million Transfer Balance Cap in super, using the main residence CGT exemption strategically, and investing via smart structures like family trusts.
The second half of the episode is a Q&A where Stuart responds to listener questions about selling a high-growth property and reallocating to ETFs or super, when to use debt recycling, whether to invest surplus cash into shares or offset accounts, and how to plan for future renovations and cash flow. Whether you’re trying to make smarter tax decisions or wondering where to allocate your next $100K, Stuart’s advice focuses on managing tax across your lifetime, not just this year. If you’re a PAYG earner looking to build wealth more efficiently, this episode is packed with clarity and strategy.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
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If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
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IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this Q&A episode, Stuart tackles a wide range of strategic questions from listeners navigating big financial decisions. Alex (pseudonym Ace) asks whether it’s smarter to upgrade to a forever home now, invest in shares and super, or pursue an investment property first. Stuart explains why securing your long-term home earlier often pays off. Gavin, recently divorced, wants to know how best to prioritise home upgrades, property consolidation, and super with limited income and family demands. Kieran outlines three ways to fund a new home using equity, cross-collateralisation, or selling. Stuart weighs in on the pros, risks, and tax implications of each option. An avid listener aiming to retire early asks whether managing $900K via a company structure is optimal or if there are better strategies given his and his wife’s high incomes. Across these cases, Stuart highlights the importance of ownership structure, long-term planning, and aligning financial moves with lifestyle goals, especially around super, family planning, and tax strategy. Whether you're early in your investing journey or already managing millions, this episode delivers practical, thoughtful advice on how to make smart, forward-thinking decisions across property, super, and investment strategy.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart explains why property investors need to be cautious when relying on the last five years of price data. He outlines how this period has been shaped by a series of unique, disruptive events: surging construction costs, extreme interest rate movements, volatile migration patterns, and the rise of working from home. While these factors have significantly impacted prices, they don’t reflect long-term fundamentals and may not be repeated.
Stuart explores how elevated construction costs have distorted growth in certain markets, particularly where building value outweighs land value. He also explains how changing borrowing capacity and RBA interventions have shifted investor behaviour and redirected capital to more affordable regions, trends that may not be permanent. With overseas migration and remote work patterns still evolving, Stuart argues that recent market movements are not a reliable indicator of future performance.
He also warns against the explosion of data-driven buyers’ agents who lean heavily on short-term trends, questioning the quality and applicability of much of the property data being used. For investors looking to make smart, evidence-based decisions, Stuart makes the case for focusing on 20+ years of data and understanding the fundamentals that truly drive long-term growth. A timely, clear-eyed episode.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Campbell addresses a wide range of thoughtful listener questions covering retirement planning, property strategy, superannuation structuring, and the real cost of working with brokers. “Fred” runs through a detailed retirement plan with over $5M in super, trust, and cash assets and seeks a sanity check on his 3.25% spending rate and family gifting strategy. Campbell provides perspective on sequence risk, cash buffers, and longevity planning. Kayt asks whether using a financial advisor is worth the cost compared to a low-fee Vanguard income stream and raises concerns around fees and trust. Campbell explores the pros, cons, and value of advice.
Dan challenges whether mortgage brokers truly offer better value than DIY research, especially for borrowers with simple needs. Campbell explains when brokers add value and the industry incentives shaping their recommendations. Lyn asks how to execute the recontribution strategy across pension accounts, while Paul raises a practical question about simple family trust arrangements. Finally, Brad, a developer, wonders whether investor resales currently priced below replacement cost offer an opportunity or are a value trap.
Whether you're planning a long retirement, rethinking property strategy, or weighing adviser fees, this episode delivers clear, balanced answers to help you make more confident financial decisions.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart unpacks what it really means to construct an evidence-based investment portfolio and why portfolio construction is arguably the most important decision an investor can make. He explains how diversification across shares and property helps smooth returns, not because it eliminates volatility, but because it helps investors stay the course and adapt to life’s inevitable curveballs.
Stuart takes a deep dive into factor-based investing, highlighting the importance of selecting investment strategies grounded in fundamentals like Value and Quality, while being wary of overhyped strategies such as Momentum, which often falter when trading costs and taxes are factored in. He discusses how to build an "all-weather" share portfolio, the importance of starting valuations, and the role listed property and infrastructure can play in balancing growth and defensiveness.
He also explores the role of liquidity, why he remains cautious about unlisted investments, and how residential property, with its low correlation to shares, can enhance diversification. Finally, Stuart outlines his preferred approach to asset allocation, blending direct property and diversified shares using rules-based strategies, all while staying agnostic to asset class labels and focusing purely on what best serves long-term financial goals. A must-listen for serious investors looking to sharpen their portfolio strategy.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart answers a wide range of listener questions on property strategy, superannuation, and capital gains tax, each offering a unique perspective on wealth management across different life stages. Jim and his wife are considering whether to upgrade their home now, invest in ETFs, or continue expanding their portfolio through a trust structure. Stuart weighs the options and long-term implications of each. Kayt asks whether a low-fee option like a Vanguard retirement product is a better choice than working with a financial adviser, prompting a discussion on the value (and cost) of advice in retirement.
Andrew raises questions about potential changes to the CGT discount and negative gearing rules, asking whether indexation or rising yields could offset these changes. Stuart also reviews Andrew’s calculations around CGT savings when selling assets with no other income. Penny considers moving investment properties out of her SMSF to a family trust to manage exposure to the proposed $3 million super tax and unrealised gains regime. Stuart unpacks the trade-offs, including CGT and stamp duty.
Whether you're starting to build wealth or managing a significant portfolio in retirement, this episode delivers clear, grounded insights to help you navigate policy changes and strategic decisions with confidence.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart takes a deep dive into momentum investing, what it is, how it works in theory, and whether it holds up in practice when applied to shares and property. Momentum is a factor strategy that involves buying assets that have performed strongly over the past 6–12 months. While it sounds compelling, Stuart explains why real-world results often fall short due to high trading costs, tax drag, and dilution when trying to reduce turnover. He also shares why the most popular momentum ETFs have consistently underperformed broad market indexes over time, despite short-term outperformance.
Shifting to property, Stuart questions whether momentum has any place in property investing, especially when social media is filled with spruikers showcasing booming suburbs and recent wins. He explains why transaction costs, timing risks, and the long lead times in property make momentum strategies largely ineffective, and why long-term capital growth, underpinned by strong fundamentals, remains the key to building wealth through real estate.
Whether you're intrigued by share market factors or wondering when to jump into the property cycle, this episode unpacks the myths of momentum investing and reminds you that successful investing is about strategy, not chasing yesterday’s winners.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart tackles one of the most frequently asked investing questions: property vs. shares, but through a sharper lens: how leverage, gearing levels, and borrowing constraints impact the comparison. Sam asks at what point property stops outperforming shares if you can't borrow 100% of the purchase price. Stuart explains the inflection points and when ETFs might offer a better return for your capital. Bob, planning for retirement abroad, outlines a sophisticated strategy involving property sales, prepaying interest, super catch-up contributions, and CGT exemptions using the 6-year rule. Stuart dissects the layers of complexity and tax implications.
Vanessa considers selling a 1-bed unit that’s underperforming to boost super contributions and weighs the pros and cons of holding vs. exiting. Julia, with a substantial share portfolio and large cash reserves, is re-evaluating her DCA strategy due to potential burnout and health concerns. Stuart offers guidance on cash deployment and balancing liquidity with long-term planning.
Finally, Steve shares several options for managing two trust-held units and $170K in savings, including paying down debt, expanding the portfolio, or diversifying into ETFs. Stuart helps him weigh risk, return, and timing. This episode is packed with practical insights for anyone fine-tuning their next move.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this data-driven episode, Stuart explores what really predicts property price movements, beyond the headlines about population growth. Using lending volume data across major Australian cities, Stuart shows why borrowing activity is one of the most reliable indicators of short-term property price trends. He compares trends in Sydney, Melbourne, Brisbane, Adelaide, and Perth, highlighting how lending volumes often correlate far more strongly with price growth than population alone. Stuart also examines investor participation across the states, noting that Melbourne and Perth may offer compelling opportunities based on current lending patterns and market dynamics.
He then answers a listener's question from Steve, who is managing two investment properties in a trust for his daughters and is considering the best way to use $170K in savings. Should he pay down debt, buy a third property, or invest in ETFs for long-term diversification? Stuart discusses the pros and cons of each path, balancing risk tolerance, timing, and goals.
Whether you're watching the market closely or managing a multi-property portfolio, this episode unpacks how lending drives price cycles and offers practical frameworks to help you decide what to do next. A must-listen for property investors looking for clarity and a smarter edge.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this packed Q&A episode, Stuart answers listener questions from all stages of life and wealth, covering everything from young families building momentum to seasoned investors managing multi-million-dollar portfolios. Amit asks whether to sell a newly built property in Beveridge and reinvest closer to Melbourne, like Frankston, for long-term compounding, and weighs up whether to redevelop or sell his current home before buying into a better school zone. Ron from Brisbane wants to know if he and his wife can retire early by splitting time between Manila and Australia, and whether they should prioritise debt reduction, super contributions, or property investment. Zach, a new dad in his 30s, asks where to focus over the next decade: offset savings, shares, or prepping for property, especially with a trading trust in the mix.
Blair shares his proposed ETF allocation inside his SMSF and seeks Stuart’s thoughts on tilting toward value and emerging markets. Anthony, a high-end developer with a strong property portfolio, questions whether to prioritise super contributions now or allow compounding to work its magic with his standout A-grade asset. As always, Stuart offers grounded, evidence-based insights that help each listener weigh lifestyle, tax, and long-term goals. A must-listen for clarity at any stage of your financial journey.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart examines whether being a wholesale investor truly unlocks better investment opportunities or is merely a more sophisticated marketing pitch. He explains what qualifies someone as a wholesale investor under Australian law, what protections are lost when switching from retail, and whether exclusive access to private equity, hedge funds, and unlisted property trusts is truly worth the trade-off. Stuart also breaks down the core risks of wholesale investments, like illiquidity, high fees, and lack of transparency. Why he believes these options should remain on the edges of a portfolio, not at the core.
Stuart also answers a follow-up question from Blair about ETF selection in an SMSF. Blair shares his proposed allocation of VAS, VGS, VGE, and VVLU, designed to balance value exposure, emerging markets, and reduced reliance on expensive US growth stocks. Stuart offers a perspective on how to think about ETF construction in a core-satellite portfolio and the role diversification plays over a 20-year investment horizon.
This episode is essential listening for anyone wondering if “exclusive” really means “better” in the investment world, and how to stay grounded in a disciplined, evidence-based approach that prioritises simplicity, cost-efficiency, and long-term compounding.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A-packed episode, Stuart tackles a broad range of listener questions covering everything from starting in your 30s to optimising a $5 million property portfolio. Zach, a new parent with a $1M home and solid income, asks what to focus on over the next 5–10 years and whether topping up the offset or investing in shares makes more sense. Stuart also addresses whether Zach's discretionary trust setup is a smart long-term move. Rob asks about private banking services, what they offer, and when they’re worth it. Michael (pseudonym) walks through his detailed $5.3M property portfolio and plans to consolidate into commercial assets, asking if it’s the best way to maximise income while preserving lifestyle and flexibility.
Lucy wants guidance on timing the sale of investment properties to maximise superannuation and whether their family trust is the right vehicle for ETF investments. Blair revisits ETF portfolio structure and seeks feedback on a value-tilted SMSF strategy. Courtney and her partner, with kids on the horizon, ask where to direct their growing surplus. Finally, Stuart answers the timeless question: “If you had to start again at 18, what would you do?” This episode is packed with timeless insights for every life stage and wealth level.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Campbell Wallace tackles one of the most overlooked yet significant taxes in retirement planning: the 17% superannuation death benefit tax. While Australia doesn’t have a formal inheritance tax, this “sneaky tax” can quietly strip hundreds of thousands from your estate if left unmanaged, particularly when adult children inherit super balances with large taxable components. Campbell explains why this tax exists, who it applies to, and how to work around it using smarter strategies.
He breaks down the traditional recontribution approach and explains why it often falls short. More importantly, he introduces a smarter alternative, using two super accounts to isolate taxable and tax-free components. This technique can reduce, or even eliminate, the death benefit tax in under a decade, saving families significant sums. Campbell also covers real-life examples, contribution caps, expected returns, and the modest costs involved compared to the tax savings.
Listeners will also learn the importance of reversionary pensions, binding death benefit nominations, and integrating estate planning structures like testamentary trusts. If you’re nearing retirement or want to ensure your super passes to your family, not the ATO, this episode is a must-listen, packed with practical strategies and long-term benefits. A little planning now can go a very long way.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart answers a range of insightful listener questions on wealth-building strategies through property, ETFs, and superannuation. Burt asks if he’s on track to retire by age 60, despite limited borrowing capacity and tight cash flow. Stuart unpacks the numbers and suggests possible next steps to gain traction. Blair, seeking to build a well-structured ETF portfolio inside an SMSF, asks how to balance growth, value, and emerging market exposure, and whether holding 6 ETFs is too much. Stuart walks through how he would personally approach portfolio construction in that context.
Bryan writes in on behalf of his 18-year-old daughter, asking what Stuart would do differently if starting his investing journey again, from school leaver to retirement. Stuart offers timeless guidance, including tips on whether to pay off HECS early or focus on saving for a home. Lastly, Raj weighs up a $1.2M investment-grade property versus allocating the same monthly cash flow to a long-term ETF portfolio. Stuart breaks down the trade-offs, highlighting tax efficiency, flexibility, and psychological considerations that go beyond the spreadsheet. This episode is packed with practical, values-aligned advice for investors at every life stage looking to optimise their strategy.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart introduces a powerful framework for property investors: Return on Borrowing Capacity (RoBC). With borrowing capacity often being a limited and scarce resource, Stuart explains why it’s critical to allocate it where it delivers the greatest after-tax, long-term wealth outcomes. He unpacks the concept by comparing different investment properties with identical total returns but varying mixes of income and capital growth, demonstrating how the wrong choice can halve your wealth creation over 30 years.
Stuart discusses why investors should treat borrowing capacity like capital; it must be deployed strategically, not just conveniently. He explores the trade-offs between high-yield and high-growth assets, the real impact of rental income on borrowing limits, and why relying solely on positive cash flow can be a trap if it hinders your ability to grow wealth elsewhere.
The episode also covers scenarios where reallocating borrowing capacity by selling underperforming assets can unlock better long-term outcomes. Finally, Stuart reminds listeners that while a spreadsheet can model returns, wise portfolio decisions must also account for opportunity cost, tax, and quality. Whether you’re just starting out or rebalancing your portfolio, this episode will sharpen how you think about borrowing and investing for long-term success.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart addresses a wide range of thoughtful listener questions, focusing on managing risk, balancing lifestyle with long-term wealth, and making informed property and investment decisions. Andrew asks whether it’s necessary to chase every spreadsheet-optimised return when he and his partner already have "enough," prompting Stuart to explore hybrid strategies that protect cash flow while still building wealth, especially when children are on the horizon. Sam raises concerns about satisfying the NSW First Home Buyer residency requirements and how failing to update the electoral roll could impact both stamp duty exemptions and CGT outcomes.
Glenn and his wife are navigating a major family home renovation and weighing whether to release equity or sell one of their investment properties to fund the shortfall. Stuart shares insights on preserving long-term flexibility while reducing financial pressure. Adamo considers whether to keep or sell his Adelaide investment property to afford a better home in Sydney’s Inner West—Stuart dives into the numbers and strategic logic. With questions on tax timing, CGT rules, and capital allocation from young first-home buyers to financially secure professionals, this episode offers clear, values-aligned guidance to help listeners build wealth without compromising lifestyle or peace of mind.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart delves into the practical benefits and strategic importance of including a testamentary trust in your will. He explains how testamentary trusts offer powerful advantages in terms of tax efficiency, asset protection, and long-term flexibility, especially for families with minor children or complex financial situations. Stuart breaks down why income distributed to minors from a testamentary trust qualifies for adult tax rates, how these trusts can shield inheritances from relationship breakdowns or poor financial decisions, and why quarantining estate capital helps preserve tax concessions.
He also explores real-life scenarios where testamentary trusts can be useful, such as supporting at-risk beneficiaries, funding intergenerational education, or managing inheritance within large families. Stuart discusses structuring loans from the trust to beneficiaries, how to handle control of trusts and companies in estate planning, and the importance of aligning your superannuation nominations with your broader inheritance strategy.
For those curious about superannuation death benefit taxes, Stuart previews Campbell Wallace’s upcoming podcast and blog that will explore how to reduce or avoid the so-called “super inheritance tax.” Whether you’re updating your own will or helping your parents structure theirs, this episode is a must-listen for anyone aiming to build a thoughtful, tax-smart estate plan.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Campbell Wallace answers a wide range of listener questions from first-home buyers to seasoned investors navigating tax and strategic property decisions. John, a rentvestor with a young family, asks whether buying an investment-grade property in Melbourne now, with plans to use the proceeds to reduce PPOR debt in the future, aligns with his flexible, lifestyle-focused goals. Campbell explores how this fits into a broader wealth strategy and the trade-offs involved.
Steve seeks clarity on the tax implications of a small-scale development profit, asking whether his return will be taxed as capital gains or income, and how reinvesting or using super contributions might defer or reduce the liability. Campbell outlines the critical details of tax treatment and timing.
Namak asks how to handle a delisted ASX stock he sold for a nominal value to crystallise a loss, and whether the cost, fee, or both can be claimed. A 21-year-old first-home buyer asks about investment-grade criteria, CGT exemption rules when living with housemates, and tips for young investors planning early financial independence. Campbell closes with insights on structuring property ownership, buffers, and relationship planning. A thoughtful episode for anyone looking to optimise their next financial move.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart tackles a vital topic for every property investor: how to manage your property manager effectively, rather than being managed by them. He explains why great property management is essential for protecting your investment and cash flow, and how unrealistic expectations or poor communication can lead to costly mistakes. Stuart shares practical tips on navigating maintenance requests, managing rental increases, attending inspections, and choosing the right tenants, all while maintaining the right level of owner involvement. He also covers how to identify and switch to a high-quality property manager, including what fees to expect across different states and what to look for beyond price.
Later in the episode, Stuart answers a listener's question from Anne about strategies for helping her son prepare to buy his first home in Brisbane. He explores different ownership and living options, including renting the property first or moving in straight away, and explains the CGT implications of each. Stuart also offers advice on choosing the right type of property, balancing ambition with practicality, and structuring the loan, comparing offset accounts versus fixed-rate options for young buyers. Whether you’re a seasoned investor or helping someone get started, this episode is packed with grounded, actionable guidance.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this comprehensive Q&A episode, Stuart answers a wide range of listener questions spanning early retirement, home loan strategy, asset allocation, and superannuation management. Brett, a low-income investor aiming to retire at 45 with $100–120K in passive income, shares his strategy of holding four investment properties and building a trust-based ETF portfolio. Stuart offers guidance on asset spread, ETF weighting, and tax efficiency. Travis outlines his Adelaide-based property and superannuation structure and asks whether to sell an underperforming investment property to fund a higher-quality principal residence. Stuart weighs the pros and cons.
Doba, a new migrant to Australia, asks how best to manage $400K in cash, weighing super contributions, offset accounts, and ETF investment. Stuart lays out a cautious, staged approach. Marco, a 52-year-old business owner considering semi-retirement, wonders whether to sell his business and pay off the home loan. Stuart explores how to stress-test this plan for future income needs. Lastly, John is in a public sector super fund and questions whether to switch to Hostplus Choiceplus due to high fees, despite incurring tax on transfer. Stuart breaks down the fee vs. return trade-off and the long-term benefit of low-cost index investing. A valuable episode for investors at every life stage.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Campbell explores one of the biggest creeping costs for property investors today, land tax, and why its rising impact should prompt a serious rethink of long-term investment strategies. He breaks down how land tax thresholds and rates have shifted over the last 20 years in Victoria, NSW, and Queensland, and highlights how frozen indexation and bracket creep are quietly eroding net rental yields. Using projections over 15 and 30 years, Campbell reveals how even investment-grade properties could see their net yields drop below 0.2% if land tax rates remain unchanged, reinforcing the message that residential property is not an income strategy, it’s a capital growth play.
He also answers listener questions, including Erik’s query on the best ownership structure for purchasing a forever home to preserve intergenerational wealth, and Justin’s detailed questions around the 6-year CGT rule and whether a temporary move-in could provide a valuable tax exemption down the track.
Campbell wraps up by stressing the importance of diversification, particularly into shares, which offer more consistent yields and liquidity, and why investors should work with advisors who are independent and experienced across multiple asset classes. A must-listen for anyone navigating today’s changing property tax landscape.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart dives into some complex and common questions from listeners navigating investment property decisions, superannuation strategies, and long-term planning. Tammy asks whether refinancing an investment loan and increasing an equity release is the best way to fund home renovations and a car upgrade. Stuart explains why selling one of their properties might be a more efficient solution.
Viktor, a long-term Melbourne investor, wants guidance on whether to sell one or more underperforming properties to upgrade the family home or wait for the next property cycle. Stuart breaks down the trade-offs between asset quality, timing the market, and using equity wisely.
Adam asks for clarity on accessing superannuation after age 60 if you stop one of multiple jobs. Stuart provides a simple explanation of the rules and how they apply.
Finally, Norm and Sharee, small business owners approaching 50, are considering using their SMSF to purchase their business premises. Stuart discusses the pros and cons of concentrating super in one asset and the long-term benefits of liquidity and diversification. He also weighs in on their plans to buy a holiday home, explaining ownership structures and strategies to fund it tax-effectively. A rich episode for property owners and planners alike.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart sounds the alarm on property spruikers and how to spot the latest fads that can lead unsuspecting investors astray. Drawing from decades of experience, he explains how to distinguish genuine investment advice from cleverly packaged sales pitches designed to serve the seller, not the buyer. From positive cash flow regional properties in the early 2000s to the GFC-era US property rush, mining town booms, and off-the-plan apartment oversupply, Stuart shares real examples of past trends that promised high returns but delivered disappointing long-term results.
He outlines the red flags of property fads: fast-money promises, businesses growing too quickly, unrealistic return forecasts, and markets driven by a handful of players. Stuart also highlights how savvy marketing, short-term results, and glowing early reviews can mask poor-quality advice. With more recent trends like development site deals and commercial property pushes now dominating the conversation, this episode is a timely warning for investors who want to stay grounded in evidence, not hype.
Whether you're new to property investing or navigating the next stage of your portfolio, Stuart’s insights will help you stay focused on sustainable, long-term strategies and avoid costly missteps fueled by short-term noise.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart answers a diverse set of listener questions covering retirement preparation, home upgrade decisions, cash flow optimisation, and early-stage financial planning. He begins with El, a couple in their late 50s wondering whether switching from Care and Brighter Super to Vanguard Super is worth the effort as they approach retirement. Stuart outlines the key considerations for super fund selection at this life stage, including fees, flexibility, and pension phase planning.
Next, Matt and his wife in Perth are juggling property investment, business growth, and a long-term goal of upgrading to a $3.5 million home. Stuart discusses whether they should focus on paying down their home loan or continue investing, and when an SMSF strategy might make sense.
Liam, a 28-year-old with a young family, asks how to juggle mortgage repayments, super contributions, and the possibility of investing while planning for a wedding and a new business venture. Stuart provides clarity on income protection, leveraging wisely, and what to prioritise in the early years.
Finally, Sarah and her partner, middle-income earners in their 40s, feel stuck despite having solid assets. Stuart offers reassurance and practical tips for improving cash flow, building buffers, and regaining financial confidence. A supportive episode for every life stage.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this data-rich episode, Stuart takes a deep dive into what 40 years of long-term data reveals about property investing across Australia’s capital cities. While the media often focuses on short-term fluctuations, Stuart explains why property should be viewed as a multi-decade investment and how compounding growth over time can deliver extraordinary returns. He breaks down the historical performance of Sydney, Melbourne, Brisbane, Adelaide, and Perth, highlighting how each city has tracked over 10, 20, 30, and 40-year periods, and what investors can learn from those patterns.
Stuart also explains why the median house price should be seen as a benchmark, not a guaranteed result, and how thoughtful asset selection is key to outperforming it over the long term. He explores whether cities like Melbourne have bottomed out after years of underperformance, if Sydney’s historical strength will continue, and why Brisbane may still have runway left ahead of the 2032 Olympics. Plus, he warns that Adelaide and Perth, despite recent strong results, may be entering more moderate growth phases.
For investors trying to cut through short-term noise and build a high-performing property portfolio, this episode offers clear, evidence-based insights to help you make smarter long-term decisions.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart answers an insightful mix of listener questions that span health, housing, retirement planning, and how to balance life’s big financial decisions. He begins with “Lucky,” a high-income medical professional and cancer survivor, who asks whether his health history should influence how much he gears, and whether to upgrade his Melbourne home, buy in Sydney near family, or stick with investing in ETFs and super. Stuart unpacks each option, weighing lifestyle, liquidity, and long-term strategy.
Next, Matt, soon to retire, asks whether using an offset account against his investment property loan is a smart way to manage share market risk in retirement. Stuart shares how to approach this strategy to strike a balance between flexibility and return.
Steve asks where average investors can access affordable, quality property data for DIY analysis. Stuart discusses practical alternatives to high-cost platforms.
Finally, Jordan and his partner share their impressive early success: two investment properties by age 25, but now struggling to balance the desire for future growth with living more in the present. Stuart responds with guidance on timing property moves, managing gearing, and the mindset shift needed to enjoy the benefits of your financial discipline, such as taking that long-awaited holiday. A rich episode for all life stages.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this forward-looking episode, Stuart unpacks a range of bold ideas for tax reform in Australia, urging policymakers to think beyond the status quo. With both federal and state budgets under pressure, and income taxes increasingly unsustainable, Stuart proposes a smarter, more balanced system that supports economic growth while ensuring fairness. He explores the dangers of bracket creep, the merits of expanding GST through a luxury rate, and the potential of capping the CGT exemption on primary residences to close one of the country’s most generous tax loopholes.
Stuart also revisits the role of private investors in solving the housing crisis, suggesting innovative tax incentives to increase the supply of affordable rentals. In superannuation, he outlines a simple yet powerful tiered contribution tax system that could help lower-income earners grow their balances faster.
Later in the episode, Stuart responds to a listener question from Dee, a high-earning sole trader and single parent, wondering whether to purchase her next investment property in her name or via a family trust. He explains the trade-offs between asset protection, negative gearing, and borrowing capacity, especially for professionals in higher-risk fields. A must-listen for anyone thinking about how tax policy and personal strategy can evolve for a better financial future.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart addresses a wide range of listener questions, focusing on smart super strategies, investment property decisions, and how to balance financial goals with market realities. Jeff asks whether funds in an offset account with a non-bank lender like Resimac are safe, prompting a discussion on lending structures and risk. Alex seeks clarity on the pros and cons of rebalancing super investment options, while Pierre (alias) returns with a detailed follow-up on reallocating borrowing capacity and how to weigh shares vs. property with a 25-year investment horizon.
Stuart also responds to Graham and Helen, a retired couple with super nearing the cap, who are considering how to best manage their share portfolios, pensions, and investment property. Another listener asks about selling a one-bedroom Brisbane apartment ahead of retirement and using the funds to either build super or invest elsewhere.
Finally, Stuart offers advice to a 34-year-old couple aiming for $2 million in net worth by age 40, debating whether to continue investing in ETFs or buy another investment property in Melbourne. With thoughtful insights on diversification, timing, tax efficiency, and long-term planning, this episode is packed with real-world guidance for investors at every stage of the wealth-building journey.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart explores why sometimes the smartest investment strategy is to do less. With global markets hitting all-time highs and every major asset class delivering positive returns in 2025, Stuart cautions against overconfidence. He explains why sitting on cash or keeping borrowing capacity in reserve can be a strategic move, not a missed opportunity. Drawing on recent market trends, including the unusual simultaneous rise of gold and bitcoin, Stuart unpacks why this environment feels disconnected from economic and political realities.
He also discusses the impact of index investing on market momentum, why market-cap indexing may behave like a growth strategy, and why blindly following the crowd can increase your risk exposure. Alongside this market reflection, Stuart answers a detailed listener question from Bernadette, a 51-year-old planning for retirement. He analyses her strategy to maximise super contributions, transition into part-time work, and possibly adopt Hostplus, ChoicePlus or a WRAP account to improve tax efficiency.
With practical advice on asset allocation, superstructure selection, and risk management, Stuart reinforces a core message: building long-term wealth doesn’t require reacting to every market move. Sometimes, keeping your powder dry is the most powerful move you can make.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A-packed episode, Campbell tackles a variety of real-life scenarios from listeners navigating property decisions, capital gains tax, and super strategies. He begins by clarifying whether deferring the sale of investment properties until retirement results in meaningful CGT savings, a common assumption he carefully unpacks for Catherine. Elise then asks whether to continue hunting for an investment property, focus on paying off the mortgage, or invest in shares. Campbell shares a practical decision-making framework based on flexibility, returns, and borrowing power.
Next, Matt raises a nuanced estate planning question about SMSFs, wrap platforms, and directing super death benefits into a private trust. He explains the pros and cons of SMSFs versus wrap platforms and highlights which providers support direct access without needing a financial adviser.
Simon’s question on potential CGT exposure after co-purchasing a home with his mother leads to a clear explanation of how CGT applies to partial ownership, even without rental income. Finally, Ray seeks guidance on which of three strategies will best position him and his wife to buy a future family home while relocating frequently for work. Campbell compares ETFs, investment properties, and CGT exemptions, giving Ray a clear path to building flexibility and wealth. A rich episode for strategic thinkers.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart reveals the results of his annual review of super fund performance, naming the best super fund for 2025. He compares returns across both Balanced and High Growth investment options from Australia’s leading industry and retail super funds, including Hostplus, UniSuper, ART, AustralianSuper, and the increasingly competitive Vanguard Super.
But investment returns and fees aren’t the only criteria that matter. Stuart delves deeper into overlooked factors, including transparency in asset valuation (especially for unlisted assets), board governance and experience, cybersecurity risks, and service quality. He raises red flags about funds influenced by union-backed boards and highlights service issues, including lengthy wait times and delayed payouts.
Stuart also explains the hidden tax costs in pooled super funds, especially the tax drag from unrealised capital gains, and how wrap platforms or SMSFs may offer smarter alternatives for engaged investors. He outlines when splitting super across two funds might be a useful diversification strategy, and who should consider using AustralianSuper’s Member Direct or a wrap platform like Hub24 or Netwealth.
Whether you're looking for the best net returns, lower tax drag, or more control over your retirement savings, this episode offers clear insights to help you optimise your super in 2025 and beyond.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart covers a wide range of real-life scenarios, offering clear insights on property strategy, superannuation, and retirement planning. He begins by unpacking Paul’s question about setting up a self-managed super fund (SMSF) and whether his current balance is sufficient to make a property purchase viable within it. Stuart also reflects on the quality of Paul’s Melbourne townhouse investment and discusses how to assess whether a property is genuinely investment-grade. Paul’s second question around investing savings for his four young children prompts a broader discussion on smarter options beyond traditional bank accounts.
John’s situation leads to a compelling conversation around downsizing in retirement. Stuart evaluates John's unique plan of selling the family home, investing the proceeds into super, and renting to try different locations before settling permanently.
Other questions explored include what to consider when upgrading to a more premium home, the risks of holding off on selling your current home, and how to structure equity effectively. Stuart finishes the episode with a deep dive into Amelie’s property portfolio and how to optimise her $2.2 million in equity to build super and potentially upgrade to a better principal residence. A must-listen for property owners and planners alike.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here
In this episode, Stuart takes a deep dive into one of the most misunderstood aspects of superannuation, how unrealised capital gains tax (CGT) affects your balance, and how to avoid it. He begins by explaining the irony of the government’s proposed tax on super balances over $3 million: while controversial, most Australians are already paying tax on unrealised gains daily via pooled super funds. Stuart breaks down how these products calculate unit prices and the role of future tax provisions in that process.
He then explores smarter alternatives, including wrap platforms and self-managed super funds (SMSFs), which allow investors to directly own assets and potentially eliminate CGT on unrealised gains altogether, provided they stay under the pension cap at retirement. Stuart walks through the financial modelling, showing how the fee trade-off still results in long-term gains, especially for high-contribution investors.
Listeners also learn about timing, portfolio turnover, and tax-saving potential across various life stages. He closes with a performance and fee comparison between pooled funds like Vanguard and wrap platforms, offering guidance on when the shift is worth it. This episode is essential listening for anyone serious about optimising their super and reducing tax drag over a lifetime.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart tackles a wide range of complex financial and property questions from listeners navigating wealth-building decisions. He begins with a couple considering converting their first home into an investment property. Stuart breaks down the implications of their joint ownership structure, refinancing strategy, and whether they've missed the opportunity for negative gearing, providing insight into how high- and middle-income earners can best structure property portfolios.
He then addresses a nuanced question about the transfer of assets from a discretionary trust to a testamentary trust upon death. Stuart explains the differences, key considerations, and whether investing under a lower-income spouse’s name may offer more long-term estate planning benefits.
Next, Stuart analyzes a detailed case involving a Brisbane-based couple with a multi-million-dollar property portfolio, employee share schemes, and a retirement goal of $200K income in 10 years. He evaluates their asset base, capital growth assumptions, gearing levels, and whether their current strategy is sufficient to meet their goals.
Finally, Stuart reviews the future potential of two Sydney investment properties in Edgecliff and Mosman following changes to development zoning. He offers a framework for assessing heritage restrictions, supply risks, and ongoing demand in a shifting market. A rich, insightful episode for investors at all stages.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here
In this episode, Stuart explores how to build personal wealth through employee share schemes (ESS), breaking down everything from RSUs and stock options to tax-effective strategies like salary sacrifice. He explains how shares vest, when and how they’re taxed, and the implications of holding versus selling. Stuart also highlights the importance of managing concentration risk and making informed decisions based on valuations, market conditions, and long-term goals.
Listeners will learn the difference between tax-deferred and taxed-upfront schemes, how to take advantage of the $5,000 salary sacrifice limit without triggering fringe benefits tax, and how to tactically reduce tax liabilities through transfers or strategic selling. Stuart offers clear insights on trading through issuer-sponsored share registries and outlines practical scenarios for divesting or retaining employee shares.
The episode concludes with a detailed response to a listener planning a two-year overseas move. Stuart reviews their investment properties, managed funds, super, and future home upgrade goals, offering a framework for managing surplus cash flow abroad, timing a principal place of residence purchase, and balancing debt, investment, and long-term security. This episode is packed with expert financial planning advice tailored for modern professionals navigating employee entitlements, tax laws, and international transitions.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart dives into some of the most pressing financial questions on the minds of listeners, from retirement tax strategies to smart investing moves. He unpacks the intricacies of transferring UK pensions to Australia, outlining the key rules, common pitfalls, and how to reduce unnecessary fees. Stuart then breaks down savvy loan structures for purchasing property through a company, with tips on minimising capital gains tax in the process.
With retirement planning front and centre, he highlights the often-overlooked fact that the $2 million superannuation tax-free cap is indexed. He explains why this should be a vital part of your long-term financial strategy. Is an SMSF property play more powerful than sticking with a high-growth super fund? Stuart weighs the pros and cons, helping listeners assess which option aligns best with their goals.
To wrap up, he tackles a real-world dilemma: should you invest surplus funds into the share market or buy your future retirement home now? Stuart offers a clear, thoughtful framework to guide that choice. Whether you're planning for retirement or navigating your next big investment move, this episode is packed with practical insights to help you make smarter financial decisions.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this insightful episode, Stuart Wemyss addresses a common investor question: Can Australian property values continue growing at 7% per year? He explains how compounding works over time and why adjusting future property values for inflation and income growth makes projections, like an $8 million home in 30 years, more relatable.
Stuart dives into the impact of income distribution, noting that the top 20% of Australians earn nearly half of all disposable income and experience faster wage growth. These high-income earners drive demand for blue-chip, investment-grade property, often located within 2 to 20 km of major CBDs, making such properties more likely to achieve strong long-term growth.
He challenges the idea that Australian property is broadly overvalued by focusing on geographic scarcity, population concentration, and the limitations of regional infrastructure investment. He also outlines several tailwinds that could boost property demand in the coming decade, including lower interest rates, superannuation tax changes, inheritance wealth, and reduced future equity returns.
Whether you're a long-term investor or simply seeking clarity on the sustainability of property price growth, Stuart offers a well-reasoned, practical perspective grounded in evidence and experience. Tune in to gain confidence in your investment decisions and understand the forces shaping Australia’s real estate landscape.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this insightful Q&A episode, Stuart Wemyss dives into three real-life financial questions that highlight the importance of strategic planning as retirement approaches. The episode begins with a deep dive into “Alex’s” situation a successful small business owner aiming to generate a $200,000 annual income in retirement. Stuart explores how Alex might structure assets post-business sale and whether selling an investment property could be necessary to meet income goals.
Next, Francois raises a question about fixing a less-than-ideal property ownership structure. Stuart uses this as a springboard to discuss a common trap: designing your financial strategy around existing assets, rather than letting a clear strategy guide asset selection and structure, especially important when tax and long-term efficiency are involved.
Finally, Stuart responds to Jason, who asks what defines an “investment-grade” property in Melbourne, and whether it’s realistic to buy one within an $850k–$900k budget in today’s market.
Whether you’re planning your retirement, refining your investment structure, or considering your next property purchase, this episode offers practical insights and timeless financial wisdom to help you make smarter, strategy-first decisions.
🎧 Click to listen now and discover what steps could bring you closer to financial freedom.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this insightful episode, Stuart Wemyss explores the safest, most reliable income-generating investment options for risk-averse investors or those with short investment horizons. He begins by highlighting why fixed income investments deserve more attention, especially for portfolio stability, retirees, or anyone with a low risk tolerance.
Stuart presents a clear hierarchy of choices, starting with mortgage offset accounts as the most efficient, risk-free return option, often outperforming taxable investments on a net basis. He then explores term deposits, which are secure but less appealing given flat interest rate curves.
Next, he dives into fixed income ETFs, breaking them into categories: government bonds (like VGB), corporate bonds (such as CRED and HCRD), composite ETFs, and hybrid securities (like BHYB), which blend the features of shares and bonds for higher income. These options provide dependable yields (4–6.7% p.a.) with varying degrees of risk and liquidity.
Stuart also touches on alternative investments like unlisted mortgage and private credit funds but warns they often carry more risk, lack transparency, and may offer marginally higher returns not worth the trade-off.
If you're seeking steady, low-risk income from your investments, this episode is packed with practical, evidence-based strategies to help you make informed decisions.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Campbell unpacks a range of nuanced financial scenarios submitted by listeners grappling with how to best use their wealth, equity, and income to build a stronger financial future. The central theme revolves around one of the most common dilemmas: when your wealth is mostly tied up in property, what’s the next strategic step?
Whether it’s deciding whether to chase a dream home post-auction, restructure assets for retirement, or explore SMSFs as a way to diversify and leverage superannuation, Campbell cuts through the noise with practical, numbers-driven advice. He discusses the real cost of holding underperforming investments, how to assess whether an advisor is actually adding value, and the common pitfalls of over-contributing to super when tax benefits are marginal.
For listeners who’ve built up significant property equity but now want more lifestyle freedom, Campbell provides guidance on when to upgrade your home, when to walk away from additional property investment, and how to think about risk-adjusted returns from ETFs versus real estate. This episode is a must-listen for anyone balancing ambition with lifestyle, and aiming to make smart, long-term decisions that align with both financial security and personal fulfilment.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart Wemyss distils insights from over a decade and 150+ blogs into four golden, evidence-based rules for successful property investing. He begins with the foundational principle: prioritise capital growth over income when buying, focusing on high-quality, investment-grade assets in tightly held, established suburbs. Income, he explains, can be improved later, but land location is forever.
Rule two highlights the importance of understanding property cycles, and timing your purchases to coincide with upcoming growth phases can dramatically fast-track wealth building. Drawing on real client case studies from Brisbane, Stuart illustrates how identifying the right cycle makes a significant difference.
Next, he breaks down the math behind wealth accumulation, leveraging full borrowings, negative gearing, and compounding capital growth to create outsized long-term returns. He contrasts property with shares to explain why property is often the better vehicle for gearing.
Finally, Stuart stresses future buyer capacity; understanding who will be able to afford your property in 10, 20, or 30 years is key to selecting high-performance assets. He unpacks the roles of credit policy, urban sprawl, and wealth inequality in fuelling long-term growth.
This episode is a must-listen for anyone serious about building long-term wealth through strategic property investing.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart tackles one of the most pressing challenges facing many Australians today: how to make smart financial moves when most of your wealth is tied up in property. He explores the tension between long-term investment strategy and short-term lifestyle pressure, helping listeners find a better balance between financial progress and personal well-being. From assessing whether a self-managed super fund (SMSF) is a wise move to managing multiple investment properties with tight cash flow, Stuart offers clear, strategic thinking on how to future-proof your finances while reducing financial stress.
He also delves into key questions like whether to upgrade your home or invest further, how to think about property versus shares in a changing market, and the value of liquidity and flexibility as you approach retirement. Throughout, Stuart keeps the focus practical and empathetic, guiding listeners through complex decisions with clarity and a long-term lens.
If you’re trying to decide what to do with your next investment dollar, wondering whether to hold or sell, or simply aiming for more freedom without sacrificing your financial future, this episode is packed with insights to help you move forward with confidence.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart breaks from tradition to deliver an exclusive review of Vanguard Super, Vanguard’s bold foray into the Australian superannuation market. Known for his commitment to independence and strategy-first insights, Stuart explores why Vanguard’s entry could be a game-changer for Australians dissatisfied with the opaque and politically entangled operations of traditional industry super funds. He delves into Vanguard’s unique not-for-profit structure, ultra-low fees, tech-forward administration through Grow Inc., and its world-class investment expertise.
While Vanguard Super is still small, its rapid growth and financial sustainability signal promising potential. Stuart also offers a deep dive into Vanguard’s investment options, explains why he recommends the High Growth option for long-term investors and compares fees with heavyweights like AustralianSuper and UniSuper, revealing a clear cost advantage. He even tackles often-overlooked areas like insurance quality and tax implications of pooled vs. non-pooled products.
If you're exploring superannuation alternatives or want expert insight into how Vanguard stacks up, this episode is packed with analysis you won’t want to miss.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart dives into real-life financial dilemmas from listeners navigating pivotal moments in their wealth journeys. Daniel, a self-employed father of three, outlines his comprehensive plan to retire at 60 with $100k passive income, using property, super, and ETFs. Stuart unpacks the nuances of risk mitigation when income is uncertain and weighs in on a Geelong investment property. An anonymous listener from Perth wants to buy their “forever home” in 7–10 years and seeks advice on how to balance their growing family with smart asset leverage. K, facing a windfall of inheritance, asks about the best long-term ETF strategy in a volatile market, and Stuart offers perspective on diversification and timing. Finally, Blair and Robyn wrestle with whether to sell and upgrade their Sunshine Coast home before moving to New Zealand, trying to predict growth and manage cash flow with future repatriation plans. Stuart brings thoughtful insights to each case, blending strategy, realism, and empathy—perfect for anyone planning for property, retirement, or investment in uncertain times. Tune in for practical takeaways and sharp commentary!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Campbell Wallace explores one of the most crucial steps in any property journey: setting the right budget.
He breaks the process into two key questions, how much you can borrow vs. how much you should borrow, and explains why borrowing capacity alone shouldn't drive your decision.
Campbell outlines:
- How to calculate a sustainable borrowing limit based on your surplus investable cash flow
- When it might make sense to borrow to your full capacity, especially for younger investors with a long time horizon
- Why property quality should trump quantity, and how to avoid false economies with your home purchase
- The risks of under borrowing or compromising too much on asset quality
- How other factors like super contributions, diversification, and age should influence your investment approach
He also warns against letting location dictate your budget and shares the golden rule: budget first, property second. Plus, a reminder not to ask your barber if you need a haircut—always be mindful of biased advice.
If you're thinking about your next property purchase, this episode will help you set a smart, strategy-aligned budget that supports your long-term wealth goals.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart addresses a wide range of listener questions, from technical ETF tax adjustments to retirement planning strategies using superannuation.
He starts by explaining how ETF investors need to account for AMIT cost base adjustments when calculating capital gains tax—an often overlooked detail that could mean paying more tax than necessary. He breaks down what AMIT is and why it matters for investors who regularly receive ETF tax statements.
Next, Stuart gives thoughtful advice on helping children into the property market, tackling the challenges of managing differing time horizons and property goals across siblings. He outlines a balanced approach to structuring property purchases with long-term capital growth in mind.
He also responds to a listener planning to move to Brisbane and build a home while selling underperforming investment properties. Stuart discusses how to balance serviceability, construction timing, and preserving cash against inflation.
Finally, he covers asset allocation in retirement, addressing whether it’s risky to have all super invested in a lifecycle fund when to consider diversifying into property and whether cash buffers are needed for market downturns.
This is a helpful episode for anyone navigating wealth building, tax strategy, or long-term planning.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart tackles a tricky but important question: how bad does a property need to be to justify selling it?
If you suspect a property in your portfolio isn't investment-grade, Stuart walks through a step-by-step process to assess whether replacing it could make you significantly better off—after factoring in selling costs, stamp duty, buyer’s agent fees, and capital gains tax.
He explains how to:
- Estimate your current property’s future return
- Set a realistic benchmark for what investment-grade property should deliver (2% yield + 7% capital growth)
- Weigh opportunity cost and transactional expenses
- Use detailed scenario modelling to compare long-term wealth outcomes
He also highlights key questions to consider before making a decision:
- Can you afford to upgrade to a superior asset?
- Will underperformance materially impact your retirement plans?
- Do you have enough time before retirement to justify the switch?
- Could you hedge by buying a better asset now and selling the underperformer later?
This episode is packed with real numbers, smart frameworks, and cautionary insights. If you're unsure whether to hold or sell a lagging property, this is essential listening.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart explores whether his financial strategies apply broadly or mainly to wealthier Australians, responding to recent data showing few households have $2M+ in super. He explains how his goal is to equip a wide range of listeners to make better decisions, regardless of starting point, and why aiming high with financial goals can still be relevant and motivating.
He also answers a question on US-domiciled ETFs, covering tax implications, currency risk, and whether Irish-domiciled UCITS ETFs can provide a more efficient option for long-term Australian investors. He discusses how income, reporting, and capital gains are treated, and clarifies some common misconceptions.
Next, Stuart tackles whether it’s worth switching investment property loans from interest-only to principal and interest, weighing the opportunity cost of redirecting cash flow toward debt versus other investments or paying down a PPR loan.
Finally, a listener outlines their detailed financial plan and asks if they should stretch their home budget, buy an investment property, or stay the course with ETF investing and super. Stuart walks through key considerations around private school costs, inheritance timing, and borrowing strategy.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Register for live event on 28 May at 7pm
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart tackles one of the most important financial planning questions: how much is enough? He shares his personal philosophy—invest just enough to meet your goals comfortably, but no more—and reminds listeners that wealth is a means to enjoy life, not just a number to chase.
Stuart explains how to think about wealth targets, offering a clear framework for calculating how much you need to fund different retirement lifestyles. He covers:
- How to plan around supercaps and tax-free thresholds
- What to do with property in retirement
- Why you should consider reducing property exposure and using super for tax efficiency
- When to invest more, and when to start spending
He also addresses the mental challenge of switching from saver to spender, and why starting early—even with small amounts—makes a big difference.
Whether you’re in your 30s, 50s, or already retired, this episode offers a grounded, practical, and values-based approach to wealth building. Tune in to rethink your goals, reset your expectations, and align your money with your life.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Register for live event on 28 May at 7pm
In this Q&A episode, Stuart dives into questions around co-investing in property with family, selling to adult children, managing tax exposure, and adjusting share portfolios amid market volatility.
He begins by exploring the complexities of joint property ownership among siblings, highlighting the importance of equal ownership, clear legal structures, and protective clauses to manage risk, especially around relationship breakdowns or financial stress. He also covers how to structure a family property when parents will live in it, including handling rental income and tax compliance.
Next, Stuart responds to a parent considering selling 50% of an investment property to their daughter and her partner. He explains the capital gains tax and structuring implications, and whether the strategy is a sound path toward intergenerational wealth transfer.
The episode also features guidance on portfolio rebalancing in volatile markets, including whether to reduce concentrated holdings or invest in emerging market ETFs—plus a few fund suggestions for those looking at Asia.
Lastly, Stuart clarifies the six-year CGT exemption rule and answers a property strategy question for a couple struggling to balance rentvesting, affordability, and long-term home ownership.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Register for live event on 28 May at 7pm
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart revisits a call he made nearly five years ago—that investment-grade apartments in Melbourne were due for a growth cycle. After a long period of underperformance, the signs are finally pointing to a market turning point.
He outlines the key forces driving a potential resurgence:
- New apartment supply is not keeping up with population growth
- Construction costs are up 30%, raising replacement costs and limiting new stock
- Expanded government incentives like the First Home Guarantee will supercharge demand
- Falling interest rates and relaxed HELP debt rules are boosting borrowing capacity
- Melbourne’s apartment prices look historically cheap compared to both houses and other capital cities
Stuart also draws a comparison to Brisbane, where apartment prices surged nearly 60% after a 13-year flat spell. Could Melbourne be next? A recent sale in Hawthorn may already be hinting at a shift.
If you've been holding an investment-grade apartment or are considering entering the market, this episode is packed with data, strategy, and timing insights. Tune in to understand why the next growth phase could be closer than you think.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Register for live event on 28 May at 7pm
In this Q&A episode, Stuart explores whether it's worth holding low- or ungeared property investments when shares often offer higher returns. He explains why opportunity cost matters—but also why property’s stability, tax treatment, and long-term compounding still make it a valuable part of a diversified portfolio.
He also answers a common question: if you don’t plan to sell your investment properties, how do you turn that equity into cash flow in retirement? Stuart outlines several strategies, including using offsets, redrawing, or modest leverage to access equity without selling.
The episode then shifts to property strategy, with a listener debating whether to buy now in Sydney, wait to purchase in their ideal suburb or invest interstate. Stuart unpacks the trade-offs between negative gearing, borrowing limits, and timing the market.
Finally, he responds to a listener deciding whether to sell a Geelong property to buy in Queensland or hold it under the six-year rule while rentvesting.
Whether you’re managing equity-rich properties, planning a home upgrade, or navigating high interest rates, this episode offers practical, thoughtful strategies to help guide your next move.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Register for live event on 28 May at 7pm
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart shares practical advice for one of the most important superannuation decisions you'll make: how to invest your super once you've chosen your fund.
He explains the differences between pre-mixed investment options like Conservative, Balanced, Growth, and High Growth, and why you can't always trust the label. Some “Balanced” options are really aggressive, so always check the underlying asset allocation.
Stuart breaks down the two key factors to consider: your time horizon and your risk tolerance. If you're under 50, the evidence clearly shows that growth assets (like shares and property) outperform over the long term—even if they’re more volatile. For those not accessing super for decades, that volatility is worth enduring.
He also warns against common mistakes like mixing investment options, trying to manage your own asset allocation, or using DIY investment tools without advice. Instead, he recommends choosing one pre-mixed option that matches your goals and sticking with it.
Whether you're just starting out or approaching retirement, this episode will help you make a smarter, evidence-based choice for your super. Tune in and take control of your long-term financial future.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A podcast episode, Stuart tackles timely questions on super contributions, property strategy, and how to structure wealth to optimise flexibility, returns, and tax outcomes—particularly as retirement nears.
Jack opened the episode with a practical question about offset accounts versus redraw facilities. As he approaches retirement, he's focused on maximising flexibility and wanted clarification on how each structure works, especially with salary deposits, credit card repayments, and long-term access to funds.
George, aged 58, sought guidance on how to best deploy $260,000 in spare cash after selling a Queensland investment property. Stuart explores the pros and cons of contributing to super (both concessional and non-concessional), buying property (including the impact of Melbourne’s land tax), or investing in ETFs—especially during periods of market volatility. George’s goal is to retire at 62, and Stuart offers a strategy that balances growth potential with tax efficiency.
Shan and his wife, both in their mid-30s, wanted to understand when it makes sense to increase super contributions, given they already have a mortgage-free home and neutral investment properties. Stuart outlines the questions young families should ask when weighing super versus other wealth-building paths during their peak earning years.
Pat, 32 and a company director asked when a family trust becomes more beneficial than investing personally. With a growing share portfolio, he wanted clarity on the cost-benefit tipping point for using a trust structure—especially in a down market where transferring assets might carry lower CGT.
Finally, Vanessa explored whether to use inherited funds to purchase a property within super or invest in ETFs now and contribute later. Stuart shares general insights on liquidity, long-term growth, and the trade-offs between inside and outside super environments.
If you’re weighing super, property, ETFs or trust structures—or trying to figure out when to dial up your retirement strategy—this episode is packed with valuable insights.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart breaks down the key factors to consider when owning property in your personal name. While it is the most common structure among investors, there are important decisions to make that can have a lasting impact on your tax outcomes, cash flow, and asset protection.
He outlines the three main ownership options: sole ownership, joint ownership, and tenants-in-common. Each structure comes with its own benefits. For example, sole ownership may maximise negative gearing if one spouse has a higher income, while a tenants-in-common split can be tailored for tax efficiency and cash management.
Stuart also explains how ownership affects land tax thresholds, capital gains tax, and estate planning. He shares strategies using offset accounts to optimise loan structure, particularly for couples with uneven incomes.
When it comes to your family home, Stuart covers when asset protection or future investment use might influence how it should be owned.
The key takeaway is that changing ownership after purchase is usually expensive and triggers stamp duty or CGT, so it is essential to get it right from the start.
If you are planning to buy property soon, this episode will help you choose the best ownership structure for both current and future circumstances.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart Wemyss shares the success story of a couple who experienced a six-fold increase in their investment assets, now positioning them for a comfortable retirement. When they first sought advice in 2015, the couple, aged 54 (him) and 51 (her), had a home valued at $900k with no debt, and co-owned three investment properties worth $1.2 million with $760k of debt. Their superannuation was $180k, and their combined income ranged from $300k to $400k annually.
Fast forward to today, their home is now worth $1.6 million, and they have reduced debt on their properties, resulting in $760k of equity. A new investment property purchased in Melbourne in 2018 has added $600k in equity. Their superannuation has grown to $1.2 million, and family trust investments amount to $595k. Their net investment assets now total $3.15 million, a six-fold increase, with $1 million of that coming from debt reduction.
Stuart highlights key strategies that contributed to their success, such as diversifying investments, optimizing super, and consistently investing in shares since 2020. He also discusses the importance of effective cash flow management and reducing unnecessary insurance cover. The couple, now 64 and 61 years old, are ready to retire comfortably.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart shares smart, practical steps for those who aren’t quite ready to pay for full financial advice—but still want to make smart money moves.
He explains the difference between straightforward and complex financial decisions. Early in your wealth-building journey, most choices are straightforward if you educate yourself on the fundamentals and find a great professional mentor—like a savvy mortgage broker or accountant—to guide and reassure you.
Stuart also gives real-world examples of how mentorship and basic strategic advice have helped clients successfully build property portfolios and secure financial freedom—without initially needing full-service advice.
However, he warns that when financial complexity increases, or if you lack confidence in making investment decisions, it’s crucial to know when to bring in a qualified financial advisor.
If you’re early in your journey and wondering how to move forward wisely without overpaying for advice, this episode is essential listening. Stuart offers clear, experience-backed guidance to help you stay on track while you build your foundation.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In yesterday’s Q&A podcast episode, Stuart answered a wide range of listener questions about property investing, tax strategies, and long-term financial planning. He explained options for investors whose interest-only loan terms are ending, covering whether refinancing or switching to principal and interest repayments makes more sense depending on personal strategy. He also discussed the timing of paying down investment loans and different exit strategies for property investors.
Another listener sought advice on structuring future ETF investments and whether it is worthwhile to transfer an existing portfolio into a family trust. Stuart broke down the key factors to consider, including capital gains tax implications and long-term flexibility.
For those planning education funding, Stuart addressed whether education bonds are an efficient way to save for private school fees compared to a regular share portfolio, and the pros and cons of setting up one bond per child versus one combined bond.
The episode also covered the nuances of land value growth for units versus houses, and how to think about the land-to-asset ratio when assessing long-term investment prospects.
Finally, Stuart reviewed a detailed family financial plan involving superannuation consolidation, wrap platforms, education bonds, and SMSF management, offering broad principles to help guide listeners facing similar decisions.
As referenced during the episode, you can also listen to Don’t Wait Until It’s Too Late – Strategic Retirement Planning here.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart takes a critical look at property planning services, which promise to help you build a portfolio by mapping out your borrowing capacity, cash flow, and investment strategy—for a price tag of $4,000 to $5,000.
He explains why these plans might work if you’re committed to only ever investing in property. But if you want holistic advice that considers shares, super, tax, insurance, and retirement planning, property plans often fall short.
Stuart outlines key limitations—like the lack of licensing, regulatory oversight, and inability to provide comprehensive tax or credit advice. He also questions whether these plans are truly tailored strategies or just templated sales tools aimed at generating buyers’ agent fees.
That said, property plans can offer value in mapping geographic diversification and tenant profiles, especially for investors pursuing multi-property portfolios. But quality always trumps quantity—one $1.5M investment-grade property will likely outperform four $500K average ones.
So, are property plans worth it? Stuart says: maybe—but only in narrow cases. For most people, you’re likely better off working with a financial adviser, accountant, and mortgage broker who can give broader, tailored, and regulated advice.
Tune in for an honest, experience-backed breakdown of this increasingly common offering.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart unpacks a range of nuanced financial strategies, from tax-effective investing for children to optimising debt, investment structure, and global property opportunities.
He begins with Cara’s question about investing an inheritance for her children and explains the surprising tax concession available through testamentary trusts—highlighting how they can be used to minimise tax on investment earnings for minors, which is a rare opportunity under Australian tax law.
Shawn’s question opens up a discussion on investing in international real estate. Stuart weighs up the potential benefits, like geographic diversification and affordability, against challenges such as foreign tax laws, currency risk, and lack of local knowledge.
In Tom’s case, the classic dilemma of repaying a mortgage versus investing is explored in detail. Stuart helps Tom assess whether to hold onto a non-investment-grade property, how to optimise surplus income post-property upgrade, and whether using equity to buy an investment-grade asset might deliver better long-term returns.
Andy’s scenario focuses on property ownership structuring and tax efficiency. Stuart breaks down how adjusting ownership percentages between spouses can optimise negative gearing benefits, especially when incomes are uneven. He also addresses the often-overlooked role of bonds in asset allocation, particularly for those with mortgages and offset accounts.
Finally, Stuart answers Adam’s niche query about testamentary trusts and corporate beneficiaries, clarifying the flow of profits and tax treatment when a company is owned by a trust, and whether the concessional tax treatment for minors still applies.
Whether you’re investing for children, managing large-scale debt, exploring offshore property, or trying to perfect your tax setup—this episode delivers clarity, strategy, and actionable ideas. Tune in now!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart dives into the heart of the Australian share market, breaking down how a small group of stocks—the big banks and major miners—are dominating the ASX200. In 2024, just three banks (CBA, Westpac, NAB) delivered more than half the index’s gains, while BHP and Rio Tinto dragged returns down.
Stuart questions whether this concentration risk is sustainable. With CBA trading at historically high valuations and 14 out of 15 brokers rating it a 'sell', it may be time for investors to take profits. Meanwhile, Macquarie Bank stands out with solid long-term growth and attractive valuation.
On the mining side, copper is booming, offering hope for BHP and Rio despite iron ore headwinds and China uncertainty.
Stuart also explores alternative ETF strategies like equal-weight and ex-top-20 indices, which reduce exposure to overpriced large caps and give broader diversification.
If you’re concerned about valuation risk, market concentration, and how to position your portfolio for the future, this episode is essential listening. Stuart offers practical, data-backed insights to help you rethink how you're investing in the ASX.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart explores the intricacies of livevesting, a strategy that uses your primary residence as both a lifestyle asset and an investment tool. He responds to a thoughtful proposal to use the equity in a fully paid-off home to fund early retirement while still benefiting from the compounding capital growth of a high-quality property. Stuart unpacks the assumptions, risks, and practicalities of this "bridge" strategy, including cash flow, interest-only loans, and tax considerations.
He also helps listeners navigating the transition from investment to forever homes, tackling questions about when to switch from interest-only to principal & interest loans and how to prepare for changing cash flow needs. In a compelling case study, Stuart reviews a listener’s $2.4M property strategy and offers guidance on optimising the loan structure and transitioning to owner-occupier status.
For those balancing travel goals with financial growth, Stuart analyses how to manage debt, timing capital gains, and choosing between keeping, selling, or recycling equity from properties into diversified investments. He explains how to execute a part-time travel lifestyle without derailing long-term financial plans.
Finally, the episode includes a technical dive into the real top marginal tax rate, including the Medicare Levy and Surcharge, and clears up misconceptions around the tax treatment of super and company income.
If you’re thinking about retiring early, leveraging your home for growth, or managing lifestyle ambitions alongside investment goals, this episode is packed with practical strategy and long-term thinking. Tune in now!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Campbell Wallace dives into one of the most talked-about debates in Australian property circles: rentvesting vs. home ownership. With housing affordability challenges in major cities, many investors are asking, is it smarter to rent where you want to live and invest elsewhere, or should you just buy your own home as early as possible?
Campbell unpacks the pros and cons of both strategies, from tax benefits and flexibility to CGT implications and long-term retirement outcomes. Using a detailed case study, he compares the 30-year financial outcomes of a rentvester and a homeowner, factoring in cash flow, capital growth, tax, and retirement planning.
The verdict? Home ownership edges ahead in the long run, thanks to the CGT exemption and the powerful cash flow advantage of being mortgage-free in retirement. But Campbell also highlights when rentvesting makes sense, particularly for those with short-term living plans or better investment opportunities elsewhere.
Whether you're starting out or rethinking your strategy, this episode will help you weigh your options and understand the trade-offs. Tune in for a clear, numbers-backed perspective on two very different paths to wealth
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart tackles a diverse mix of listener questions, exploring everything from low-cost SMSF innovation to strategic debt repayment, financial reading recommendations, and smart home upgrade planning.
He kicks things off by discussing how falling costs and rising tech-driven solutions have made SMSFs more accessible at lower balances, especially for those wanting control over ETF investing and more flexible tax management. Dean’s question about selling capital gains while debt recycling leads to a valuable discussion on capital gains strategy, reinvestment, and tax-smart debt reduction.
For readers seeking more financial wisdom, Stuart shares his top book recommendations across investing, property, and historical market insights. He also demystifies the complex rules around developing property inside an SMSF—addressing what’s possible (like subdivision and construction) and where the limits are, particularly around borrowing and ownership structures.
Jeff’s question ties it all together with a practical discussion on buying a forever home, long-term debt planning, and the timeline for introducing an investment property into your portfolio, even later in your financial journey.
Whether you're refining your super strategy, weighing a big property move, or just hungry for better financial understanding, this episode is full of expert guidance and useful frameworks. Tune in now!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart discusses the recent Trump Tariffs and their potential impact on your investments.
The US has raised tariffs from 2.5% to 22%, causing the US market to drop 10% over two days, with, for example, Apple losing 17% of its value - equal to one third of the value of the whole ASX - $1 trillion Australian dollars.
If these tariffs remain, we could see higher living costs and inflation in the US, while supply chain disruptions could push prices even higher globally. On the flip side, other countries might experience lower inflation and interest rates as the risk of a global recession rises.
Stuart discuss whether these tariffs are a permanent strategy or a tactical move, suggesting that their long-term impact is still uncertain. With the US market now trading at April 2024 levels, he reminds listeners not to panic, as market corrections are a normal part of investing.
He also explore how this could affect your property investments, with lower interest rates and share market volatility often proving beneficial for the property market.
As long-term investors, we see market drops as opportunities to invest more strategically and continue playing the long game.
Tune in for insights on navigating this volatility and positioning your portfolio for future growth.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart unpacks a lesser-known strategy in property investing: using a private company to hold investment properties and how it could cut your capital gains tax (CGT) by up to 28%.
While companies don’t get the 50% CGT discount or immediate negative gearing benefits, Stuart explains how careful structuring, like borrowing personally to buy company shares, can preserve gearing benefits and open the door to massive long-term tax savings.
Using real-life scenarios, he shows how distributing capital gains slowly over many years, using franking credits, can drop your effective CGT rate to as low as 10%, less than half what you’d pay in your personal name.
He also breaks down:
✅ When this structure works best (e.g. for PAYG and self-employed investors)
✅ How to avoid land tax surcharges
✅ What to watch out for, like borrowing limitations and upfront costs
This episode is essential listening if you’re looking to build long-term wealth through property and want to know whether a company structure belongs in your portfolio mix.
Tune in to hear when and why this strategy works and when it doesn’t.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart explores how to make strategic decisions with lump sums, whether they come from inheritances, business opportunities, or property sales. He offers guidance to William, who’s weighing how best to use a $750,000 inheritance to build long-term wealth while balancing homeownership and market timing. Sarah, currently on maternity leave, wants to optimise the $130,000 proceeds from a property sale—whether to pay down debt, invest in shares, or consider another investment property—all while managing cash flow and long-term goals.
Stuart also answers Meteor Girl’s question on choosing between buying into a business or investing in property, offering a practical framework to assess risk, return, and control. For Ron, he discusses investing cash within an SMSF—specifically whether to stay in offset or shift into capital-growth-focused ETFs, and how to approach investing during market highs.
He also speaks to Kazza, who wants to transition from being equity-rich but cash flow poor to a perpetual income-focused portfolio. Stuart breaks down a potential pathway to generating $180K/year in passive income, using ETFs and a phased exit from property.
If you’re managing large sums of money or rethinking your portfolio for the next phase of life, this episode is packed with frameworks, real-world examples, and practical advice. Tune in now for smart, considered strategies to guide your financial decisions.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart breaks down the 'Investor Risk Premium', a key concept that helps you assess whether you’re being fairly rewarded for the risks you take with your investments. Traditionally used in share investing, Stuart explains why this idea should apply to all asset classes, from shares and property to speculative assets like crypto.
Right now, U.S. equities appear overvalued, with future returns unlikely to match the past decade’s gains. In fact, forward-looking data suggests the expected equity risk premium in the U.S. is negative, meaning investors may not be adequately compensated for the risk.
By contrast, Australian shares and property offer more attractive return prospects, especially when measured against the risk-free rate.
The key takeaway? Don’t chase past performance—focus on future returns relative to risk. Whether you're investing in shares, property, or anything else, you need to ensure the expected return is worth the volatility, liquidity constraints, and uncertainty you're taking on.
A sound, evidence-based strategy that prioritises risk-adjusted returns is the smartest way to build long-term wealth. Tune in to learn how to apply this thinking across your portfolio and avoid the common traps of emotional or trend-driven investing.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart unpacks a wide range of listener questions, from navigating complex property strategies to exploring the role of diversification in a balanced investment portfolio. He shares tailored insights with AJ on managing a high-income household, including whether to sell, develop, or hold investment properties, how to structure super contributions and if moving into a completed knockdown-rebuild could offer tax advantages.
Peter and Veronika weigh whether to sell their fully paid-off Rockdale unit or hold while rentvesting—and Stuart considers the timing and risks of Sydney’s apartment market. For Greg, the focus is on helping his sons grow their first home savings using more effective vehicles than a basic bank account.
The episode also features an in-depth question from DIY David, who is deciding whether to sell two fully paid-off Perth investment properties in favour of ETFs, with a keen focus on diversification and CGT strategy. Lastly, Stuart offers practical, step-by-step investment guidance to Craig as he and his partner look to balance mortgage repayments, wealth building, and retirement goals.
If you’re navigating property development, family wealth planning, or retirement strategy, this episode is packed with practical advice and long-term thinking. Tune in now for a strategy-focused Q&A that could reshape how you approach your next financial move.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, we dive deep into the hotspotting vs. buy-and-hold debate to determine which strategy delivers better long-term wealth.
🔹 What is hotspotting?
Hotspotting involves identifying areas poised for short-term price growth, often in regional locations or outer suburbs. But has it really outperformed over decades, or is it just a risky bet on market cycles?
🔹 Why buy-and-hold may be the better strategy
Stuart compares the financial outcomes of both strategies, revealing that investment-grade properties with long-term capital growth outperform hotspotting in the long run. With real numbers, he tests best-case and semi-perfect scenarios, showing how missing just one market cycle could cost an investor hundreds of thousands in lost returns.
If you’re thinking about investing in property, this episode is a must-listen! Stuart breaks down why a strong, buy-and-hold strategy is often the smarter play for wealth creation. Tune in now!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart dives into diverse financial topics, from tax-efficient super strategies to Melbourne's property market trends and business exit planning. He answers listener questions on the best share broking platforms, breaking down fees, accessibility, and market options.
For superannuation investors, Stuart explains the tax implications of switching super fund investment options and discusses strategies for managing the taxable component of an SMSF, including the re-contribution method. He also provides guidance on balancing mortgage repayments, property investment, and share market exposure as retirement nears.
The episode also explores the dynamics of Melbourne’s property market, evaluating whether now is the right time to buy, and the impact of land tax policies on investors. Lastly, for business owners, Stuart outlines tax-effective exit strategies, focusing on minimising CGT when selling a startup.
If you’re looking to optimise your wealth-building strategy, superannuation planning, or investment approach, this episode is packed with expert insights to help you make informed financial decisions. Tune in now for valuable takeaways!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, we take a deep dive into property development as a wealth-building strategy. Using real-life case studies, we explore whether small-scale property development offers better returns than traditional buy-and-hold investing.
🔹 Does developing property really pay off?
Stuart analyzes a 20-year property development case study, showing how one investor turned $270,000 into $1.4 million—a 14.8% after-tax IRR. But does this kind of return hold up in today’s market? Rising land and construction costs have changed the game, making high-IRR developments harder to achieve.
🔹 Key insights from the numbers:
✅ How land appreciation and construction costs impact development margins
✅ Why higher capital contributions may lead to greater wealth accumulation
✅ The realistic return expectations for developers in today’s market
✅ When buy-and-hold property investing could be a better long-term strategy
💡 Should you invest in property development?
Stuart breaks down whether small-scale development is worth the risk—or if your money is better off in a well-selected, investment-grade property with a simpler buy-and-hold strategy.
If you're considering developing property, this episode is a must-listen! Tune in now for a data-driven breakdown of what works—and what doesn’t.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart tackles pressing financial questions on asset protection, property decisions, and short-term investment strategies. He delves into whether high-net-worth individuals should prioritise asset protection over tax efficiency and whether selling assets now to move them into a trust is worth the CGT hit.
Stuart also advises on the tricky decision of whether to sell or hold an investment property in light of expected life changes, breaking down the financial implications of each choice. For those managing finances across Australia and New Zealand, he provides insights on the best way to maximise savings for a major renovation while planning for private school fees.
Additionally, he helps a listener decide on the right timing for property investment, considering borrowing capacity fluctuations and market conditions. Finally, he clarifies the tax implications of switching super investment options within an industry fund to better suit long-term financial goals.
If you're grappling with wealth-building strategies, property investments, or optimising your super, this episode is packed with expert insights to help you make informed decisions. Tune in now for practical financial guidance!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart shares the key ways a financial advisor can help you maximise your share portfolio’s returns—beyond just picking stocks.
🔹 What difference does an advisor make?Even savvy, self-directed investors can unknowingly leave money on the table. Stuart recounts a recent client experience where DIY investing resulted in costly mistakes—mistakes that could have been avoided with expert guidance.
🔹 What do advisors actually do?✅ Portfolio Construction – Advisors structure portfolios to capture long-term growth, balancing market trends and historical cycles.
✅ Risk Reduction – By strategically diversifying and reducing overexposure, advisors help you avoid concentration risk.
✅ Behavioral Coaching – Preventing emotional, short-term decisions that could harm long-term returns.
✅ Tax Efficiency – Ensuring investments are structured to minimise tax liabilities and maximise after-tax returns.
💡 Can an advisor truly improve your returns?
Stuart explains why professional investment management isn’t just about picking winners—it’s about avoiding costly mistakes, optimising for long-term gains, and managing risk effectively.
If you're investing or considering working with an advisor, this episode is a must-listen! Tune in now to find out how a strategic, evidence-based approach can elevate your investment success.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A podcast, I discuss strategies for maximising superannuation contributions, including the eligibility criteria for large non-concessional contributions and using income from properties and trusts to qualify. A listener seeking retirement planning advice receives insights on optimising investments for income, along with guidance on investing in shares versus property and the implications for estate planning. I also tackle superannuation strategies, exploring the benefits of separating taxable and non-taxable components and comparing the advantages of investing in shares personally versus through a company, particularly focusing on long-term growth and negative gearing benefits.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Campbell Wallace breaks down the key qualities that make a great buyer’s agent and why choosing the right one can make or break your property investment strategy.
Investing in the highest-quality, investment-grade property within your budget is crucial for long-term capital growth. But navigating the market alone can be risky, and making the wrong purchase could set you back years financially. A top-tier buyer’s agent helps you avoid costly mistakes and ensures you secure the best asset possible.
🔹 What should you look for?
✅ A minimum of 10 years of experience or a team-based approach to leverage expertise
✅ Deep local market knowledge—not just data-driven analysis but real, on-the-ground insight
✅ A rigorous due diligence process to uncover hidden risks before you buy
✅ Transparent pricing advice—no misleading “bargain” off-market deals
✅ Integrity & reputation—agents who are willing to walk away from a bad deal
💡 BONUS: Campbell shares insider tips on how to vet potential agents, ask the right questions, and ensure you’re working with someone who prioritises your long-term success over a quick commission.
If you’re serious about property investing, this episode is a must-listen. Tune in now to learn how to find a buyer’s agent who will set you up for financial success!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart delves into a variety of listener questions, tackling key financial strategies for wealth-building, tax optimisation, and long-term investment planning. He explores the complexities of intergenerational wealth creation, discussing how trusts can be structured to compound assets over generations. Loan structuring and tax deductibility are also covered, helping investors understand how to optimise their financing for maximum benefits.
Additionally, Stuart critiques different investment strategies beyond property, guiding a listener on diversifying their portfolio effectively. The episode also features an in-depth discussion on balancing property investments with homeownership goals—whether to continue expanding an investment property portfolio, buy a primary residence, or hold off for a better opportunity. Lastly, he provides insights for those feeling financially stretched after purchasing their first investment property, offering a strategic roadmap to move forward.
If you're looking to refine your investment approach, structure wealth for future generations, or navigate key financial decisions, this episode is packed with expert insights to help you chart the best course. Tune in now for practical advice on securing your financial future!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart explores why having a clear, long-term investment strategy is essential for financial success. Inspired by Rohan Rajiv’s insights on strategy, he breaks down how defining a sequence of smart financial steps can help you navigate trade-offs, avoid costly mistakes, and stay on track toward your financial goals.
You’ll discover:
✅ How a well-planned strategy helps you make smarter financial and lifestyle decisions
✅ Why defining your end goal is the key to making wealth-building efficient
✅ How a structured approach to investing can help you balance risk, tax, and diversification
✅ The biggest mistakes people make when they invest without a clear plan
Plus, Stuart shares an often-overlooked bonus benefit of having a strong financial strategy—one that lets you enjoy life today while securing your future!
Don’t miss this insightful discussion—tune in now to find out how to build lasting wealth the right way!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart tackles a diverse range of listener questions, covering key financial strategies to optimise wealth and retirement planning. He explores the idea of setting up super accounts for children, weighing the long-term benefits against prioritising present-day investments. He also dives into the complexities of franking credits, comparing industry funds with self-managed super funds and their impact on retirement income.
For property investors, Stuart breaks down the decision-making process between renovating a home or reinvesting sale proceeds into new opportunities, factoring in tax implications and market trends. He also provides insights into early retirement planning, discussing how much is "enough" to retire comfortably while maintaining financial flexibility. Additionally, he examines how property valuations within SMSFs influence pension obligations and long-term financial planning.
Whether you're strategising for your family's financial future, navigating superannuation complexities, or deciding when to retire, this episode is packed with expert insights to help you make informed decisions. Tune in now for actionable advice on making the most of your wealth.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart explores an alternative strategy for property investors who may be cash-flow-poor but asset-rich—co-investing in property with your superannuation.
Building on last week’s discussion about the pros and cons of borrowing inside super, Stuart introduces a method that could help investors increase their budget to secure higher-quality properties without fully relying on superannuation borrowings. By co-investing with your SMSF, you can leverage personal assets while keeping the super fund's share unleveraged—potentially improving diversification, minimizing tax liabilities, and enhancing long-term returns.
However, Stuart also breaks down the complexities of this approach, from legal structures to tax considerations and liquidity concerns. He cautions against forcing a property investment strategy where it may not be the best fit and stresses the importance of independent financial advice.
Is this strategy right for you? Tune in to learn how co-investing with your super could help you access better-quality assets while maintaining financial flexibility. Plus, get insights into when property may not be the ideal investment choice within your super fund.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
In this case study episode, Stuart Wemyss discusses a client’s journey to establishing a successful retirement strategy using a perpetual portfolio. The client, who began retirement with a Self-Managed Super Fund (SMSF) balance of just under $2 million, faced significant losses from a poor stock pick. However, over seven years, the portfolio has grown despite drawing substantial pension payments. Stuart highlights key strategies employed to achieve this growth, such as selling underperforming active funds, including Magellan and Walter Scott, and shifting to a more income-focused equity strategy using ETFs and corporate bonds.
The client’s real estate assets have also appreciated, with equity in their property doubling. Stuart emphasizes the importance of diversification, noting that despite some asset classes like banks and bonds underperforming, diversification across sectors smooth returns over the long run. He also stresses the importance of balancing income and capital growth in a retirement portfolio, ensuring all assets contribute. The episode concludes with a discussion on the challenges of active management and the benefits of long-term, diversified strategies for a successful retirement.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart breaks down the realities of borrowing to invest in property inside your superannuation. While SMSFs using Limited Recourse Borrowing Arrangements (LRBAs) have seen impressive asset growth—rising from $43 billion to $70 billion in just five years—the benefits of this strategy are often overstated.
Stuart dives into the numbers, comparing returns on property investment inside and outside of super. He highlights key factors such as higher SMSF loan interest rates, reduced negative gearing benefits, and the importance of gearing ratios. While avoiding Capital Gains Tax (CGT) in super sounds appealing, the actual after-tax return may not always outperform traditional property investment in personal names.
Should you borrow to invest in property inside super? Or would you be better off leaving your funds in a high-performing super fund instead? Stuart provides in-depth analysis, answering these critical questions and offering practical guidance on making the right investment choice.
He also warns of potential liquidity traps and emphasizes the importance of choosing investment-grade property for long-term growth. Tune in to get the full breakdown and a sneak peek into next week’s strategy for overcoming borrowing constraints in super!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart answers a range of listener questions covering property investment strategies, tax considerations, and structuring share portfolios for long-term wealth building. He explores whether it's better to sell investment properties to upgrade a family home, how to balance rental yields with capital growth, and whether to renovate or develop for higher returns.
Stuart also dives into tax-efficient superannuation strategies, IRR calculations for property investments, and the differences between investing in personal names versus family trusts. For those looking to optimize their share investments, he provides insights on platforms like Stockspot and Pearler and how to build a tax-efficient portfolio outside of super.
If you're navigating property decisions, investment structures, or long-term financial planning, this episode is packed with valuable, practical advice to help you make informed choices. Tune in for expert insights tailored to investors at all levels!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart dives into the essential traits that make a mortgage broker truly great and how they can transform your financial journey. With over two decades of experience in mortgage broking and property investing, Stuart shares unique insights into what separates exceptional brokers from the rest. He explores the five critical attributes every top-tier broker should possess, including property investment experience, a strong understanding of tax-efficient loan structures, and a solution-focused mindset to tackle even the most complex scenarios.
Stuart highlights why working with a broker who specializes in clients like you can make all the difference and explains the importance of having a broker who’s not afraid to give honest advice—even when it’s not what you want to hear.
While many focus solely on securing the lowest interest rates, Stuart argues that a broker’s real value lies in helping you achieve your long-term financial goals by ensuring smarter, well-informed decisions. Whether you’re a first-home buyer, investor, or someone seeking the right mortgage solution, this episode offers actionable insights to help you find a broker who will support you for life.
If you’re looking to borrow or invest wisely, this episode is packed with advice to help you avoid costly mistakes and set yourself up for success.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this engaging Q&A episode, Stuart tackles a wide range of listener questions on investing, property development, superannuation strategies, and financial planning. He provides expert insights into whether to use dollar-cost averaging or lump sum investing, evaluates the benefits of wrap platforms versus low-cost funds like VDGR, and offers guidance on property decisions, including whether to renovate or develop for higher returns.
Listeners will also gain practical advice on optimizing super contributions, debt recycling strategies, and building a high-growth, low-maintenance property portfolio. Stuart delves into the complexities of investing as a non-resident, the tax implications of capital gains, and how to leverage equity effectively.
Whether you're planning your next property move, fine-tuning your investment strategy, or considering long-term retirement goals, this episode is packed with actionable insights to help you make smarter financial decisions. Perfect for investors at every stage of their journey!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart explores the best strategies for investing in the share market in 2025, comparing index funds, managed funds, and direct shares. Backed by data from the S&P Dow Jones SPIVA report, Stuart explains why evidence-based, rules-driven strategies consistently outperform active management. He also unpacks the dominance of large-cap stocks in 2024, the risks of growth-focused portfolios, and the potential of alternative index strategies like equal-weight and value-tilted funds. Whether you're a seasoned investor or just starting out, this episode is packed with practical tips to help you build a diversified, long-term portfolio.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart answers listener questions about share market investing in 2025, exploring the merits of index funds, managed funds, and direct shares. He explains why evidence-based, rules-driven strategies consistently outperform active management, using data from the S&P Dow Jones SPIVA report. Stuart highlights that over 85% of Australian actively managed funds and 90% of U.S. funds fail to beat their respective indexes over the long term. This makes index funds, with their low fees, tax efficiency, and minimal turnover, a compelling choice for investors.
Stuart also reviews 2024 market trends, including the dominance of large-cap stocks like banks in Australia and the "Magnificent Seven" in the U.S. He discusses risks associated with growth-focused portfolios, noting that high valuations could limit future returns. The episode delves into alternative indexing strategies such as equal-weight, value-tilted, and quality-focused funds, examining their 2024 performance and potential for diversification.
Listeners gain insights into balancing risk and return, constructing diversified portfolios, and focusing on long-term growth rather than short-term predictions. Whether you're new to investing or a seasoned pro, Stuart’s expert advice offers practical guidance for navigating the share market and achieving financial success in the years ahead.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart delves into the key trends and expectations shaping the Australian property market in 2025. He unpacks the fascinating dynamics driving property prices across the nation’s capital cities. From Perth's explosive growth to Melbourne's ongoing flat cycle, Stuart provides expert insights into the factors influencing the market, including interstate migration, loan volumes, housing supply, and the anticipated interest rate cuts.
Whether you're a seasoned investor or a first-time buyer, this episode offers valuable perspectives on:
- Why Perth remains a standout performer.
- Melbourne’s potential to transition from a flat to a growth cycle.
- The impact of interstate migration patterns, from Sydney’s population outflow to Queensland’s popularity surge.
- How 2025’s federal election and interest rate adjustments could shape property prices.
Stuart also shares his predictions for market performance in 2025 and why now could be the perfect time to explore opportunities in slower markets like Melbourne. Packed with actionable insights and historical context, this episode is a must-listen for anyone planning their next property move.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart dives into listener questions covering a wide array of financial topics, from optimising the use of offset accounts versus SMSF loans to debt recycling as a tax-efficient strategy. He shares insights on how to allocate surplus funds, particularly in scenarios where SMSF loans carry higher interest rates than traditional investment loans.
Stuart also explores the complexities of consolidating superannuation accounts to reduce fees, particularly for retirees, and discusses the trade-offs between active financial advisers and industry super funds. Listeners curious about investment property decisions will benefit from a discussion on whether selling properties to pay off personal debts and improve borrowing capacity is a sound strategy.
The episode tackles a thought-provoking debate on property versus shares within SMSFs, weighing long-term returns, diversification, and the impact of fees. Additionally, Stuart provides a high-level look at insurance strategies, offering guidance on determining appropriate coverage for families and retirees while balancing value for money.
For those navigating tax implications in superannuation or contemplating asset reallocation, this episode offers practical advice and actionable insights tailored to the current financial climate. Don’t miss this informative discussion!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Campbell tackles a common yet complex financial question: should you use your surplus cash flow to pay down debt or invest for the future? Starting with the goal of owning your home outright by retirement, Campbell explains why that’s a sensible priority. He then explores the less straightforward decision of managing tax-deductible debt tied to an income-producing asset, such as an investment property.
By examining realistic scenarios, Campbell reveals how strategies like paying off debt, investing in shares or utilising tax-effective super contributions each impact your long-term position. He highlights the potential benefits of maintaining leverage for tax savings, demonstrates the power of compounding returns from growth assets, and discusses the importance of having a balanced mix of property and shares. Throughout, Campbell stresses the value of cash flow forecasting—ensuring your property and investments align with your retirement plans and liquidity needs.
Whether you’re looking to maximise your financial efficiency, build a robust investment portfolio, or simply gain clarity on your best next move, this episode offers practical insights. Campbell’s guidance helps listeners navigate the trade-offs of debt reduction versus investment growth and chart a confident path toward a financially secure retirement.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart addresses a variety of listener questions covering topics like helping family members plan for retirement, understanding the tax implications of superannuation options, and the intricacies of asset protection in personal and business relationships. He explores strategies to assist parents with low financial literacy, including structuring their business for tax savings and leveraging super contributions effectively.
Stuart delves into the nuances of capital gains tax in superannuation, comparing pooled and non-pooled investment options, and their impact on long-term returns. He also tackles questions about active fund management versus index options, providing an evidence-based perspective on the viability of high-fee strategies.
The episode includes a deep dive into asset protection for business owners, focusing on safeguarding assets against risks from personal and business relationships. Stuart also weighs in on the timeless debate between investing in property or shares, addressing tax implications, long-term returns, and the role of leverage in wealth creation.
Whether you're navigating family financial support, fine-tuning your super strategy, or protecting your business assets, this episode offers valuable insights and actionable advice. Don’t miss this engaging discussion!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Campbell delves into the often-overlooked liquidity challenges of holding property within a Self-Managed Super Fund (SMSF). While the tax-friendly environment of superannuation can make SMSF property ownership seem attractive, the reality is more complex. Campbell explains how borrowing restrictions, higher interest rates, and reduced negative gearing benefits can impact returns. He also highlights the pivotal issue of maintaining liquidity once you enter the pension phase, where minimum withdrawal requirements may outpace your property’s rental income.
Through practical examples, Campbell illustrates why balancing your property investments with a substantial allocation of liquid assets—like shares, bonds, and cash—is essential. Doing so provides the flexibility to meet pension payments without being forced to sell your property under potentially unfavourable market conditions. He examines various scenarios showing how adjusting the share of property within an SMSF affects the timeframe you can comfortably hold onto it, allowing for greater potential growth and better timing for eventual sale.
By understanding these liquidity traps and managing them proactively, listeners learn how to maintain true financial freedom in retirement. This episode is a must-listen for anyone considering property investments within their SMSF, aiming to maximise returns while retaining control and flexibility.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this week’s Q&A episode, Stuart dives into a variety of listener questions that touch on key aspects of financial planning, investment decisions, and retirement strategies. Topics include the ongoing debate of superannuation versus property investment, understanding the capital gains tax implications of rebuilding an investment property as a principal residence, and managing tax-efficient loan structures when multiple properties are involved.
Stuart also shares insights on including adult children in SMSFs, the benefits and potential drawbacks, and explores scenarios for selling well-performing properties to upgrade or capitalise on new opportunities. For expats planning future moves, Stuart offers advice on whether to invest in lifestyle properties or focus on long-term investment strategies.
Finally, he discusses how to best allocate surplus cash flow between super contributions, offset accounts, and ETFs, while considering life events like starting a family. Packed with practical guidance and tailored advice, this episode offers valuable takeaways for anyone navigating complex financial choices.
Whether you’re an investor looking to optimise your portfolio or planning for future retirement, this episode is full of actionable insights. Tune in now!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Campbell dives into one of the most debated investment topics: property versus shares. Drawing on a practical, real-life scenario, he explores how much capital growth a property needs to produce before it outperforms a share portfolio, factoring in critical variables like leverage, tax implications, and ongoing costs. By comparing a leveraged property investment to a diversified, income-generating share portfolio, Campbell illustrates why the intuitive assumption that property will always outdo shares isn’t guaranteed.
He sheds light on the tipping point where a property’s growth rate must surpass around 5.4% just to match returns from shares—and even higher if you consider selling and incurring capital gains tax. Campbell also examines how retirement timing affects the final outcomes, revealing that selling down shares strategically can help minimise tax more effectively than selling a single, large property.
Far from a one-size-fits-all conclusion, this episode emphasises the importance of understanding the nuances of both asset classes. Whether you’re considering a property purchase, diversifying into shares, or pondering if it’s time to shift strategies, Campbell’s insights will help you make more informed decisions about where to invest your hard-earned money. Don’t miss this chance to gain clarity on a perennial investment question.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this week’s Q&A episode, Stuart tackles some insightful and diverse listener questions covering tax strategies, investment structures, and retirement planning. He explains how bucket companies operate under different tax rates, the importance of comparing investment returns before and after tax, and whether family trusts can help kids leverage equity to buy property.
Stuart also explores strategies for time-poor investors with surplus cash flow, addressing whether ETFs are a viable alternative to property for those who prefer a simpler, lower-stress investment approach. For retirees and estate planners, he discusses SMSF considerations, such as whether large property assets must be sold upon death, and offers practical insights into wrap accounts versus SMSFs for direct investments.
Finally, Stuart examines how to accelerate early retirement goals, outlining how consistent surplus investing and tax-efficient strategies can generate significant passive income. Whether you’re navigating tax rules, planning for your children’s future, or aiming for financial independence, this episode is full of practical tips and evidence-based advice to help you make informed decisions.
If you’re looking for clear answers to complex financial questions, this is an episode you won’t want to miss. Tune in now!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart delves into the long-term future of property investing in Australia and what it means for investors. With a federal election on the horizon in May 2025, housing affordability is set to take centre stage, but will it result in real change? Stuart explains why government reliance on property-related taxes makes meaningful reform unlikely.
He explores the impact of high-density "activity centres" in Melbourne and Sydney, unpacking research that suggests these developments don’t harm local property values — and may even enhance them. He also highlights the broader challenge of increasing housing supply and the role infrastructure plays in shaping property prices.
Looking ahead, Stuart discusses how emerging technologies like robotaxis could reshape commuting and influence the demand for inner-city living. Will distance from the CBD matter if you can work or relax during your commute?
With thoughtful insights and evidence-backed analysis, this episode provides clarity on how key factors like government policy, urban development, and technological advances may affect long-term property prices. Investors will leave with a clearer view of why high-quality, investment-grade properties remain a smart bet for the future. Don’t miss this forward-looking take on property investing in Australia.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart addresses a range of thought-provoking investment questions from listeners. He explores the simplicity and effectiveness of using a single diversified ETF, such as VDHG or DHHF, while highlighting the nuances and potential limitations of this strategy for larger portfolios. Stuart also offers tailored advice on whether to upgrade a primary residence or invest in Melbourne property, ultimately favouring the lifestyle and financial benefits of upgrading.
Listeners gain insights into how property value growth is measured, including the impact of capital improvements and why median growth rates may be misleading. He provides valuable guidance on whether self-employed individuals should leverage an SMSF to buy commercial property, advising caution around liquidity risks.
Stuart also tackles timely questions about possible changes to property investment tax laws, including potential adjustments to capital gains tax (CGT) and negative gearing. He explains how these changes could affect property yields and investor decisions.
Packed with actionable insights, this episode empowers listeners to make smarter financial choices. Whether you’re considering ETF investments, planning a property purchase, or contemplating SMSF options, Stuart’s well-rounded advice is sure to provide clarity and direction.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart Wemyss delves into the essential considerations for those planning to retire within the next five years. Drawing on his extensive expertise, Stuart outlines practical strategies to ensure a smooth transition into retirement, focusing on self-funded retirees.
Key topics include resetting loan terms to maximise flexibility, adjusting or cancelling insurance as financial independence grows, and optimising your banking arrangements while still employed. Stuart also explains the tax-saving benefits of timing capital gains events post-retirement and how superannuation strategies, such as recontributions and conservative asset allocations, can safeguard your wealth against market volatility.
For those considering a phased retirement, Stuart highlights the financial and emotional benefits of continuing part-time work, allowing investments to grow while maintaining a sense of purpose.
With actionable insights into cash flow management, superannuation liquidity, and the importance of personalising your approach, this episode is packed with valuable advice for anyone nearing retirement. Whether you’re looking to fine-tune your financial plan or explore new strategies, Stuart’s guidance ensures you’re equipped to make informed decisions for a secure and fulfilling retirement.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
In this case study episode, Stuart Wemyss shares the 15-year wealth-building journey of long-term clients who successfully grew their investment assets from $479k to $3.9 million. Stuart details how this couple, now in their late 50s, strategically upgraded their family home, built a diversified property portfolio, and significantly enhanced their superannuation.
Starting in 2009 with a net worth of under $500k, their disciplined approach to asset selection and cash flow management has yielded impressive results, including outperforming median property price growth by 1–1.2% annually. Key milestones include purchasing five properties across various structures, investing in a low-cost superannuation strategy, and managing high living expenses with a combined family income of $500k.
Stuart highlights the importance of diversification, pointing out the contrasting performance of houses versus apartments in their portfolio, and how deliberate decisions, such as purchasing a property in super, ensured long-term financial security.
This episode provides valuable insights into building wealth with strategic planning and long-term focus, showcasing how Stuart’s evidence-based advice has helped clients navigate challenges while achieving remarkable financial growth. Whether you’re starting your investment journey or refining your strategy, this story is full of actionable lessons to help you succeed.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
Stuart highlights the growing concerns parents face about their children’s ability to enter the property market, offering a balanced strategy that prioritises parental financial security. The foundation of his advice is ensuring your own retirement is fully funded before considering financial support for your children. This prevents potential future dependency on them.
He explains that while parents may wish to help, their support should align with the child’s interest and motivation to buy property. Forcing the decision rarely works, as building wealth requires intrinsic motivation.
Stuart proposes a proactive strategy: parents purchasing an undervalued investment-grade apartment now, which can be sold to their children at a later date, potentially at a discounted rate. Melbourne’s stagnant apartment prices, combined with rising construction costs and low supply, make these properties an attractive investment likely to appreciate significantly over the next decade.
This approach ensures parents have control over their financial commitment while also providing a safety net for their children. If the child decides not to buy, parents can retain the property as an investment. Stuart advises professional guidance to navigate complexities like borrowing and inheritance planning, ensuring fairness if multiple children are involved.
Ultimately, he stresses putting your financial security first.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart answers diverse listener questions, offering valuable insights into navigating complex financial decisions. Whether you’re considering moving into an investment property, leveraging equity to build a share portfolio, or deciding between two locations for your next property purchase, Stuart provides clear, actionable advice tailored to different life stages and financial goals.
He explores the implications of turning your investment property into your principal residence, unpacking tax considerations and how they impact long-term financial planning. For retirees with geared share portfolios, Stuart weighs the benefits of reducing debt versus maintaining market exposure, especially in a low-tax environment.
First home buyers aren’t left out—Stuart discusses the pros and cons of units with backyard space, their land value, and how they fit into broader investment strategies. He also tackles the age-old debate about property growth potential, addressing whether Australia’s property market can sustain its upward trajectory.
Whether you’re a seasoned investor, first-time buyer, or simply planning for the future, this episode is packed with practical advice to help you make informed decisions. Tune in for Stuart’s expert take on these questions and more!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart tackles one of the toughest decisions investors face: when to hold onto an underperforming investment and when to cut your losses. While it’s tempting to sell and move on, legendary investor Charlie Munger reminds us, “The big money is not in the buying and the selling, but in the waiting.”
Stuart explores the natural cycles of markets—recovery, expansion, and downturn—and why timing matters. Some investments, like the S&P500 and the Nikkei 225, show that patience often pays off, even after prolonged periods of stagnation. But how do you distinguish between an investment that needs more time and one that’s fundamentally flawed?
He provides practical guidance for reassessing investments, highlighting the importance of revisiting your original decision, understanding opportunity costs, and knowing how to strategically exit when the timing is right. Stuart also shares real-world examples, from property markets to emerging markets, to help listeners make informed decisions.
Whether you’re a seasoned investor or just starting, this episode will equip you with the tools and insights to navigate the complex question of when to hold or sell. Tune in to learn how patience, perspective, and strategy can shape your investment success.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart tackles some of the most pressing financial and property questions from listeners. With a focus on practical strategies, Stuart shares insights into managing paid-off investment properties and how leverage can impact long-term returns. He also explores tax-effective investment options, including innovative ways to reduce taxable income through bonus share plans.
For property investors, Stuart addresses concerns around rising land taxes in Victoria versus Queensland and whether investor sentiment aligns with actual holding costs. Additionally, he dives into strategies to hedge against currency fluctuations, particularly for those with significant international stock exposure, and explains how to safeguard wealth as retirement approaches.
Listeners will also gain perspective on broader market dynamics, including how forced savings, like superannuation and endowment funds, influence asset prices. Stuart doesn’t shy away from tough topics, discussing scenarios where investments haven’t performed as expected and the lessons learned from these experiences.
Whether you’re an experienced investor or just starting out, this episode is packed with actionable advice and thoughtful commentary to help you make smarter financial decisions. Tune in for Stuart’s straightforward approach to navigating complex investment landscapes!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart Wemyss dives into the key strategies for maximising property investment returns by striking the right balance between holding costs and capital growth. Discover why compounding capital growth is the real driver of wealth accumulation and how to avoid common pitfalls of focusing too much on rental income.
Stuart explains the concept of the internal rate of return (IRR) and how it measures the relationship between your investment and return. Using real-world examples, he compares the outcomes of different property types, highlighting why high-growth, low-yield properties often outperform others in long-term wealth creation.
You’ll learn a practical two-step approach to maximise your IRR: first, by selecting a property with strong capital growth potential, and second, by taking steps to reduce holding costs. Stuart also shares a personal case study where simple cosmetic upgrades significantly boosted a property’s value, rental income, and IRR.
If you’re serious about building wealth through property, this episode is packed with actionable insights to help you choose the right asset, optimise returns, and accelerate your financial independence. Tune in to learn how to make smarter property investment decisions!
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this week’s Q&A episode, Stuart dives into a range of compelling questions that challenge conventional wisdom on property investment, superannuation strategies, and emerging investment opportunities. Whether you’re curious about optimising your borrowing capacity, choosing the right ownership structure for property investments, or understanding the nuances of splitting super contributions, this episode delivers actionable insights tailored to today’s financial landscape.
Stuart also addresses thought-provoking topics like the relationship between property values and rental growth, the pros and cons of trust structures, and the implications of new access rules for Dimensional Funds. Plus, he shares his perspective on cryptocurrency as an asset class, offering a framework for evaluating new investment opportunities in an evolving market.
With real-world examples, detailed explanations, and Stuart’s trademark clarity, this episode is packed with practical advice for anyone looking to grow their wealth, minimise tax, and make informed financial decisions. Whether you’re an experienced investor or just starting to build your financial knowledge, there’s something here for everyone. Tune in to gain insights that could shape your financial future!
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Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart explores the concept of jumbo property investing: should you go all-in on a single high-value property or spread your investment across multiple, smaller properties? With average investment loans climbing past $600,000, many Australians face the question of whether to concentrate their budget or diversify. Stuart breaks down why a “jumbo” investment – such as buying a $3 million home in a high-demand area – might yield higher returns due to scarcity and alternative uses, like potential redevelopment. However, jumbo investing isn’t without risks, from fluctuating holding costs to limited flexibility if financial situations change.
Stuart also shares a real-world example of a client who purchased a unique property in Melbourne’s Prahran neighbourhood, turning it into a highly profitable investment. And while this approach may not be for everyone, Stuart’s insights on quality over quantity, understanding market demand, and avoiding limiting beliefs apply to all investors. Whether you’re a seasoned property investor or just beginning, this episode unpacks the risks, rewards, and essential strategies behind high-value property investing. Tune in to discover if jumbo property investing could be your path to greater returns and a robust property portfolio.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this week’s Q&A episode, Stuart dives into diverse and practical strategies to help listeners navigate complex financial and investment decisions.
From a single-income family exploring the best ways to invest despite low borrowing capacity to advice for Australians living abroad, Stuart addresses the financial nuances that impact people at all stages of life. He shares tips on how a father can help his adult daughter purchase a home without jeopardising his own retirement plans, plus insights on consolidating super and investments to achieve steady cash flow in retirement.
Listeners also sought guidance on tax-efficient share investing strategies, balancing superannuation with share portfolios, and preparing for retirement abroad. For those facing similar financial dilemmas, this episode is a valuable resource filled with actionable advice and tailored financial insights.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this episode, Stuart dives into one of property investing's most critical decisions: choosing the right ownership structure. Since changing property ownership can trigger significant costs like stamp duty and capital gains tax, it’s essential to start with a structure that aligns with your long-term investment goals.
Stuart explains key considerations, including how tax implications, borrowing capacity, estate planning, exit strategy, and asset protection all play a role in finding the right fit. He also breaks down popular ownership options—like holding property in personal names, family trusts, companies, or self-managed super funds (SMSFs)—outlining the pros, cons, and tax implications for each.
Whether you’re looking for tax efficiency, greater flexibility, or asset protection, Stuart’s insights will help you navigate these options and avoid costly mistakes. Tune in to learn how a strategic ownership choice can maximise your returns and align with your overall financial goals.
Disclaimer: Tax and property regulations can change; consult a professional for up-to-date advice.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this Q&A episode, Stuart covers several insightful financial scenarios, delving into when it makes sense to wind up a self-managed super fund (SMSF), strategies to manage capital gains tax (CGT), and guidance on property purchases to assist children in building wealth. Stuart examines how an SMSF with a lower balance can sometimes lead to higher costs, suggesting alternatives that may offer reduced fees and potentially better returns. Additionally, he addresses CGT concerns, highlighting tactics that can mitigate tax impacts for those facing a large one-time gain.
A key takeaway is Stuart’s advice on supporting children’s property ownership; he explains the importance of timing, tax implications, and encouraging financial independence. His pragmatic approach underscores the need to weigh both the emotional and financial costs of early assistance, as well as the importance of financial education and empowerment. Stuart’s insights provide actionable steps for listeners at various stages of their financial journeys. Whether you’re looking to optimise your SMSF, reduce CGT, or invest for future family needs, this episode offers valuable guidance.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
New Report: The Evidence-Based Approach to Investing in Property & Shares: download here.
Read full blog here.
In this podcast, Stuart shares smart strategies for managing the rising costs of personal insurance, covering income protection, life insurance, TPD, and trauma insurance. Recognising that insurance is often essential to avoid financial disaster, he explains that premiums for these products have significantly increased over the last decade. While many people see insurance as an all-or-nothing decision, Stuart suggests a more flexible approach: gradually reducing coverage as your financial position strengthens and your responsibilities shift, like when children reach independence.
Key points include prioritising income protection insurance, which Stuart ranks as the most crucial since it safeguards your ability to earn an income. Life insurance comes next, with TPD and trauma insurance following. Stuart also offers practical ways to manage costs, such as increasing your policy’s wait period or switching to indemnity value coverage, which can be more affordable if your income is stable. He emphasises maximising tax deductions on premiums where possible to reduce after-tax costs.
Ultimately, Stuart advocates for a long-term, adaptable strategy, reminding listeners to keep insurance in line with their evolving financial goals. This measured approach ensures essential coverage without overcommitting financially.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
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IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart delves into a real-life case study showcasing the journey of a couple who began working with him in 2016 with an extensive asset portfolio, substantial debt, and high income—but faced critical decisions in managing their investments effectively. Starting with their principal home valued at $1.85 million, two investment properties with marginal equity, and $900,000 in investment assets, Stuart walks through their progression to today’s robust financial position, including a debt-free home now worth $2.5 million, a holiday property, increased super, and investment assets that have nearly tripled.
Stuart emphasises that timing is key in investment success, showing how the couple’s decision to hold onto high-performing shares instead of selling them paid off. He also underlines the importance of strategy over impulsive action, with well-timed commercial property investments proving to be a lesson in patience and risk management. Key takeaways include the power of patience, quality over timing, and having a clear strategy for assets like SMSF. This episode is packed with insights into the delicate balance of knowing when to stay invested and when to make changes.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
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In this episode, Stuart discusses the significant impact property decisions have on your financial plan, which is often overlooked by financial planners. He explains that property decisions are typically life-long, whether it's purchasing a home or investment property. Many financial planners traditionally focus on shares, bonds, and superannuation, while ignoring property as part of a comprehensive financial strategy.
Stuart shares real-life client examples to highlight how property decisions intertwine with other financial choices, such as when to sell underperforming assets, managing debt during retirement, or deciding between renovating versus upgrading. He also explores strategies for buying investment properties or future homes, particularly for clients who plan to live overseas temporarily.
Stuart emphasizes that financial planners need to expand their knowledge in property to provide holistic financial advice. By integrating property into a comprehensive financial plan, planners can help clients make smarter, long-term decisions, maximising wealth potential and ensuring financial stability.
He concludes by addressing the division between financial planners and property advisors, noting that both fields must work together for optimal client outcomes, urging for more professionals to understand both asset classes.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart Wemyss dives into some great listener questions covering a mix of financial strategies. He kicks off with advice on debt recycling, sharing practical tips on how to construct a solid share portfolio for long-term growth. Stuart also unpacks strategies for boosting super balances, especially for those with unique super funds, offering ideas on how to make the most of salary sacrifice and contribution rules.
He then tackles a popular debate: residential versus commercial property as an investment. While commercial property might offer better returns, Stuart points out the risks and costs involved. For couples buying property together, he gives helpful tips on choosing the right ownership structure based on income differences.
There’s also a discussion about smart ways to invest for kids, with Stuart sharing thoughts on long-term strategies that keep taxes in check. Lastly, he touches on how high-income earners can deal with Division 293 tax, offering some smart planning strategies. Overall, it's packed with useful tips for managing wealth and growing investments.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
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In this episode, Stuart Wemyss explores the benefits and drawbacks of using a wrap account to invest in superannuation. He explains that wrap accounts offer a similar level of transparency and control as self-managed super funds (SMSFs) but with lower costs and fewer administrative burdens.
Stuart describes a wrap account as an investment platform that provides a wide array of options, including shares, ETFs, and managed funds, allowing users to build a diversified portfolio. It simplifies tax reporting, compliance, and performance tracking. One of the key benefits is tax efficiency—investors can avoid capital gains tax by holding assets long-term and transitioning to a pension phase upon retirement.
However, wrap accounts come with administrative and investment fees, which, while lower than SMSFs, still need to be considered. Stuart advises that wrap accounts may be suitable for individuals with over $1 million in super, those confident in managing their investments, or those seeking financial advice. He also mentions Hub24 and Netwealth as highly rated platforms, though most wrap accounts are advisor-driven.
Ultimately, Stuart suggests wrap accounts are a solid option for investors seeking flexibility without the complexities of an SMSF.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
DOWNLOAD our 97-point financial health checklist here.
In this engaging Q&A episode, Stuart answers pressing listener questions on financial strategies that touch on inheritance management, property decisions, SMSF contributions, and optimal allocation of discretionary income. He offers practical insights, such as whether it's more beneficial to invest surplus income or pay down a home loan, how to approach receiving an inheritance in your 20s, and what to consider if your super balance exceeds the $1.9m cap.
Stuart also dives into property investment, explaining why it might not be the right time to sell underperforming properties and when to consider reallocating funds to super. He addresses SMSF dilemmas, offering advice on whether to pay down a loan or invest in shares based on individual long-term goals. Stuart’s detailed answers help listeners navigate complex financial situations, offering clarity and actionable advice.
Whether you’re looking to grow your wealth or make smart investment decisions, this episode provides valuable strategies to consider. Listen now to hear Stuart’s thoughtful and straightforward guidance on balancing long-term growth with short-term financial choices.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
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In this episode, Stuart provides a comprehensive overview of the best ways to invest your superannuation. He starts by exploring the landscape of industry and retail super funds, discussing the pros and cons of both. He critiques the scale and fee structures of industry super funds, noting that while they have grown significantly, their fees have not decreased proportionally. Stuart also touches on the increasing competitiveness of retail funds since the 2019 regulatory changes, highlighting Vanguard Super as a notable new player in the market.
For those seeking more control and transparency, he explains the advantages of Self-Managed Super Funds (SMSFs) but emphasises that they are only worth considering for specific types of investments, such as property. He introduces wrap products as an alternative, offering flexibility and control without the administrative burden of an SMSF. He concludes that these options can offer more control and potentially better cost-efficiency compared to traditional industry funds.
In part two of the podcast, Stuart promises to delve deeper into the costs and benefits of wrap products and help readers decide between industry, retail, wrap platforms, or SMSF based on their individual needs.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
DOWNLOAD our 97-point financial health checklist here.
In this insightful Q&A episode, Stuart Wemyss addresses a range of topics that are crucial for anyone looking to grow their wealth and make informed financial decisions. He shares his thoughts on choosing the right investment strategies, including how to balance fees and returns when selecting super funds. Stuart also explores the growing trend of ethical investing, discussing whether prioritising socially responsible investments could impact long-term returns.
For those looking to upgrade their homes or build wealth for a major purchase, Stuart offers practical advice on how to strategically plan and achieve financial goals within a set timeframe. He breaks down the key factors that drive wealth creation and provides tips on how to navigate market cycles.
Throughout the episode, Stuart’s clear and evidence-based approach offers listeners valuable insights, helping them align their investments with both personal values and long-term objectives. Whether you're close to retirement, planning a big move, or exploring the world of ethical investing, this episode provides practical strategies for anyone looking to maximise their financial potential.
Do you have a question? Email: questions@investopoly.com.au or for a faster response, post a comment on the episode's video over on YouTube: https://www.youtube.com/@investopolypodcast/podcasts
If you're interested in working with my team and me, discover how we can work together here: https://prosolution.com.au/prospective-client/
If this episode resonated with you, please leave a rating on your favourite podcast platform.
Subscribe to my weekly blog: https://www.prosolution.com.au/stay-connected/Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog: https://prosolution.com.au/books/
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
DOWNLOAD our 97-point financial health checklist here.
Read full blog here.
In this episode, Stuart delves into the key indicators property investors should pay attention to, beyond the typical headlines. While economic factors like interest rates and unemployment often dominate discussions, Stuart explains why understanding the psychology of owner-occupiers and credit policy settings is crucial. With over two decades of experience, he shares insights from his recent interview with David Bassanese, highlighting how behavioural finance and lending conditions impact property price movements. Stuart also breaks down the importance of interstate migration trends, which reflect homeowner sentiment and can signal changes in the market. He critiques the overemphasis on housing supply shortages and discusses how credit restrictions are pushing investors towards more affordable areas, contributing to price growth in cities like Perth and Adelaide. This episode provides a deeper look into what truly drives property price growth and offers valuable advice for making informed investment decisions.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart takes you through an incredible case study of a young couple who transformed their finances, growing their net worth from $60k of investment assets to over $1.6 million in just 8 years. When they started working with Stuart in 2016, they were 28 years old, and had a home valued at $400k, $60k in super, and $100k in HECS debt.
Stuart explains how they strategically purchased two investment properties, including a Queensland property that doubled in value to $1.6 million. They also acquired a dental practice, adding another $400k in equity. By 2024, their net worth had skyrocketed to over $3 million, thanks to their successful investments in property, super, and shares.
This episode highlights the importance of laying a strong investment foundation and using tailored advice to achieve long-term financial goals. Stuart shares valuable insights on timing, structuring, and even the challenges of overcapitalising. Whether you're starting out or looking to grow your wealth, this case study showcases how strategic planning and disciplined execution can lead to impressive financial growth.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
...
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Read full blog here.
In this episode, Stuart sheds light on the pitfalls of relying too heavily on property data when making investment decisions. While data can be a valuable tool, he explains why it's often misleading in the property market, especially compared to the more reliable stock market data. Stuart dives into the wide variations between different data publishers—highlighting examples where property price changes ranged from 3.3% to 16.7% in the same year!
He breaks down the key limitations of suburb-level data, explaining how thinly traded markets and individual sales can distort the true value of a property. Stuart also cautions that factors like poor marketing campaigns or emotionally driven buyers can skew sales prices, making it even harder to rely solely on data.
For those serious about property investing, Stuart emphasises the importance of combining data with local expertise. He discusses why two-thirds of property buyers are motivated by lifestyle choices rather than financial gain, adding another layer of complexity to the market.
If you’re looking to navigate the property market smartly, this episode is a must-listen, offering actionable advice on how to avoid data traps and make informed, confident investment decisions.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this Q&A episode, Stuart tackles a variety of listener questions.
Key topics include commercial property investment funds versus index funds, superannuation strategies, trust structures for investments, financial priorities during maternity leave, employee share risks, and eligibility for first home owner grants.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
...
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Read full blog here.
In this episode, Stuart dives into the rising cost of financial advice and what it means for Australians. With ongoing advisor fees often starting at $5,000 per year, many advisors now focus on long-term client relationships, leaving fewer options for those seeking once-off advice. Stuart explains how this shift forces many to navigate financial decisions independently, a challenge that can be daunting but not impossible.
He shares four key steps to take before hiring a financial advisor: first, get a clear understanding of your cash flow; second, educate yourself on fundamental financial concepts like superannuation, property vs shares, and leveraging debt to invest; third, assess whether your next financial move is obvious or if you truly need strategic advice; and finally, make sure your financial house is in order by addressing any outstanding issues like consolidating super or building a savings buffer.
Stuart's advice empowers listeners to take proactive steps toward financial independence while highlighting when it might be necessary to seek professional help. Whether you're just starting your wealth-building journey or considering your next big move, this episode offers practical guidance to help you make smarter financial decisions.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this episode, Stuart explores a remarkable case study of a client who increased their investment assets by 5.9 times in just six years. Starting in 2018 with a net worth of $2.9 million, primarily in home equity and superannuation, the client has grown their wealth to $5.1 million today, marking a 170% increase in net worth. Stuart breaks down the key factors behind this success, including the strategic purchase of a Queensland property in 2018, which gained over $700k in equity, and an Elwood apartment in 2022.
Stuart also highlights the importance of market timing, strong investment in superannuation, and careful cash flow management, which allowed the client to invest in renovations, super, and a corporate beneficiary. The case study underscores the value of timely advice and disciplined financial planning.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
...
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Read full blog here.
In this episode, Stuart explores the ongoing debate about the future of interest rates and inflation, addressing key questions about when the Reserve Bank of Australia (RBA) might begin cutting rates. He highlights the disparity between the RBA’s forecasts, which predict inflation will only stabilise by 2026, and market expectations, which signal rate cuts as early as 2025. Drawing on historical trends and market insights, Stuart discusses the potential risks of prolonged inflation and how government spending and a tight labour market are contributing to this issue.
He also explains why Australia’s current strategy differs from other countries, noting that our reliance on variable-rate mortgages makes consumers more sensitive to rate changes. With historical data showing inflation often reaccelerates Stuart cautions that any potential rate cuts in 2025 could be short-lived, leading to further hikes.
Stuart offers a balanced view on whether the RBA can achieve the elusive "soft landing" or if more economic pain lies ahead. This episode is essential listening for anyone interested in understanding the complex factors shaping Australia's economic future.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this Q&A episode, Stuart tackles a variety of listener questions on property investment, super contributions, and share portfolios. One listener asks whether it’s wise to leverage for an investment property now, even if it might need to be sold in the next five years. Stuart emphasises the long-term benefits of property ownership, combining gearing with time, and suggests a strategy to buy an upgraded home and rent it out.
Another listener seeks advice on redirecting voluntary super contributions to their mortgage for short-term cash flow relief amid rising interest rates. Stuart supports this approach, provided cash flow is well-managed, noting that adjusting investments during economic challenges is common.
There’s also a query about when to sell single stocks that have performed well. Stuart provides a straightforward framework to evaluate stocks based on value and growth prospects, offering practical advice on taking profits.
Stuart also advises on whether to convert a super fund into a wrap account 10 years before retirement, weighing the costs of capital gains tax and the potential benefits of professional advice. This episode provides valuable insights into key financial decisions across different life stages.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
...
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Read full blog here.
In this episode, Stuart tackles a crucial question for property investors: How long does it take for an investment property to cover its costs? He delves into the cash flow dynamics of property investment, explaining why most properties start as cash flow negative and what you can do to improve this over time.
Stuart discusses the importance of understanding the timeline for your property to become cash flow neutral, especially in the context of retirement planning. He explores strategies like debt reduction through offset accounts, making capital improvements to boost rental income, and how these actions can accelerate your property’s journey to positive cash flow.
The episode also examines the potential trade-offs of selling a property to reduce debt and improve cash flow, highlighting when this might be a viable option. Stuart emphasizes the need for a long-term plan that includes both acquiring high-quality assets and proactively managing cash flow to ensure your property portfolio supports your financial goals, particularly as you approach retirement.
If you're navigating the complexities of property investment, this episode offers practical insights to help you make informed decisions and maximise your investment's potential.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this case study episode, Stuart delves into the transformative journey of a couple who started working with Prosolution in their mid-40s, back in September 2016, with a $900k investment portfolio. Over the past eight years, they've grown their investment assets to $2.5 million, a remarkable 2.8x increase.
Stuart discusses how Prosolution played a crucial role in cleaning up their investments and ownership structures, including eliminating expensive managed funds, optimising direct shares, and strategically using a trust with a corporate beneficiary. The clients also benefited from expert guidance on superannuation and smart allocation of surplus cash flow.
One of the significant moves was purchasing an investment property in 2017, which has appreciated by $200k. Stuart also shares insights into the emotional relief the clients experienced by outsourcing complex financial decisions, allowing them to focus on their careers and personal lives.
Throughout the episode, Stuart highlights the importance of tax efficiency through corporate beneficiaries, super contributions, and gearing strategies, noting that while gearing hasn't fully matured yet, it's a solid foundation for future growth. This episode offers valuable lessons on wealth management and strategic financial planning.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
...
DOWNLOAD our 97-point financial health checklist here.
Read full blog here.
In this episode, Stuart explores the critical question of whether financial advice is worth the cost. He delves into how the value of advice is closely tied to the amount you have to invest, the complexity of your financial needs, and the range of services required.
Stuart highlights how professional advice can optimise investment returns, reduce taxes, and prevent costly mistakes through behavioural coaching. He also discusses the true value of advice, emphasising its role in helping you achieve long-term lifestyle goals rather than merely chasing returns.
Additionally, Stuart provides a breakdown of the costs associated with financial advice and shares insights on when it might be better to take a DIY approach to managing your finances.
This episode is packed with practical guidance for anyone considering whether to engage a financial advisor.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
...
DOWNLOAD our 97-point financial health checklist here.
Read full blog here.
In this episode, Stuart delves into why Australia’s share market often seems to underperform compared to global markets, despite occasional bright spots. He reflects on the recent 6% market drop followed by a modest recovery in Australia compared to the US. While historical data shows a relatively small difference in long-term returns between Australian and international markets, Stuart highlights how recent years have been driven by the tech boom, particularly in the US. Companies like the "Magnificent 7" have propelled global indexes, but Stuart cautions that their future growth may already be priced in, making them riskier investments moving forward.
He discusses forecasts by Research Affiliates, predicting strong future returns for the Australian market, largely driven by high dividend yields. With expected annual returns of 7.9% for Australian shares, Stuart argues that Australia could outperform global markets in the coming decade. However, he advises against neglecting international exposure, as Australia makes up only a small portion of global markets and is heavily concentrated in sectors like mining and banking. This episode is packed with insights for investors looking to optimise their portfolios for the future.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
...
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
In this case study episode, Stuart takes listeners through a fascinating client journey that showcases a 3.2x growth in investment assets over nine years. Starting with a net worth of $2.7 million in 2015, the clients have seen their wealth soar to $6.5 million by leveraging smart financial strategies. Stuart shares how they helped these clients build a $3.5 million home, increase equity in a holiday property from $350k to $1.6 million, and boost their superannuation from $700k to $2.15 million. They also acquired an investment property in Clifton Hill, which is set to underpin future super growth despite modest initial returns.
The episode highlights key learnings, including the importance of having a clear strategy around repaying home debt, divesting employee shares to reduce debt, and optimising superannuation for maximum returns. Stuart reflects on how the COVID boom perfectly timed the holiday house investment and explains why planning is ultimately about achieving life goals, not just financial returns. Whether you're looking for practical insights or inspiration from real-life success, this episode delivers both.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
...
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Read full blog here.
In this episode, Stuart revisits the concept of "liveinvesting," a strategy where you invest more in your family home to secure a prime location with strong growth potential. As property prices in cities like Melbourne are currently more affordable, Stuart explores whether now is the perfect time to implement this approach.
He explains how liveinvesting can offer significant tax-free capital growth, improve your lifestyle, and boost your retirement savings by downsizing later. However, Stuart also highlights the risks, including the lack of tax-deductible home loan interest, concentration risk, and the potential emotional challenge of downsizing in the future.
With Melbourne's property market poised for potential growth and interest rates likely to stabilize, Stuart discusses why this might be an opportune moment to consider liveinvesting.
Tune in to learn more about this innovative strategy and whether it could be the right move for your financial future.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
...
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Read full blog here.
In this episode, Stuart delves into the six crucial considerations for selling a property, offering valuable insights to maximise your success. He begins by emphasizing the importance of presentation and making small improvements to attract buyers and achieve a higher sale price. Stuart discusses the best times to sell, noting that while spring is popular, other seasons might be more advantageous depending on your property's unique features and location.
Choosing the right real estate agent is highlighted as a key factor, with Stuart advising on what to look for in an agent and the benefits of vendor advocates. He then covers the complexities of taxation, explaining how Capital Gains Tax (CGT) can impact your sale and offering strategies to minimize liability. Mortgage management is another critical topic, as Stuart outlines steps to ensure you retain control over the sale proceeds.
Finally, Stuart addresses tenancy agreements, providing guidance on selling tenanted properties and the importance of planning ahead. This episode is packed with practical advice and expert tips to help you navigate the property selling process with confidence and success. Don't miss it!
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
...
Do you have a question? Email questions@investopoly.com.au and Stuart may answer it in the podcast.
In this case study episode, Stuart explores the impressive journey of a couple who have transformed their net worth from $868k in 2010 to over $5.4m today. Starting with a modest portfolio that included a primary residence, a Tasmanian property, shares, and superannuation, the couple strategically diversified and expanded their investments. Stuart highlights key moves such as acquiring a commercial property for their business, investing in shares, and navigating the challenges of cash flow management while funding private school fees.
Listeners will learn valuable insights from their experiences, such as the impact of quality investments like their double-fronted Victorian home in Northcote, which contributed significantly to their wealth increase. Stuart also discusses the importance of timing and location in property investments, comparing different outcomes from commercial property purchases.
The episode underscores the power of patience and compounding, with Stuart noting that the couple's continued success now hinges on time rather than additional contributions. Key takeaways include the significance of cash flow management, the benefits of forced savings through mortgages, and the value of taking action within one's budget constraints. This episode is packed with practical lessons and inspiration for anyone looking to build and manage a successful investment portfolio.
DOWNLOAD our 97-point financial health checklist here: https://prosolution.com.au/download-checklist/
Do you have questions? Email questions@investopoly.com.au
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
...
Do you have a question? Email questions@investopoly.com.au and Stuart may answer it in the podcast.
Read full blog here.
In this episode, Stuart delves into the critical topic of selecting the best super fund for 2024. With many super funds delivering impressive double-digit returns in the past financial year, Stuart highlights the disparity among funds, particularly in terms of transparency and risk. He emphasizes the importance of scrutinizing funds' investments, especially those with unlisted assets, and the potential conflicts of interest tied to industry funds' connections with trade unions and political parties.
Stuart advises on the benefits of choosing super funds with a significant allocation to listed investments for better transparency and reliability. He also discusses the recent legislative changes allowing super funds to provide limited financial advice, noting the potential conflicts of interest.
For those with substantial super balances, Stuart suggests exploring alternatives to industry funds, such as wrap platforms, which offer greater transparency and potentially lower fees. He champions UniSuper as the top industry fund due to its consistent strong returns, low exposure to unlisted assets, and competitive fees.
Tune in to gain insights on maximizing your super returns and making informed decisions about your retirement savings.
Do you have a question? Email to questions@investopoly.com.au and Stuart will answer in the podcast.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Do you have a question? Email questions@investopoly.com.au and Stuart may answer it in the podcast.
In this case study episode, Stuart Wemyss shifts from case studies to an interactive Q&A format, addressing several listener inquiries. The episode kicks off with strategies for early retirement, where Stuart discusses balancing investment approaches, living expenses, and aggressive gearing techniques to achieve financial independence in your 40s. He also delves into superannuation contributions and managing the transfer balance cap.
Next, he explores investment structures, focusing on family trusts and corporate beneficiaries. Stuart highlights the tax implications and benefits of these entities, providing practical insights into capital gains tax considerations. An example calculation demonstrates the significant financial impact of working longer versus drawing on superannuation, offering valuable advice for those contemplating their retirement timeline.
Stuart also tackles the challenge of finding holistic financial advice and providing tailored investment recommendations based on current assets and income. He suggests focusing on super contributions over additional property investments for a more balanced financial plan.
Listeners are encouraged to submit their questions for future Q&A episodes, and Stuart announces plans for upcoming webinars and live events to discuss advisor fees and selection criteria further. This interactive episode promises to equip listeners with actionable insights and personalized advice for their financial journeys.
Do you have a question? Email to questions@investopoly.com.au and Stuart will answer in the podcast.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Do you have a question? Email questions@investopoly.com.au and Stuart may answer it in the podcast.
Read full blog here.
In this episode, Stuart delves into the essential topic of how much superannuation you need for a comfortable retirement. Drawing on a recent discussion with James Kirby from The Australian newspaper, Stuart explores the complexities of retirement planning, including how long your retirement might last and the shortcomings of traditional super calculators. He emphasises the importance of a perpetual portfolio, where your investment returns exceed your living expenses, ensuring your capital remains intact.
Stuart breaks down two key scenarios: relying solely on super and combining super with property investments. He explains how each approach can provide financial security and highlights the critical factors to consider, such as initial investment base and asset allocation. With practical advice and real-world examples, Stuart offers listeners a comprehensive guide to planning for a financially secure retirement, helping you decide whether a perpetual portfolio or a mix of super and property is right for you. Tune in to learn how to achieve a sustainable retirement plan that safeguards against longevity risk and ensures peace of mind for the future.
Do you have a question? Email to questions@investopoly.com.au and Stuart will answer in the podcast.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Do you have a question? Email questions@investopoly.com.au and Stuart may answer it in the podcast.
In this case study episode, Stuart takes us through the financial journey of a high-income client who started with mortgage advice in 2007 and expanded to holistic financial advice in 2014. The client's initial assets included a primary residence worth $1.2 million. Significant property investments followed, including a $3.8 million Camberwell property and several other strategic acquisitions.
In 2016, the client began share investing, contributing $10,000 per month, which has grown substantially. By 2022, the client diversified into a lifestyle asset with a $2.4 million holiday home in Lorne. Now, with a net worth exceeding $15 million, including their home, the client is embarking on a major renovation of their primary residence.
Key insights include the importance of gearing early to leverage future growth, strategic investing to control cash flow, and the financial freedom to invest in lifestyle assets.
This episode offers valuable lessons on reducing debt, building wealth, and achieving financial security.
Do you have a question? Email to questions@investopoly.com.au and Stuart will answer in the podcast.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Do you have a question? Email questions@investopoly.com.au and Stuart may answer it in the podcast.
Read full blog here.
In this episode, Stuart dives into the world of share investing by exploring four alternative rules-based indexing strategies beyond the traditional market cap approach. He starts with a brief history of market cap indexing and highlights its major shortcomings, such as overexposure to overvalued stocks and rebalancing inefficiencies. Stuart then introduces four compelling alternatives:
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Equal Weight Indexing: This strategy allocates an equal amount to each company in an index, reducing the dominance of large-cap stocks and providing balanced exposure across all company sizes.
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Dimensional Indexing: Backed by rigorous academic research, this approach adjusts conventional indices based on factors like value, size, and profitability, aiming for higher long-term returns.
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Quality Factor Indexing: This method selects stocks based on objective quality metrics, offering a defensive strategy against economic downturns by focusing on profitable, low-debt companies.
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Value Indexing: By investing in attractively priced stocks, this strategy aims to capitalize on undervaluation for above-average future returns.
Stuart also discusses the importance of considering factors such as liquidity, fees, and diversification before investing in any ETF. Whether you have a small or large portfolio, this episode provides invaluable insights to help you navigate the complex world of share investing.
Do you have a question? Email to questions@investopoly.com.au and Stuart will answer in the podcast.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart delves into the transformative journey of a couple who embraced the principle that quality trumps quantity in property investment. Beginning their journey in 2015 with a net worth of $1.35 million, their portfolio included several underperforming properties. Through strategic advice, they sold these assets and reinvested in higher-quality properties, significantly boosting their financial position. Key moves included purchasing a property in South Yarra and a home in Haberfield with an investment lens, which later sold for impressive gains.
Fast forward to 2024, their net worth has almost tripled to nearly $4.1 million. Stuart highlights crucial insights: the importance of replacing underperforming assets with high-quality ones, the power of focusing on fewer, superior properties, and the flexibility to pivot investment strategies based on changing financial circumstances. Additionally, he underscores the value of investing in one's home as a potent strategy for wealth building.
This episode is packed with practical lessons on how prioritising quality and adaptability can lead to substantial financial growth, making it a must-listen for anyone looking to optimise their property investment strategy.
Do you have a question? Email to questions@investopoly.com.au and Stuart will answer in the podcast.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Do you have a question? Email questions@investopoly.com.au and Stuart may answer it in the podcast.
Read full blog here.
In this episode, Stuart Wemyss delves into the significant impact of the current cost-of-living crisis on retirement planning. Stuart highlights how the sharp rise in everyday expenses over the past four years, often outpacing general inflation, can hinder your ability to save for retirement. He explains that maintaining your standard of living now requires a larger wealth base, potentially delaying retirement plans.
Stuart provides actionable advice on managing this crisis, including the importance of making spending visible to better control cash flow and the potential benefits of taking on more investment risk through growth assets and leveraging. He emphasises the necessity of small sacrifices now to avoid larger compromises in retirement.
Drawing on real-life examples and expert insights, Stuart outlines strategies to combat rising costs, such as diversifying investments, particularly focusing on shares and property, and the importance of geographical diversification. He also discusses the value of ongoing, independent advice to navigate conflicting strategies and maximise investment returns.
Tune in to learn how to effectively adjust your financial planning to ensure a secure and comfortable retirement despite the challenges posed by the cost-of-living crisis.
Do you have a question? Email to questions@investopoly.com.au and Stuart will answer in the podcast.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart Wemyss explores the journey of a client who has successfully navigated property investment within their superannuation, shares, and the importance of diversification. Working with the client since 2009, Stuart details their progression from an initial $4.8 million in assets to an impressive $9 million. The episode highlights the client's strategic acquisition of five apartments in Sydney and Melbourne, achieving significant long-term growth rates of 6.3% and 7.1% per annum, respectively.
Stuart delves into the client's approach, which included geographical diversification and the strategic allocation of funds into shares within their superannuation. He also shares valuable insights on cash flow management and the impact of providing financial assistance to their children. However, Stuart also discusses areas where the client could have improved, such as considering different property types and the value of ongoing, independent advice.
Listeners will gain a comprehensive understanding of the client's successes and the lessons learned from their investment journey. Stuart's expert analysis provides actionable takeaways for anyone looking to diversify their investment portfolio and maximise returns.
Tune in to discover how a well-rounded investment strategy can lead to substantial wealth growth and financial security.
Do you have a question? Email to questions@investopoly.com.au and Stuart will answer in the podcast.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Send us a Text Message.
Read full blog here.
In this episode, Stuart delves into the often-overlooked downsides of property investing. While the benefits are frequently highlighted, it's crucial to recognise and mitigate the potential drawbacks. Stuart outlines six key reasons why property might not be the best investment choice for everyone. He explains how compounding returns require decades to materialise fully, making property a long-term commitment. He also discusses the hands-on nature of property management, the typically low and unreliable rental income, and the illiquidity of property compared to other assets like shares.
Additionally, property investments are susceptible to legislative and tax changes, posing significant risks. Stuart emphasises the substantial financial commitment involved in buying investment-grade property and the importance of being prepared for this commitment. Throughout the episode, Stuart provides practical mitigants for each downside, such as diversifying investments and ensuring a solid financial plan.
By the end of the episode, listeners will gain a balanced perspective on property investing, understanding both the potential rewards and the inherent risks. Stuart's insights aim to equip investors with the knowledge to make informed decisions and build a resilient, diversified investment portfolio.
Tune in to learn more about the complexities of property investment and how to navigate them effectively.
ASK STUART A QUESTION HERE: https://youtu.be/8flNZYOeFoQ (and subscribe to the channel)
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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In this case study episode, Stuart delves into the impressive financial journey of a client who staunchly avoids property investment. Starting in 2016 with $760k in shares and $595k in debt, the client had a combined super of $324k and no home loan on a $2.5m residence. With an income of $440k and living expenses of $96k, his net investment assets stood at $490k. Fast forward to today, his shares have grown to $2.15m with a $725k loan and super has increased to $1.07m. Additionally, he acquired a $1.7m holiday house with a $1m debt. Despite receiving a $400k inheritance in 2016, his net investment assets have tripled to $3.2m.
Key insights from this journey include the benefits of strategic gearing, disciplined tracking of wealth and performance, and effective cash flow management. The client’s portfolio, focused on growth with a mix of direct stocks and ETFs, benefitted from timely investments in Macquarie and US markets (VTS). A lifestyle-driven decision to purchase a coastal property through a buyer’s agent in 2020 has also paid off, appreciating from $1.4m to $1.7m. Stuart highlights how these strategies and decisions have collectively contributed to a threefold increase in net assets.
ASK STUART A QUESTION: https://youtu.be/8flNZYOeFoQMy YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart delves into the intriguing question: should you invest 100% of your super in shares? He explores the conventional wisdom of diversified asset allocation, highlighting the potential benefits of focusing entirely on shares given the long-term nature of superannuation. Stuart explains how pre-mixed investment options and lifecycle strategies manage your super, often diluting potential returns.
He argues that volatility isn't a concern for long-term investors, and shares historically deliver higher returns over decades. Stuart also addresses potential risks, such as market concentration, and advises on using rules-based, low-cost index strategies to mitigate these. He cautions that an all-in shares approach might not suit everyone, especially nervous investors or those nearing retirement.
Additionally, Stuart discusses the role of listed property and the considerations for using geared ETFs within super. He challenges conventional financial advice, advocating for a more aggressive investment strategy for those with a long horizon and suitable risk tolerance.
Tune in to hear Stuart's insights on maximising your super's growth and whether a 100% shares investment strategy could be right for you.
ASK STUART A QUESTION: https://youtu.be/8flNZYOeFoQMy YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart shares the long-term success story of a client he has worked with for over two decades. Starting with mortgage broking 20 years ago, this client has built an impressive investment property portfolio worth $23.5 million. The key to their success? Patience and strategic property selection. With an average holding period of 25 years, this client has seen properties grow at an average annual rate of 6.8%, resulting in substantial wealth accumulation.
Stuart highlights the importance of investing in blue-chip suburbs and unique properties with high demand, while also noting the impact of geographical diversification and thoughtful ownership structures. Despite some properties performing better than others, the overall portfolio has consistently delivered strong returns. Stuart emphasises that the next 30 years may require even more careful selection due to changing borrowing capacities and market conditions.
Listeners will gain valuable insights into the benefits of long-term property investment, the significance of location and uniqueness, and the need for a strategic approach. This episode is a testament to the power of patience, careful planning, and the right investment decisions.
ASK STUART A QUESTION: https://youtu.be/8flNZYOeFoQMy YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart explores the soaring costs of holding investment properties and whether they still make financial sense. Over the past four years, significant hikes in expenses like insurance, council rates, and maintenance, coupled with a cash rate increase from 0.10% to 4.35%, have challenged property investors. Despite anticipated rental income growth, the discussion reveals that higher holding costs demand properties to achieve even greater capital growth to maintain desired returns.
Stuart delves into long-term investing assumptions, noting the historical and current trends in expenses and interest rates. The analysis shows that while property returns are sensitive to interest rates, they are less so to holding costs. Stuart emphasises the importance of selecting properties with strong potential for long-term capital growth and provides practical tips for managing expenses.
Tune in for insightful strategies to navigate the current property investment landscape and maximise your returns. Don't miss out on the detailed analysis and expert advice in this episode.
Listen now: Is It Still Worthwhile to Invest in Property?.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart explores the remarkable journey of a couple on the road to early retirement. When they began working together in 2015, the couple had a net worth of $420k. Fast forward to today, their net worth has soared to $2.5m, driven by strategic property decisions and smart investment moves. They purchased their first investment-grade apartment in 2016 for $488k, followed by a house in Brisbane in 2019 for $885k, which is now worth $1.4m. They also upgraded their home in 2022 and have accumulated $220k in shares through diverse ETFs.
The couple's family income has seen a substantial increase from $270k in 2017 to $570k today. With this growing income, they have balanced improving their lifestyle and making prudent long-term investments. Stuart highlights their unique approach of being very hands-on with tracking their wealth and cash flow while also diligently following professional advice.
The next phase of their strategy involves investing in shares to build what Stuart calls a "third super fund," aiming to retire within the next decade. This episode offers valuable insights into achieving financial independence through disciplined planning and investment.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart issues a crucial warning to couples: don't let one spouse handle all the financial matters. While it's natural for one partner to take the lead, it's vital for both to stay involved and informed. Stuart highlights the importance of understanding and communicating about financial documents, ensuring both partners know what they’re signing. He stresses the need for both spouses to be prepared for any eventuality, from navigating financial decisions in the event of a loss to handling a relationship breakdown.
Listeners will learn practical tips to engage their spouse in financial discussions, such as scheduling regular financial check-ins and simplifying complex topics. Stuart also advises on the importance of having a comprehensive spreadsheet of assets and liabilities, and how to prepare a letter of wishes for guidance.
With insights into maintaining financial independence and the potential pitfalls of relying solely on one partner, this episode is a must-listen for anyone seeking to safeguard their financial future and ensure both partners are equally empowered and prepared. Tune in to understand why protecting yourself financially is a shared responsibility, not one to be delegated entirely to your spouse.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart and Frencham unveil a compelling 15-year journey towards financial freedom through property and superannuation. Beginning with a modest net worth of $2.4 million in 2008, their client's portfolio has surged to nearly $10 million today. Through strategic property investments, including homes in desirable locations like Hawthorn and Toorak, and optimising superannuation investments, they've achieved remarkable growth.
Key insights reveal the importance of aligning property investments with long-term goals and having a clear strategy for homeownership without debt. The success story underscores the pivotal role of superannuation in wealth accumulation and the value of professional guidance throughout the journey.
Tune in to discover how prudent property investments and smart superannuation strategies can pave the way to financial independence and long-term prosperity.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart explores the often-overlooked dangers of being too risk-averse in financial planning. He argues that an excessive focus on reducing perceived financial risk can jeopardise your lifestyle goals due to the high opportunity costs involved. Many people fall into the trap of continuously repaying debt at the expense of exploring other investment opportunities, resulting in a limited risk tolerance that may not serve them well in the long run.
Stuart emphasises the importance of becoming comfortable with perceived risk and adopting a long-term investment strategy. He explains that most people share a similar risk profile, seeking average returns over time rather than chasing high-risk, high-reward scenarios. He focuses on evidence-based and rules-based investing and illustrates how market volatility is less concerning when viewed over extended periods.
Education is highlighted as the key to reducing perceived risk. Investors can make informed decisions without fear by understanding basic investment principles and seeking professional advice. Stuart also suggests starting small to build confidence and familiarity with investments.
Listeners will gain valuable insights into balancing risk and reward, and how taking calculated risks is essential for achieving financial and lifestyle goals. Tune in to learn if you're taking enough risk in your financial strategy.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart delves into the financial journey of a client he began working with in 2012. Back then, the client had $800k in net investment assets, including shares primarily in Rio Tinto, superannuation, and a property in Hawthorn East. Today, that figure has grown to almost $2.8 million.
Despite challenges, such as underperforming investment properties and a shift to consulting work post-2017, strategic decisions have led to significant growth. A key move was gradually selling down Rio shares, especially after their value peaked at over $130, and redirecting the proceeds into superannuation.
Listeners will gain valuable insights into the importance of not having your wealth tied to the same industry as your income and the critical role of superannuation performance. The episode highlights the balance between holding and selling investment properties and underscores a gradual strategy to increase the proportion of wealth in superannuation.
This case study exemplifies how careful planning and strategic asset management can lead to substantial financial growth, even when faced with market fluctuations and changes in employment. Tune in to learn more about achieving financial stability and growth through diversified investments and proactive superannuation contributions.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart tackles a common investment dilemma: should you buy an investment-grade apartment in a blue-chip location or a house in a secondary area? He delves into the key factors influencing your decision, such as land value, potential for capital growth, and maintenance costs. Stuart explains why houses typically offer higher returns due to their land value but also highlights the hidden potential in older apartments with significant land components. He examines the middle ground with villa units and discusses the impact of your budget on the best investment choice. Additionally, Stuart explores market cycles, the importance of location quality, and future growth prospects. Whether you're eyeing a city apartment or a suburban house, this episode provides crucial insights to help you make an informed investment decision. Tune in to understand which property type aligns best with your financial goals and market conditions.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart delves into the financial journey of a couple who began building wealth later in life. Starting in 2009, they purchased an entry-level apartment in South Yarra for $390k. Fast forward to 2015, Stuart joined them, and their wealth-building strategy took a serious turn. By 2016, they acquired an investment property in Richmond for $1.3m and restructured their superannuation, moving one spouse from a subpar fund to a wrap account while the other stayed with a solid industry fund.
Over the past nine years, their focus on maximising cash in offset accounts and making substantial super contributions has paid off, growing their superannuation from $770k in 2015 to over $2.3m today. Key insights include the benefits of starting investments earlier, the importance of asset quality, and the power of diversification. Stuart highlights that reaching a critical mass in super allows returns to significantly boost wealth, setting the stage for a comfortable retirement. This episode is a compelling listen for anyone looking to understand the impact of strategic financial decisions made later in life.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart provides a comprehensive guide to end-of-financial-year tax planning strategies that can help maximise your tax savings. With a wealth of practical tips and considerations, he breaks down complex tax concepts into easily digestible insights.
Whether you're a high-income earner, a business owner, or simply looking to optimise your tax position, Stuart's advice covers a range of scenarios and opportunities. From maximising super contributions and utilising unused caps to navigating tax brackets and deductions, he offers actionable steps to potentially save thousands in tax liabilities.
Stuart's holistic approach also explores strategies for spouses, trusts, and businesses, ensuring no stone is left unturned in the quest for tax efficiency. His clear explanations demystify the intricacies of tax planning, empowering listeners to make informed decisions.
With the end of the financial year rapidly approaching, this episode is a must-listen for anyone seeking to minimise their tax burden while staying compliant. Tune in to gain valuable knowledge and unlock potential savings that could significantly impact your overall financial well-being.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart shares an insightful journey with long-term property investor clients. He highlights key lessons learned about the importance of diversification and adapting strategies over time.
Despite diligently managing cash flow and contributions, the clients' concentrated property portfolio delivered underwhelming returns initially. However, Stuart reveals how diversifying into other asset classes and taking an evidence-based approach ultimately put them on track for a comfortable retirement.
Along the way, he provides valuable insights on pitfalls to avoid when investing in property, recognising when professional advice is warranted, and the merits of strategic portfolio diversification. Stuart will leave listeners with a better understanding of the nuances involved in building a resilient investment portfolio over the long haul.
Whether you're a property investor or just starting out, this episode offers a relatable and thought-provoking perspective you won't want to miss. Tune in to learn from these clients' experiences and gain practical tips to enhance your own wealth-building journey.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here
In this episode, Stuart delves into the concept of strategic asset allocation and its critical importance in maximising long-term investment returns. He presents evidence demonstrating the unpredictability of short-term returns across asset classes, highlighting the need for diversification. However, Stuart argues that long-term returns are more predictable due to the principle of mean reversion.
He advocates for an approach that involves actively allocating new capital towards undervalued asset classes or geographical markets, rather than blindly following a one-size-fits-all asset allocation model. Stuart believes that this strategy, though potentially leading to imbalanced portfolios in the short term, positions investors for superior long-term performance by capitalising on opportunities for above-average future returns.
Throughout the episode, Stuart emphasises the importance of maintaining a long-term perspective, employing evidence-based investment strategies, and resisting the temptation to chase short-term returns. He challenges the conventional wisdom of adhering to theoretical asset allocation models, arguing that maximising client returns should be the primary objective, even if it means adopting an unconventional approach.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart shares a poignant experience to highlight the importance of involving loved ones in financial planning and ensuring they are well informed and prepared. He recounts working with a client, Grant, since 2009, focusing on debt reduction, superannuation, and share investing.
Tragically, Grant passed away suddenly in 2018, leaving his wife in an unfamiliar situation, having never been involved in the financial decision-making process. Stuart had to guide Grant's wife through understanding their investments, making important decisions about their home, and properly managing the estate.
While everything eventually worked out, and Grant's wife is now in a comfortable position for retirement, Stuart emphasises the significant stress and challenges that could have been avoided had proper measures been taken earlier.
The key lessons include ensuring spouses are aware of the financial situation, introducing them to advisors, and keeping important documents like wills and passwords up-to-date. Stuart reminds listeners of the critical importance of proactive financial planning, not just for themselves but also for the well-being of their loved ones.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart makes a compelling case for why the Melbourne property market is poised to deliver the strongest capital growth among Australian capital cities over the next decade. Despite negative sentiment driven by factors like stricter tenancy laws, increased taxation, and concerns over the state's escalating debt, Stuart argues that Melbourne's property prices are currently undervalued relative to other cities like Sydney.
He presents data illustrating how Melbourne's median house prices have underperformed in recent years, suggesting that the market is due for a rebound in line with the principle of mean reversion. Stuart emphasises that while Perth may offer higher percentage growth, Melbourne's higher starting property values could translate into more substantial dollar-based returns, which are more crucial for retirement planning.
Stuart also discusses the investment potential of Melbourne's investment-grade apartments, which he believes are intrinsically undervalued. Overall, the episode provides a data-driven and contrarian perspective on why investors should consider Melbourne as a prime investment destination for the coming decade, despite the current negative sentiment surrounding the market.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart shares insights from working with a high-income client who initially focused on building a property portfolio but later diversified into shares. The client's share portfolio was initially held in his wife's name due to their circumstances at the time, but a portion was later moved into a trust structure for tax efficiency.
Stuart emphasises the importance of considering all components of investment returns, including income, growth, and tax credits. He also highlights how market corrections can present opportunities for investors. The episode offers a practical example of how Stuart's approach to formulating advice has been applied, considering factors like ownership structures, asset allocation, and tax implications.
By sharing this real-life case study, Stuart aims to provide listeners with a relatable and informative illustration of the principles and methodologies he discusses in his regular weekly episodes. Listeners can expect to gain valuable insights into holistic wealth-building strategies and the practical considerations involved in implementing them effectively.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8My YouTube channel: https://youtube.com/@investopolypodcast
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email. SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart discusses the importance of considering potential inheritances when developing long-term financial plans. He acknowledges that with the vast amount of wealth expected to be passed down in Australia over the next two decades, many individuals are likely to receive an inheritance at some point in their lives.
Stuart explores the various factors to consider when determining the extent to which an inheritance should be factored into one's investment strategy. He suggests adopting a conservative approach, as relying too heavily on an inheritance can carry risks, especially if the benefactor is relatively young and in good health.
The episode delves into how incorporating an inheritance into one's financial plan might impact decisions such as home loan repayment, investment debt reduction, and risk tolerance. Stuart also provides insights on managing inheritances efficiently, including options like testamentary trusts, superannuation contributions, and debt reduction. He emphasises the importance of seeking professional advice to navigate the tax and legal implications of inheritances.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart shares a real-life example of how his approach to financial planning helped a client transition from an underperforming self-managed super fund (SMSF) to a more efficient and transparent investment structure.
The client had an SMSF managed by stockbrokers, heavily concentrated in Australian shares with minimal international exposure. After reviewing the fund's performance, Stuart found it had underperformed an industry fund by over 3% per annum.
Rather than divesting the existing shareholdings, which were trading below fair value, Stuart recommended transferring the assets in-specie into separate super wrap accounts for the client and their spouse. This allowed the client to maintain transparency over their direct investment holdings while eliminating the compliance obligations and costs associated with running an SMSF.
Stuart highlights the advantages of super wrap accounts, including the ability to defer capital gains tax until assets are sold, and the potential for substantial tax savings over time, especially for large balances with minimal turnover.
The episode emphasises the importance of regularly benchmarking investment performance and considering cost-effective alternatives to SMSFs, such as wrap platforms, which can provide full transparency while minimising administrative burdens and compliance costs.
ASK ME A QUESTION ON YOUTUBE: https://www.youtube.com/watch?v=ACnxmEP8vv8
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart provides valuable insights and practical advice for first-time property buyers and their parents. He emphasises the importance of adopting an investment mindset when purchasing a home, focusing on areas with consistent supply-demand imbalances, analysing past growth patterns, and maximising land value. Stuart highlights government assistance programs like the First Home Super Saver and Home Guarantee Scheme, which can provide significant financial benefits.
He also discusses how parents can help their children, such as offering family guarantees or cash gifts while considering potential legal and tax implications. Stuart shares a real-life example of how his team helped a first-time buyer maximise their borrowing capacity, leverage tax benefits, and protect their capital gains tax exemption.
Overall, this episode equips listeners with a comprehensive understanding of the property market, government incentives, and strategies for parents to support their children's first home purchases effectively.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart presents a fascinating case study that challenges the traditional view on overcapitalising on a home. The clients in focus own a profitable business and have been strategically building their investment portfolio. Despite planning to spend a significant amount on constructing their dream home, Stuart reveals that overcapitalising may not be a major concern if certain conditions are met.
The clients in question own a share in a thriving business generating over $1m pre-tax profit. They have a diverse investment portfolio and a desire to build their dream home. Despite spending almost $7m on this home, the potential for financial loss is diminished by their ability to continue investing in other assets and a solid exit strategy. Stuart highlights the importance of affordability, continued wealth-building outside of the home, and having a viable exit strategy.
Listeners are encouraged to consider this unconventional approach to home investment, emphasising the balance between enjoying the present and securing future financial stability. This insightful episode challenges conventional wisdom and offers a fresh perspective on wealth-building strategies.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart presents a fascinating case study that challenges the traditional view on overcapitalising on a home. The clients in focus own a profitable business and have been strategically building their investment portfolio. Despite planning to spend a significant amount on constructing their dream home, Stuart reveals that overcapitalising may not be a major concern if certain conditions are met.
The clients in question own a share in a thriving business generating over $1m pre-tax profit. They have a diverse investment portfolio and a desire to build their dream home. Despite spending almost $7m on this home, the potential for financial loss is diminished by their ability to continue investing in other assets and a solid exit strategy. Stuart highlights the importance of affordability, continued wealth-building outside of the home, and having a viable exit strategy.
Listeners are encouraged to consider this unconventional approach to home investment, emphasising the balance between enjoying the present and securing future financial stability. This insightful episode challenges conventional wisdom and offers a fresh perspective on wealth-building strategies.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart discusses the feasibility and strategies of borrowing to invest in shares. He compares the practice of leveraging for share investments with the more commonly accepted approach of borrowing for property investments in Australia. Stuart highlights that gearing contributes significantly to property investment returns and the same principles can be applied to share investments.
The episode explores three borrowing options: margin loans, investment mortgages, and internally geared ETFs. Stuart addresses the higher volatility associated with shares and suggests mitigating strategies like regular investing and maintaining a conservative loan-to-value ratio.
He presents a case study demonstrating how an investor could accumulate substantial wealth by consistently investing borrowed funds alongside personal savings over an extended period of 24 years. Stuart estimates the investor would have tripled their investment by the end.
The episode concludes with Stuart's recommendations - for smaller portfolios under $500,000, he suggests internally geared ETFs, while for larger investments, he advises seeking professional guidance to ensure proper diversification and risk management through a mix of ETFs and low-cost managed funds.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart discusses the feasibility and strategies of borrowing to invest in shares. He compares the practice of leveraging for share investments with the more commonly accepted approach of borrowing for property investments in Australia. Stuart highlights that gearing contributes significantly to property investment returns and the same principles can be applied to share investments.
The episode explores three borrowing options: margin loans, investment mortgages, and internally geared ETFs. Stuart addresses the higher volatility associated with shares and suggests mitigating strategies like regular investing and maintaining a conservative loan-to-value ratio.
He presents a case study demonstrating how an investor could accumulate substantial wealth by consistently investing borrowed funds alongside personal savings over an extended period of 24 years. Stuart estimates the investor would have tripled their investment by the end.
The episode concludes with Stuart's recommendations - for smaller portfolios under $500,000, he suggests internally geared ETFs, while for larger investments, he advises seeking professional guidance to ensure proper diversification and risk management through a mix of ETFs and low-cost managed funds.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart takes us through a real-life scenario of a client who retired at 55 with ambitious spending goals. The client wanted to spend a hefty $300,000 per year for the first 15 years of retirement, followed by reduced spending of $200,000 and then $150,000 annually in later years. With a substantial asset base including $2 million from selling their home, $2.5 million in super, and a $4 million beach house, proper planning was crucial.
Stuart outlines the multi-faceted strategy they devised, involving property elements like investing the home sale proceeds, buying a city property, and restructuring to minimise capital gains and land taxes. Navigating investment entities and structures to optimise imputation credits was also key. Perhaps the biggest challenge was generating a high income stream, especially before the client could access their super.
This case study highlights the importance of comprehensive retirement planning that accounts for desired spending levels, makes prudent return assumptions, seamlessly integrates tax planning, and strategically utilises all available assets and income sources. An engaging listen for anyone looking to master their retirement game plan.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this case study episode, Stuart takes us through a real-life scenario of a client who retired at 55 with ambitious spending goals. The client wanted to spend a hefty $300,000 per year for the first 15 years of retirement, followed by reduced spending of $200,000 and then $150,000 annually in later years. With a substantial asset base including $2 million from selling their home, $2.5 million in super, and a $4 million beach house, proper planning was crucial.
Stuart outlines the multi-faceted strategy they devised, involving property elements like investing the home sale proceeds, buying a city property, and restructuring to minimise capital gains and land taxes. Navigating investment entities and structures to optimise imputation credits was also key. Perhaps the biggest challenge was generating a high income stream, especially before the client could access their super.
This case study highlights the importance of comprehensive retirement planning that accounts for desired spending levels, makes prudent return assumptions, seamlessly integrates tax planning, and strategically utilises all available assets and income sources. An engaging listen for anyone looking to master their retirement game plan.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart delves into statistical analyses and economic insights, dissecting the nuanced factors influencing property market trends over the past two decades and speculating on their implications for future investment strategies.
Commencing with a comparative analysis of median house price growth rates across major capital cities, Stuart uncovers a stark contrast between the preceding two-decade periods. He scrutinises inflation-adjusted growth figures, attributing a significant portion of the disparity to evolving economic landscapes and regulatory shifts.
He delves into pivotal events such as the Global Financial Crisis and recent pandemics, examining their impact on borrowing capacity and market sentiment. Through an exploration of historical borrowing trends and regulatory interventions, Stuart illuminates the evolving dynamics shaping property investment landscapes.
Drawing on empirical data and forward-looking projections, he advocates for a conservative approach to property investment, emphasising the importance of proactive portfolio management and market intelligence. From identifying potentially undervalued markets to leveraging value-added opportunities, Stuart empowers listeners with actionable insights to navigate uncertain terrain and maximise investment returns.
Stuart offers a prudent reminder: while the property market's future trajectory remains uncertain, strategic planning and informed decision-making can mitigate risks and position investors for long-term success. Tune in to gain invaluable perspectives on adapting to evolving market dynamics and safeguarding your property investment portfolio.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart delves into statistical analyses and economic insights, dissecting the nuanced factors influencing property market trends over the past two decades and speculating on their implications for future investment strategies.
Commencing with a comparative analysis of median house price growth rates across major capital cities, Stuart uncovers a stark contrast between the preceding two-decade periods. He scrutinises inflation-adjusted growth figures, attributing a significant portion of the disparity to evolving economic landscapes and regulatory shifts.
He delves into pivotal events such as the Global Financial Crisis and recent pandemics, examining their impact on borrowing capacity and market sentiment. Through an exploration of historical borrowing trends and regulatory interventions, Stuart illuminates the evolving dynamics shaping property investment landscapes.
Drawing on empirical data and forward-looking projections, he advocates for a conservative approach to property investment, emphasising the importance of proactive portfolio management and market intelligence. From identifying potentially undervalued markets to leveraging value-added opportunities, Stuart empowers listeners with actionable insights to navigate uncertain terrain and maximise investment returns.
Stuart offers a prudent reminder: while the property market's future trajectory remains uncertain, strategic planning and informed decision-making can mitigate risks and position investors for long-term success. Tune in to gain invaluable perspectives on adapting to evolving market dynamics and safeguarding your property investment portfolio.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this captivating case study episode, Stuart delves into the real-life journey of rebuilding wealth post-divorce, offering invaluable lessons along the way.
Following a client's separation in 2018, Stuart outlines the financial implications and strategic decisions made during the subsequent settlement in 2019. Despite the challenges, Stuart's guidance steered the client towards retaining key assets and formulating a plan for future financial security.
Through meticulous planning and prudent investment choices, including property acquisitions and retirement strategies, Stuart demonstrates how resilience and strategic foresight can lead to successful wealth rebuilding post-divorce.
Listeners gain actionable insights into navigating complex life transitions, the importance of financial planning, and the potential for rebuilding even amidst adversity.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this captivating case study episode, Stuart delves into the real-life journey of rebuilding wealth post-divorce, offering invaluable lessons along the way.
Following a client's separation in 2018, Stuart outlines the financial implications and strategic decisions made during the subsequent settlement in 2019. Despite the challenges, Stuart's guidance steered the client towards retaining key assets and formulating a plan for future financial security.
Through meticulous planning and prudent investment choices, including property acquisitions and retirement strategies, Stuart demonstrates how resilience and strategic foresight can lead to successful wealth rebuilding post-divorce.
Listeners gain actionable insights into navigating complex life transitions, the importance of financial planning, and the potential for rebuilding even amidst adversity.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this insightful episode, Stuart dives into the critical factors to weigh when upgrading your home - a decision with both significant lifestyle and financial implications. He emphasises the importance of approaching it with an investment mindset, aiming to purchase a high-quality home that aligns with your aspirations while also maximising long-term capital growth potential.
Key topics explored include strategically stretching your borrowing capacity to afford the best property possible without overextending yourself. He provides guidance on evaluating whether to retain your existing home as an investment, the ideal sequence of buying before selling, financing options like bridging loans and assembling the right professional team.
Stuart underscores the need to remain as unemotional as possible throughout the process, leveraging the objectivity of experts like buyers' agents. He also addresses skillfully timing real estate market cycles to optimise buying and selling decisions.
With valuable real-world insights, this episode equips you to confidently navigate the complexities of upgrading your home. Maximise this impactful investment by considering all angles - from finances and tax implications to lifestyle priorities. Don't miss the expert advice on transforming your home upgrade into a wealth-building opportunity.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this insightful episode, Stuart dives into the critical factors to weigh when upgrading your home - a decision with both significant lifestyle and financial implications. He emphasises the importance of approaching it with an investment mindset, aiming to purchase a high-quality home that aligns with your aspirations while also maximising long-term capital growth potential.
Key topics explored include strategically stretching your borrowing capacity to afford the best property possible without overextending yourself. He provides guidance on evaluating whether to retain your existing home as an investment, the ideal sequence of buying before selling, financing options like bridging loans and assembling the right professional team.
Stuart underscores the need to remain as unemotional as possible throughout the process, leveraging the objectivity of experts like buyers' agents. He also addresses skillfully timing real estate market cycles to optimise buying and selling decisions.
With valuable real-world insights, this episode equips you to confidently navigate the complexities of upgrading your home. Maximise this impactful investment by considering all angles - from finances and tax implications to lifestyle priorities. Don't miss the expert advice on transforming your home upgrade into a wealth-building opportunity.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this compelling case study episode, Stuart shares a real-life example that masterfully combines estate planning, tax minimisation, and portfolio management strategies. He walks through the steps taken to optimise an unexpected multi-million dollar inheritance for a client.
The pivotal move? Establishing a testamentary trust as outlined in the will, enabling the transfer of the inherited share portfolio into this strategic structure. By distributing the income and capital gains to the client's seven grandchildren, a remarkable tax-free outcome was achieved by leveraging their lower marginal rates.
Stuart's team then transitioned the concentrated Australian share portfolio to a more diversified, rules-based, and evidence-backed approach—reducing risk while still capturing impressive growth from $4 million in 2020 to $4.8 million today despite drawing income.
This case serves as a powerful testament to the compounding benefits of seeking timely advice and properly structuring assets.
Tune in for an insightful look at how professional guidance can potentially unlock substantial value, even from unexpected windfalls. Don't miss these real-world lessons!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this compelling case study episode, Stuart shares a real-life example that masterfully combines estate planning, tax minimisation, and portfolio management strategies. He walks through the steps taken to optimise an unexpected multi-million dollar inheritance for a client.
The pivotal move? Establishing a testamentary trust as outlined in the will, enabling the transfer of the inherited share portfolio into this strategic structure. By distributing the income and capital gains to the client's seven grandchildren, a remarkable tax-free outcome was achieved by leveraging their lower marginal rates.
Stuart's team then transitioned the concentrated Australian share portfolio to a more diversified, rules-based, and evidence-backed approach—reducing risk while still capturing impressive growth from $4 million in 2020 to $4.8 million today despite drawing income.
This case serves as a powerful testament to the compounding benefits of seeking timely advice and properly structuring assets.
Tune in for an insightful look at how professional guidance can potentially unlock substantial value, even from unexpected windfalls. Don't miss these real-world lessons!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
In this episode, Stuart presents a compelling analysis of the merits and pitfalls of investing in digital assets. Despite recent surges in Bitcoin's price and endorsements from influential figures like Blackrock's CEO, he expresses significant scepticism about cryptocurrencies as a worthwhile investment.
Stuart acknowledges the growing presence of fund managers and the proliferation of Bitcoin Exchange-Traded Funds (ETFs) as potential avenues for investment. However, he cautions against undue optimism, highlighting the commercial incentives of asset managers and the uncertain impact of ETFs on crypto's volatility. He argues that after over a decade, crypto has failed to gain wide adoption as a means of exchange beyond speculative investing and illicit activities. It lacks the fundamental utility underpinning traditional investments tied to products or services. Stuart likens crypto to a social Ponzi scheme reliant on continuously convincing new buyers.
Major drawbacks he outlines include extreme volatility undermining crypto's viability as a store of value, along with significant custody risks from unregulated exchanges vulnerable to hacking or bankruptcy. If crypto did achieve mainstream success, Stuart argues regulation would strip away its touted decentralised nature.
While some have gotten rich from crypto's rise, he cautions it operates on a zero-sum basis with equal losers. If investing, Stuart recommends only allocating what you can afford to lose within a fundamentally sound overall portfolio strategy, as the "music could stop any time on this speculative party."
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
In this episode, Stuart presents a compelling analysis of the merits and pitfalls of investing in digital assets. Despite recent surges in Bitcoin's price and endorsements from influential figures like Blackrock's CEO, he expresses significant scepticism about cryptocurrencies as a worthwhile investment.
Stuart acknowledges the growing presence of fund managers and the proliferation of Bitcoin Exchange-Traded Funds (ETFs) as potential avenues for investment. However, he cautions against undue optimism, highlighting the commercial incentives of asset managers and the uncertain impact of ETFs on crypto's volatility. He argues that after over a decade, crypto has failed to gain wide adoption as a means of exchange beyond speculative investing and illicit activities. It lacks the fundamental utility underpinning traditional investments tied to products or services. Stuart likens crypto to a social Ponzi scheme reliant on continuously convincing new buyers.
Major drawbacks he outlines include extreme volatility undermining crypto's viability as a store of value, along with significant custody risks from unregulated exchanges vulnerable to hacking or bankruptcy. If crypto did achieve mainstream success, Stuart argues regulation would strip away its touted decentralised nature.
While some have gotten rich from crypto's rise, he cautions it operates on a zero-sum basis with equal losers. If investing, Stuart recommends only allocating what you can afford to lose within a fundamentally sound overall portfolio strategy, as the "music could stop any time on this speculative party."
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart delves into the gravity of property decisions and their far-reaching consequences. He recounts a particularly challenging scenario where his expertise was pivotal in guiding clients through the maze of property investment considerations.
The dilemma was whether to purchase a home now or defer the decision to a later date. Many factors came into play, including borrowing capacity, taxation implications such as unrealised capital gains, and the looming prospect of escalating property prices in the future.
Striking the delicate balance between leveraging debt for investment while preserving flexibility for future home purchases demanded a comprehensive understanding of property markets, investment fundamentals, and tax implications. Stuart's approach encompassed financial modelling, taxation expertise, and traditional financial planning acumen, culminating in a meticulously crafted strategy.
The complexity of the task highlights the rarity of advisors capable of navigating such intricate terrain. Stuart emphasises the necessity of a multidisciplinary approach, acknowledging the limitations of specialists confined within their respective domains.
This case study serves as a poignant reminder of property decisions' profound impact, extending beyond mere investment returns to shape long-term financial well-being. It underscores the imperative for informed decision-making, where expertise across diverse fields converges to chart a course towards financial security and prosperity.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart delves into the gravity of property decisions and their far-reaching consequences. He recounts a particularly challenging scenario where his expertise was pivotal in guiding clients through the maze of property investment considerations.
The dilemma was whether to purchase a home now or defer the decision to a later date. Many factors came into play, including borrowing capacity, taxation implications such as unrealised capital gains, and the looming prospect of escalating property prices in the future.
Striking the delicate balance between leveraging debt for investment while preserving flexibility for future home purchases demanded a comprehensive understanding of property markets, investment fundamentals, and tax implications. Stuart's approach encompassed financial modelling, taxation expertise, and traditional financial planning acumen, culminating in a meticulously crafted strategy.
The complexity of the task highlights the rarity of advisors capable of navigating such intricate terrain. Stuart emphasises the necessity of a multidisciplinary approach, acknowledging the limitations of specialists confined within their respective domains.
This case study serves as a poignant reminder of property decisions' profound impact, extending beyond mere investment returns to shape long-term financial well-being. It underscores the imperative for informed decision-making, where expertise across diverse fields converges to chart a course towards financial security and prosperity.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart Wemyss delves into the nuanced debate of prioritising short-term returns versus adopting a steadfast long-term investment strategy. Drawing from his extensive experience, Wemyss navigates the complexities of financial planning, urging listeners to reevaluate their approach amidst fluctuating market conditions.
He articulates the inherent advantages of a long-term perspective, emphasising its ability to filter out short-term noise and minimise risks and costs associated with frequent trading. Through insightful analysis, he elucidates the unparalleled power of compounding returns, vividly depicting wealth accumulation over time.
However, Wemyss acknowledges the allure of short-term gains and the potential benefits for novice investors seeking to bolster their financial position. Yet, he cautions against the pitfalls of addiction to short-term thinking, stressing the importance of setting clear deadlines for transitioning to a long-term approach.
He challenges conventional investment paradigms, urging listeners to prioritise patience and foresight over instant gratification. As Charlie Munger aptly states, "The big money is not in the buying and selling but in the waiting."
For investors navigating the intricate landscape of financial planning, this podcast episode offers invaluable insights and strategic perspectives to inform sound investment decisions in an ever-evolving market environment.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In this episode, Stuart Wemyss delves into the nuanced debate of prioritising short-term returns versus adopting a steadfast long-term investment strategy. Drawing from his extensive experience, Wemyss navigates the complexities of financial planning, urging listeners to reevaluate their approach amidst fluctuating market conditions.
He articulates the inherent advantages of a long-term perspective, emphasising its ability to filter out short-term noise and minimise risks and costs associated with frequent trading. Through insightful analysis, he elucidates the unparalleled power of compounding returns, vividly depicting wealth accumulation over time.
However, Wemyss acknowledges the allure of short-term gains and the potential benefits for novice investors seeking to bolster their financial position. Yet, he cautions against the pitfalls of addiction to short-term thinking, stressing the importance of setting clear deadlines for transitioning to a long-term approach.
He challenges conventional investment paradigms, urging listeners to prioritise patience and foresight over instant gratification. As Charlie Munger aptly states, "The big money is not in the buying and selling but in the waiting."
For investors navigating the intricate landscape of financial planning, this podcast episode offers invaluable insights and strategic perspectives to inform sound investment decisions in an ever-evolving market environment.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart delves into the intricate interplay between personal and business advice, offering practical wisdom gleaned from real-life scenarios.
In just 2.5 years, our clients' journey illustrates the fusion of business and personal financial strategies. From optimising business structures to navigating government regulations, we've streamlined operations for growth. Meanwhile, on the personal front, we've tackled property investments, leveraged borrowing capacities, and strategised for overseas living—all while safeguarding against risks like estate planning and insurance.
The key revelation lies in the symbiosis between business success and personal aspirations. As their business flourishes, their financial framework must evolve to support personal goals. Our case study underscores the necessity of adaptability in investment decisions and tax planning amidst dynamic circumstances.
Tune in to explore how a holistic approach to financial management can seamlessly align business growth with individual wealth objectives. Invest in your future by understanding the intricate dance between personal and business finances.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart delves into the intricate interplay between personal and business advice, offering practical wisdom gleaned from real-life scenarios.
In just 2.5 years, our clients' journey illustrates the fusion of business and personal financial strategies. From optimising business structures to navigating government regulations, we've streamlined operations for growth. Meanwhile, on the personal front, we've tackled property investments, leveraged borrowing capacities, and strategised for overseas living—all while safeguarding against risks like estate planning and insurance.
The key revelation lies in the symbiosis between business success and personal aspirations. As their business flourishes, their financial framework must evolve to support personal goals. Our case study underscores the necessity of adaptability in investment decisions and tax planning amidst dynamic circumstances.
Tune in to explore how a holistic approach to financial management can seamlessly align business growth with individual wealth objectives. Invest in your future by understanding the intricate dance between personal and business finances.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In Part 1, the podcast scrutinised the performance of apartment markets in major Australian cities over the past decade, uncovering reasons behind their underperformance and prospects for a new growth cycle.
In this podcast episode, Stuart Wemyss provides a deep dive into the critical decision of whether to sell underperforming apartments in Australia's real estate market. Wemyss meticulously analyses the performance of apartment markets in Melbourne, Sydney, and Brisbane over the past decade, shedding light on factors influencing their growth potential.
Listeners gain valuable insights into the contrasting dynamics of apartment markets across major Australian cities, from rising values in Brisbane to affordability indicators in Sydney and potential challenges in Melbourne due to market dynamics and tax implications.
Wemyss presents a practical 4-question framework to guide listeners through the decision-making process, from assessing apartment quality to exploring reinvestment options and considering block selling opportunities. He emphasises the importance of tailored advice and engaging professionals like buyers' agents, mortgage brokers, accountants, and financial advisors to make informed decisions aligned with individual financial goals.
Tune in to this episode for expert guidance on navigating the complexities of the apartment market and optimising investment strategies for maximum returns in an evolving real estate landscape.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read full blog here.
In Part 1, the podcast scrutinised the performance of apartment markets in major Australian cities over the past decade, uncovering reasons behind their underperformance and prospects for a new growth cycle.
In this podcast episode, Stuart Wemyss provides a deep dive into the critical decision of whether to sell underperforming apartments in Australia's real estate market. Wemyss meticulously analyses the performance of apartment markets in Melbourne, Sydney, and Brisbane over the past decade, shedding light on factors influencing their growth potential.
Listeners gain valuable insights into the contrasting dynamics of apartment markets across major Australian cities, from rising values in Brisbane to affordability indicators in Sydney and potential challenges in Melbourne due to market dynamics and tax implications.
Wemyss presents a practical 4-question framework to guide listeners through the decision-making process, from assessing apartment quality to exploring reinvestment options and considering block selling opportunities. He emphasises the importance of tailored advice and engaging professionals like buyers' agents, mortgage brokers, accountants, and financial advisors to make informed decisions aligned with individual financial goals.
Tune in to this episode for expert guidance on navigating the complexities of the apartment market and optimising investment strategies for maximum returns in an evolving real estate landscape.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
In this podcast episode, Stuart Wemyss delves into the intriguing dilemma of whether to sell underperforming apartments in Australia's real estate market. He dissects the prolonged underperformance of apartments in Melbourne, Sydney, and Brisbane, spanning over a decade, challenging investors to reconsider their strategies in light of stagnant growth rates.
The episode navigates through the complexities of supply-demand dynamics, construction quality concerns, and shifting rental yields versus owner-occupier interest rates. Moreover, Wemyss offers insights into the evolving relationship between apartment and house prices, highlighting the current affordability gap and its implications for investment decisions.
Through meticulous analysis and astute observations, he unveils the potential triggers for a market resurgence, including dwindling new apartment starts and increasing construction costs. The episode concludes with a thought-provoking examination of the cost-benefit analysis between renting and owning, providing listeners with valuable considerations for navigating the evolving real estate landscape.
For investors seeking clarity amidst market uncertainty, this podcast episode serves as an indispensable guide, offering actionable insights and strategic perspectives to inform their investment decisions in the ever-evolving apartment market landscape.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
In this podcast episode, Stuart Wemyss delves into the intriguing dilemma of whether to sell underperforming apartments in Australia's real estate market. He dissects the prolonged underperformance of apartments in Melbourne, Sydney, and Brisbane, spanning over a decade, challenging investors to reconsider their strategies in light of stagnant growth rates.
The episode navigates through the complexities of supply-demand dynamics, construction quality concerns, and shifting rental yields versus owner-occupier interest rates. Moreover, Wemyss offers insights into the evolving relationship between apartment and house prices, highlighting the current affordability gap and its implications for investment decisions.
Through meticulous analysis and astute observations, he unveils the potential triggers for a market resurgence, including dwindling new apartment starts and increasing construction costs. The episode concludes with a thought-provoking examination of the cost-benefit analysis between renting and owning, providing listeners with valuable considerations for navigating the evolving real estate landscape.
For investors seeking clarity amidst market uncertainty, this podcast episode serves as an indispensable guide, offering actionable insights and strategic perspectives to inform their investment decisions in the ever-evolving apartment market landscape.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart Wemyss unpacks a real-life case study covering downsizing, business exits, and inheritance. The client initially received fragmented advice, leading to confusion and inefficiencies in their financial strategy.
Through our integrated approach, we optimised their SMSF investments, streamlined portfolios, and strategically sold underperforming assets. With proactive business restructuring and astute estate planning, we achieved substantial tax savings.
In just 2.5 years, our collaborative efforts spanned business advice, portfolio management, tax structuring, and property guidance. This holistic approach highlights the value of a unified advisory team.
Join Stuart as he simplifies financial planning, showcasing the transformative power of integrated guidance across disciplines. This episode illustrates how synergy can unlock significant value for clients.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this episode, Stuart Wemyss unpacks a real-life case study covering downsizing, business exits, and inheritance. The client initially received fragmented advice, leading to confusion and inefficiencies in their financial strategy.
Through our integrated approach, we optimised their SMSF investments, streamlined portfolios, and strategically sold underperforming assets. With proactive business restructuring and astute estate planning, we achieved substantial tax savings.
In just 2.5 years, our collaborative efforts spanned business advice, portfolio management, tax structuring, and property guidance. This holistic approach highlights the value of a unified advisory team.
Join Stuart as he simplifies financial planning, showcasing the transformative power of integrated guidance across disciplines. This episode illustrates how synergy can unlock significant value for clients.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
In this podcast, Stuart Wemyss delves into the intriguing dynamics of property investment, challenging the conventional wisdom that blue-chip suburbs are always the safest bet. The episode begins by scrutinising misleading claims made by some buyers' agents, emphasising the importance of thorough due diligence in a market often lacking regulatory protection. The host addresses the recent boom in regional towns, exploring why seemingly secondary suburbs can outperform blue-chip counterparts.
Drawing on extensive research and real-life examples, the podcast highlights the pitfalls of short-term performance data and the significance of focusing on long-term investment fundamentals. Through a comparison of properties with rapid initial growth and consistent, moderate growth, the host demonstrates the lasting benefits of investment-grade locations.
The episode also examines the surprising success stories of secondary suburbs like Moorabbin, Bentleigh, and McKinnon, shedding light on factors like the affordability ripple effect and gentrification. The discussion culminates in a crucial takeaway: while there may be short-term outliers, blue-chip, investment-grade locations are ultimately the least risky and more likely to withstand market fluctuations. For potential investors seeking a nuanced perspective on property investment, this podcast offers valuable insights and challenges preconceived notions, making it a must-listen in the ever-evolving landscape of real estate.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
In this podcast, Stuart Wemyss delves into the intriguing dynamics of property investment, challenging the conventional wisdom that blue-chip suburbs are always the safest bet. The episode begins by scrutinising misleading claims made by some buyers' agents, emphasising the importance of thorough due diligence in a market often lacking regulatory protection. The host addresses the recent boom in regional towns, exploring why seemingly secondary suburbs can outperform blue-chip counterparts.
Drawing on extensive research and real-life examples, the podcast highlights the pitfalls of short-term performance data and the significance of focusing on long-term investment fundamentals. Through a comparison of properties with rapid initial growth and consistent, moderate growth, the host demonstrates the lasting benefits of investment-grade locations.
The episode also examines the surprising success stories of secondary suburbs like Moorabbin, Bentleigh, and McKinnon, shedding light on factors like the affordability ripple effect and gentrification. The discussion culminates in a crucial takeaway: while there may be short-term outliers, blue-chip, investment-grade locations are ultimately the least risky and more likely to withstand market fluctuations. For potential investors seeking a nuanced perspective on property investment, this podcast offers valuable insights and challenges preconceived notions, making it a must-listen in the ever-evolving landscape of real estate.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
In this insightful podcast, listeners delve into the intriguing relationship between interest rates and growth company valuations. Contrary to conventional wisdom, higher interest rates haven't significantly dampened stock market valuations, challenging prevailing expectations. With 72% of S&P 500 companies reporting higher-than-expected earnings, the resilience of the US economy stands out. However, the discussion extends beyond the US, exploring future expected returns across different geographical markets. Japan and emerging markets lead with projected 10-year returns of 9.1%, while US large caps lag at 3.0%.
The podcast doesn't just analyse; it provides actionable insights. Listeners gain strategies for navigating these market dynamics, from diversifying portfolios across Australian and ex-US markets to incorporating sustainable investments. The evidence-based approach advocated here offers a roadmap for maximising returns while mitigating risks. Whether you're a seasoned investor or just getting started, this podcast equips you with the knowledge and strategies needed to thrive in today's dynamic market landscape.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
In this insightful podcast, listeners delve into the intriguing relationship between interest rates and growth company valuations. Contrary to conventional wisdom, higher interest rates haven't significantly dampened stock market valuations, challenging prevailing expectations. With 72% of S&P 500 companies reporting higher-than-expected earnings, the resilience of the US economy stands out. However, the discussion extends beyond the US, exploring future expected returns across different geographical markets. Japan and emerging markets lead with projected 10-year returns of 9.1%, while US large caps lag at 3.0%.
The podcast doesn't just analyse; it provides actionable insights. Listeners gain strategies for navigating these market dynamics, from diversifying portfolios across Australian and ex-US markets to incorporating sustainable investments. The evidence-based approach advocated here offers a roadmap for maximising returns while mitigating risks. Whether you're a seasoned investor or just getting started, this podcast equips you with the knowledge and strategies needed to thrive in today's dynamic market landscape.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In my regular weekly episode, I talk about the theories, methodologies, and principles associated with investing. These case study episodes aim to share how the application of our approach to formulating advice has worked in a real-life situation.
Case study: Property advice is crucial
How wealth advice, property advice, and lifestyle goals are often very interrelated.
Approached us for advice in 2019. Male-owned new-build apartment with $200k of equity. Female-owned house and land package with $260k of equity in it. They had high incomes, but also spent a lot.
Neither of their properties would be considered investment grade.
Advice: sell both, and invest $460k of equity in the highest quality house they can afford. Retain as much cash as possible. Don’t worry about building. Use a buyers’ agent.
In July 2020, they bought a home for $2m. They borrowed around $1.9m = forced savings. Used family guarantee (mum’s ppty) so that they could retain cash.
Their property is now worth $3.5m. $1.5m tax-free gain.
It was a 10+ year strategy, and we couldn’t have anticipated that they’d be so well off after only 3 years, but it’s a good example.
What can we learn?
Well-rounded advice is very important.
- A financial advisor wouldn't have the knowledge and experience to appreciate what their next best move was.
- Mortgage brokers don't have the full picture.
- Often, buyers and agents will be too influenced by the clients’ desires.
It's only with the benefit of hindsight do you know how valuable it can be to stretch yourself. Being too conservative can be costly.
Cannot underestimate the tremendous lifestyle impact of upgrading the home.
A forced savings strategy is very good for people who are spendthrifts.
Structuring the mortgage currently was important to (1) ensure he maintained a buffer and (2) took advantage of low rates – we staggered expiries.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In my regular weekly episode, I talk about the theories, methodologies, and principles associated with investing. These case study episodes aim to share how the application of our approach to formulating advice has worked in a real-life situation.
Case study: Property advice is crucial
How wealth advice, property advice, and lifestyle goals are often very interrelated.
Approached us for advice in 2019. Male-owned new-build apartment with $200k of equity. Female-owned house and land package with $260k of equity in it. They had high incomes, but also spent a lot.
Neither of their properties would be considered investment grade.
Advice: sell both, and invest $460k of equity in the highest quality house they can afford. Retain as much cash as possible. Don’t worry about building. Use a buyers’ agent.
In July 2020, they bought a home for $2m. They borrowed around $1.9m = forced savings. Used family guarantee (mum’s ppty) so that they could retain cash.
Their property is now worth $3.5m. $1.5m tax-free gain.
It was a 10+ year strategy, and we couldn’t have anticipated that they’d be so well off after only 3 years, but it’s a good example.
What can we learn?
Well-rounded advice is very important.
- A financial advisor wouldn't have the knowledge and experience to appreciate what their next best move was.
- Mortgage brokers don't have the full picture.
- Often, buyers and agents will be too influenced by the clients’ desires.
It's only with the benefit of hindsight do you know how valuable it can be to stretch yourself. Being too conservative can be costly.
Cannot underestimate the tremendous lifestyle impact of upgrading the home.
A forced savings strategy is very good for people who are spendthrifts.
Structuring the mortgage currently was important to (1) ensure he maintained a buffer and (2) took advantage of low rates – we staggered expiries.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Unlock the secrets of investment bonds in this podcast, diving into their tax-efficient allure, especially for children's investments. Discover the nuances of these financial products, their advantages, and potential drawbacks. Delve into the 10-year tax-free withdrawal strategy, the '125% rule,' and administration costs ranging from 0.40% to 0.60% p.a.
Join the discussion comparing investment bonds against low-cost index funds like Vanguard High Growth, unveiling the potential tax benefits and drawbacks over a 10-year period. Explore alternative options such as repaying home loans, investing in a lower-income spouse's name, and strategic approaches to minimize Capital Gains Tax (CGT).
Gain insights into the comprehensive financial planning needed for effective decision-making, with tips like park money in your home loan, consolidate investments, and create accounts for minors. Uncover the potential pitfalls and advantages of investment bonds, and why, in practice, they are rarely recommended. For a deeper understanding of wealth-building strategies and alternatives, tune in to this insightful podcast.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Unlock the secrets of investment bonds in this podcast, diving into their tax-efficient allure, especially for children's investments. Discover the nuances of these financial products, their advantages, and potential drawbacks. Delve into the 10-year tax-free withdrawal strategy, the '125% rule,' and administration costs ranging from 0.40% to 0.60% p.a.
Join the discussion comparing investment bonds against low-cost index funds like Vanguard High Growth, unveiling the potential tax benefits and drawbacks over a 10-year period. Explore alternative options such as repaying home loans, investing in a lower-income spouse's name, and strategic approaches to minimize Capital Gains Tax (CGT).
Gain insights into the comprehensive financial planning needed for effective decision-making, with tips like park money in your home loan, consolidate investments, and create accounts for minors. Uncover the potential pitfalls and advantages of investment bonds, and why, in practice, they are rarely recommended. For a deeper understanding of wealth-building strategies and alternatives, tune in to this insightful podcast.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Unlock the secrets to turbocharge your journey to a mortgage-free life! Forget the noise of countless tips – I've distilled it down to the essential, powerful strategies that truly make a difference.
Uncover the 3-4 game-changing methods that will accelerate your home loan repayment. No fluff, just results!
Crack the Code to Lower Interest Rates: Your loyalty is costing you! Learn how to negotiate lower rates, decode the bank's retention strategy, and save big. A good mortgage broker can be your secret weapon.
Offset, Repayments, and Cash Flow Magic: Maximize the power of offset accounts, make extra repayments with confidence, and manage your cash flow like a pro. Your mortgage will thank you with interest savings that compound over time!
Flexible Strategies with Plan B: Life happens, so be prepared. Explore alternative strategies like downsizing, smart investments, or tapping into your super. Plan B ensures you're always in control.
Self-Employed? Your Accountant Holds the Key: Get personalized advice from a holistic accountant on business structures and tax optimizations tailored to your situation. We've helped many self-employed individuals fast-track their mortgage repayments – find out how!
So, don't get lost in a sea of unimportant or inferior ideas. More than 95% of success lies in a focused approach. Minimize debt costs, leverage an offset, and channel your cash flow – that's the winning formula.
Ready to revolutionize your approach to mortgage repayment? Embrace simplicity and effectiveness. Your mortgage-free future starts here!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Unlock the secrets to turbocharge your journey to a mortgage-free life! Forget the noise of countless tips – I've distilled it down to the essential, powerful strategies that truly make a difference.
Uncover the 3-4 game-changing methods that will accelerate your home loan repayment. No fluff, just results!
Crack the Code to Lower Interest Rates: Your loyalty is costing you! Learn how to negotiate lower rates, decode the bank's retention strategy, and save big. A good mortgage broker can be your secret weapon.
Offset, Repayments, and Cash Flow Magic: Maximize the power of offset accounts, make extra repayments with confidence, and manage your cash flow like a pro. Your mortgage will thank you with interest savings that compound over time!
Flexible Strategies with Plan B: Life happens, so be prepared. Explore alternative strategies like downsizing, smart investments, or tapping into your super. Plan B ensures you're always in control.
Self-Employed? Your Accountant Holds the Key: Get personalized advice from a holistic accountant on business structures and tax optimizations tailored to your situation. We've helped many self-employed individuals fast-track their mortgage repayments – find out how!
So, don't get lost in a sea of unimportant or inferior ideas. More than 95% of success lies in a focused approach. Minimize debt costs, leverage an offset, and channel your cash flow – that's the winning formula.
Ready to revolutionize your approach to mortgage repayment? Embrace simplicity and effectiveness. Your mortgage-free future starts here!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this podcast episode, Stuart discusses a captivating case study spanning over 14 years, showcasing the positive impact of their advisory process on clients. The clients, initially with a $2 million investment base, have seen their net worth grow to $6.4 million, excluding homes, through conservative asset allocation and astute financial management. Despite a volatile market, their compounding annual growth rate stands at an impressive 8.7%. The clients, now comfortably retired, attribute their success to long-term thinking, a willingness to seek and follow advice, and the ability to stay focused on their goals amid short-term market fluctuations.
The diverse asset allocation includes investments in property, bonds, infrastructure, global property, and a mix of Australian and international shares. Stuart emphasizes the importance of understanding one's risk profile and aligning it with financial goals. The clients' disciplined cash flow management, coupled with a strategic approach to spending, has contributed to their financial security. This case study underscores the significance of a trusted advisory relationship, patience in long-term investing, and staying committed to financial goals.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
In this podcast episode, Stuart discusses a captivating case study spanning over 14 years, showcasing the positive impact of their advisory process on clients. The clients, initially with a $2 million investment base, have seen their net worth grow to $6.4 million, excluding homes, through conservative asset allocation and astute financial management. Despite a volatile market, their compounding annual growth rate stands at an impressive 8.7%. The clients, now comfortably retired, attribute their success to long-term thinking, a willingness to seek and follow advice, and the ability to stay focused on their goals amid short-term market fluctuations.
The diverse asset allocation includes investments in property, bonds, infrastructure, global property, and a mix of Australian and international shares. Stuart emphasizes the importance of understanding one's risk profile and aligning it with financial goals. The clients' disciplined cash flow management, coupled with a strategic approach to spending, has contributed to their financial security. This case study underscores the significance of a trusted advisory relationship, patience in long-term investing, and staying committed to financial goals.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Unlock the secrets to a prosperous 2024 in the real estate market with the "2024 Property Outlook" podcast. In this insightful episode, experts delve into the intricacies of the property landscape, offering a comprehensive analysis of the potential impact of key factors such as inflation, tax cuts, and market dynamics.
Listeners can expect a deep dive into the effects of inflation on property values and rental markets, gaining valuable insights into how economic trends may shape investment opportunities. The podcast explores the nuances of tax cuts and their influence on property ownership, providing practical advice for investors looking to maximize returns in a changing fiscal environment.
One of the highlights of the episode is the examination of market dynamics, where experts break down current trends and forecast future developments. From the urban jungle to suburban havens, the podcast paints a vivid picture of what the property landscape may look like in the coming year, helping listeners make informed decisions about their real estate ventures.
Whether you're a seasoned investor or a first-time homebuyer, this podcast offers actionable intelligence to navigate the evolving property market. The hosts skillfully distill complex economic concepts into easily digestible information, ensuring that listeners walk away with a clear understanding of how inflation, tax cuts, and market dynamics may impact their property portfolios.
Don't miss out on the opportunity to stay ahead of the curve in 2024. Tune in to the "2024 Property Outlook" podcast for a strategic roadmap to navigate the ever-changing real estate terrain and position yourself for success in the year ahead.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Unlock the secrets to a prosperous 2024 in the real estate market with the "2024 Property Outlook" podcast. In this insightful episode, experts delve into the intricacies of the property landscape, offering a comprehensive analysis of the potential impact of key factors such as inflation, tax cuts, and market dynamics.
Listeners can expect a deep dive into the effects of inflation on property values and rental markets, gaining valuable insights into how economic trends may shape investment opportunities. The podcast explores the nuances of tax cuts and their influence on property ownership, providing practical advice for investors looking to maximize returns in a changing fiscal environment.
One of the highlights of the episode is the examination of market dynamics, where experts break down current trends and forecast future developments. From the urban jungle to suburban havens, the podcast paints a vivid picture of what the property landscape may look like in the coming year, helping listeners make informed decisions about their real estate ventures.
Whether you're a seasoned investor or a first-time homebuyer, this podcast offers actionable intelligence to navigate the evolving property market. The hosts skillfully distill complex economic concepts into easily digestible information, ensuring that listeners walk away with a clear understanding of how inflation, tax cuts, and market dynamics may impact their property portfolios.
Don't miss out on the opportunity to stay ahead of the curve in 2024. Tune in to the "2024 Property Outlook" podcast for a strategic roadmap to navigate the ever-changing real estate terrain and position yourself for success in the year ahead.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
In this podcast, discover the alarming impact of scams on Australians, costing the government an estimated $3.1 billion annually. With the increasing digitalisation of our lives, particularly in banking and financial services, individuals are more vulnerable than ever to scams, making it imperative to take proactive steps to protect one's money.
The National Anti-Scam Centre reveals that scams primarily occur through phone calls, emails, and text messages, with phishing attacks comprising 44% of the most common scams. Other prevalent scams include false billing, online shopping fraud, hacking, and identity theft. While Australian banks often provide zero-liability policies for unauthorised transactions, a comprehensive Scams Code Framework is in development to enhance protection and compensation measures for victims.
Listeners are advised to adopt practical measures such as using password managers to enhance online security and being vigilant with emails, texts, and phone calls. Daily banking logins can help detect fraudulent transactions promptly while avoiding sharing sensitive information via insecure channels is emphasised. Regular software updates and the use of digital debit and credit cards are also recommended to minimise fraud risk.
The podcast sheds light on the consequences of banks' efforts to combat scams, which may result in inconveniences for customers due to account locks and increased scrutiny during certain transactions. For businesses, regular cybersecurity training for staff and secure management of excess cash are crucial elements in mitigating scam risks.
As scams become more sophisticated, staying vigilant is emphasised as a collective responsibility. By following the practical steps outlined in the podcast, listeners can significantly enhance the protection of their assets in an evolving digital landscape where scams pose an escalating threat.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
In this podcast, discover the alarming impact of scams on Australians, costing the government an estimated $3.1 billion annually. With the increasing digitalisation of our lives, particularly in banking and financial services, individuals are more vulnerable than ever to scams, making it imperative to take proactive steps to protect one's money.
The National Anti-Scam Centre reveals that scams primarily occur through phone calls, emails, and text messages, with phishing attacks comprising 44% of the most common scams. Other prevalent scams include false billing, online shopping fraud, hacking, and identity theft. While Australian banks often provide zero-liability policies for unauthorised transactions, a comprehensive Scams Code Framework is in development to enhance protection and compensation measures for victims.
Listeners are advised to adopt practical measures such as using password managers to enhance online security and being vigilant with emails, texts, and phone calls. Daily banking logins can help detect fraudulent transactions promptly while avoiding sharing sensitive information via insecure channels is emphasised. Regular software updates and the use of digital debit and credit cards are also recommended to minimise fraud risk.
The podcast sheds light on the consequences of banks' efforts to combat scams, which may result in inconveniences for customers due to account locks and increased scrutiny during certain transactions. For businesses, regular cybersecurity training for staff and secure management of excess cash are crucial elements in mitigating scam risks.
As scams become more sophisticated, staying vigilant is emphasised as a collective responsibility. By following the practical steps outlined in the podcast, listeners can significantly enhance the protection of their assets in an evolving digital landscape where scams pose an escalating threat.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Click here to read this blog online.
Sidebar: Wealth Editor, James Kirby and I recorded an episode of The Australia’s Money Puzzle podcast yesterday discussing our expectations for the property market in 2024: see here.
In this insightful podcast, Stuart Wemyss shares four key investment lessons gleaned from the tumultuous market of 2023, offering a compelling guide for potential listeners. Lesson one underscores the volatility of market expectations, urging investors to prioritise long-term goals over short-term forecasts. Lesson two explores the resilience required when faced with unexpected market deviations, emphasising the importance of maintaining confidence in established strategies. The third lesson advocates for steadfastness in the face of economic uncertainties, showcasing how minimal portfolio adjustments often lead to higher returns over time. Lesson four delves into the unpredictability of market conditions, cautioning against betting against prevailing trends and emphasising the potential risks of underestimating the duration of irrational market behavior.
Listeners can expect a thought-provoking discussion on the challenges and rewards of navigating the investment landscape, supported by real-world examples from 2023. The host's emphasis on data-driven decision-making, drawn from diverse sources including renowned economist John Keynes and Warren Buffett, adds a pragmatic touch to the narrative. As the podcast challenges conventional wisdom and encourages a critical examination of market insights, it promises to be an engaging resource for both seasoned and novice investors looking to refine their strategies in 2024.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Click here to read this blog online.
Sidebar: Wealth Editor, James Kirby and I recorded an episode of The Australia’s Money Puzzle podcast yesterday discussing our expectations for the property market in 2024: see here.
In this insightful podcast, Stuart Wemyss shares four key investment lessons gleaned from the tumultuous market of 2023, offering a compelling guide for potential listeners. Lesson one underscores the volatility of market expectations, urging investors to prioritise long-term goals over short-term forecasts. Lesson two explores the resilience required when faced with unexpected market deviations, emphasising the importance of maintaining confidence in established strategies. The third lesson advocates for steadfastness in the face of economic uncertainties, showcasing how minimal portfolio adjustments often lead to higher returns over time. Lesson four delves into the unpredictability of market conditions, cautioning against betting against prevailing trends and emphasising the potential risks of underestimating the duration of irrational market behavior.
Listeners can expect a thought-provoking discussion on the challenges and rewards of navigating the investment landscape, supported by real-world examples from 2023. The host's emphasis on data-driven decision-making, drawn from diverse sources including renowned economist John Keynes and Warren Buffett, adds a pragmatic touch to the narrative. As the podcast challenges conventional wisdom and encourages a critical examination of market insights, it promises to be an engaging resource for both seasoned and novice investors looking to refine their strategies in 2024.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Unlock the secrets to securing prime real estate without breaking the bank, as I, Stuart Wemyss, walk you through the strategic maze of property investment. Get ready to learn how even with modest means, you can pinpoint properties set to soar in value, thanks to the invaluable insights offered in this episode. We're scrutinizing the real estate market's ever-present supply and demand imbalance and understanding why this could be your golden ticket. I'll also reveal why the economic underpinnings of your investments are more than just background noise—they're the pulse that could dictate the heartbeat of your financial future.
Dive deeper with me as we dissect the non-negotiable characteristics of a property that's worth its weight in gold. From the undeniable influence of location to the critical contribution of land value, we leave no stone unturned. Empower yourself with the tools to assess a property's past performance and unravel the mystery of its potential, using data that demystifies the art of smart investing. And for those of you with tighter purse strings, rest assured—I've got the roadmap that will lead you to investment-grade gems in the rough, just a suburb over. This episode isn't just about property; it's about making your aspirations of wealth through savvy investing an attainable reality.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Unlock the secrets to securing prime real estate without breaking the bank, as I, Stuart Wemyss, walk you through the strategic maze of property investment. Get ready to learn how even with modest means, you can pinpoint properties set to soar in value, thanks to the invaluable insights offered in this episode. We're scrutinizing the real estate market's ever-present supply and demand imbalance and understanding why this could be your golden ticket. I'll also reveal why the economic underpinnings of your investments are more than just background noise—they're the pulse that could dictate the heartbeat of your financial future.
Dive deeper with me as we dissect the non-negotiable characteristics of a property that's worth its weight in gold. From the undeniable influence of location to the critical contribution of land value, we leave no stone unturned. Empower yourself with the tools to assess a property's past performance and unravel the mystery of its potential, using data that demystifies the art of smart investing. And for those of you with tighter purse strings, rest assured—I've got the roadmap that will lead you to investment-grade gems in the rough, just a suburb over. This episode isn't just about property; it's about making your aspirations of wealth through savvy investing an attainable reality.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Ready to conquer the Australian rental crisis and spot the next big investment opportunity? Our latest Investopoly podcast is your treasure map through the tumultuous terrain of the property market. As the rental squeeze tightens its grip, we dissect the factors at play, from vanishing vacancies to skyrocketing rents. This isn't just a breakdown of the problem—it's a rallying cry for private investors and landlords to re-enter the game. We confront the so-called mortgage fixed rate cliff and dismantle the myths that have been circulating, showcasing why Australians are more resilient in the face of rate hikes than you might think.
Beneath the surface of the rental crisis lurks a complex web of cause and effect. Over six years, a dwindling supply of rental properties has collided with steady demand to create a perfect storm. We peel back the legislative layers to reveal how recent property market shifts have starved the rental pool, and why proposals like increased social housing or build-to-rent schemes might not be the silver bullets they're made out to be. Instead, I champion a more immediate solution: empowering the private investor. With a candid look at borrowing constraints and rising interest rates, I navigate the currents of change and pinpoint how to harness these challenges for investment success.
As we usher in an era of variable mortgage rates, the whispers of market sentiment change grow louder. I share decades of industry wisdom to explain why the transition might not spell the forewarned financial fallout and how Australia's robust economic backbone supports homeowners. And finally, as property prices teeter on the edge, I revisit my prediction of an imminent market floor. This episode isn't just about weathering the storm; it's about setting sail at the first sign of clear skies. For veterans and first-time property investors alike, now could be the moment to anchor your portfolio in tomorrow's victories.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Ready to conquer the Australian rental crisis and spot the next big investment opportunity? Our latest Investopoly podcast is your treasure map through the tumultuous terrain of the property market. As the rental squeeze tightens its grip, we dissect the factors at play, from vanishing vacancies to skyrocketing rents. This isn't just a breakdown of the problem—it's a rallying cry for private investors and landlords to re-enter the game. We confront the so-called mortgage fixed rate cliff and dismantle the myths that have been circulating, showcasing why Australians are more resilient in the face of rate hikes than you might think.
Beneath the surface of the rental crisis lurks a complex web of cause and effect. Over six years, a dwindling supply of rental properties has collided with steady demand to create a perfect storm. We peel back the legislative layers to reveal how recent property market shifts have starved the rental pool, and why proposals like increased social housing or build-to-rent schemes might not be the silver bullets they're made out to be. Instead, I champion a more immediate solution: empowering the private investor. With a candid look at borrowing constraints and rising interest rates, I navigate the currents of change and pinpoint how to harness these challenges for investment success.
As we usher in an era of variable mortgage rates, the whispers of market sentiment change grow louder. I share decades of industry wisdom to explain why the transition might not spell the forewarned financial fallout and how Australia's robust economic backbone supports homeowners. And finally, as property prices teeter on the edge, I revisit my prediction of an imminent market floor. This episode isn't just about weathering the storm; it's about setting sail at the first sign of clear skies. For veterans and first-time property investors alike, now could be the moment to anchor your portfolio in tomorrow's victories.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Are skyrocketing interest rates making you question your investment strategy? I'm Stuart Wemyss, and on the Investopoly podcast, we tackle the dilemma facing many investors today: whether to pump surplus cash into investments or chip away at that home mortgage. As we bid farewell to the comfort of low interest rates and brace for the impact of significant hikes, this episode guides you through the emotional and financial intricacies of debt management versus investment growth.
Bearing witness to history's lowest interest rates, many of us are now reeling from the sharp climb, questioning our next financial move. Join me as we dissect the implications of a 5.8% home loan interest rate on your cash flow and compare the long-term benefits of extra loan repayments against the potential returns from growth investments. We'll navigate the complexities of after-tax returns and savings, helping you make an informed choice to secure your financial future amidst the current economic landscape.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Are skyrocketing interest rates making you question your investment strategy? I'm Stuart Wemyss, and on the Investopoly podcast, we tackle the dilemma facing many investors today: whether to pump surplus cash into investments or chip away at that home mortgage. As we bid farewell to the comfort of low interest rates and brace for the impact of significant hikes, this episode guides you through the emotional and financial intricacies of debt management versus investment growth.
Bearing witness to history's lowest interest rates, many of us are now reeling from the sharp climb, questioning our next financial move. Join me as we dissect the implications of a 5.8% home loan interest rate on your cash flow and compare the long-term benefits of extra loan repayments against the potential returns from growth investments. We'll navigate the complexities of after-tax returns and savings, helping you make an informed choice to secure your financial future amidst the current economic landscape.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Ever wondered why the Melbourne and Sydney housing markets are as different as chalk and cheese? Well, it's time to quench your curiosity! I'm your host, Stuart Wemyss, and in this fascinating episode, we'll be demystifying the disparities between these two major Australian cities. We'll dive deep into historical growth rates, scrutinise current property prices, and explore unique factors such as population demographics and geographical features that are making waves in these markets. We'll also confront the elephant in the room - the escalating issue of traffic congestion in both cities.
But that's not all! We are ringing in the festive season with our heartiest Christmas wishes to you, dear listeners. As we gear up for the New Year, we're thrilled to reveal a sneak peek into the marvellous content we're cooking up for our blog and website. With new team members joining us, we have more hands to curate and craft informative and engaging content to fill your 2024 with thought-provoking discussions. So buckle up and join us on this journey as we chart the course for an insightful year ahead!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Ever wondered why the Melbourne and Sydney housing markets are as different as chalk and cheese? Well, it's time to quench your curiosity! I'm your host, Stuart Wemyss, and in this fascinating episode, we'll be demystifying the disparities between these two major Australian cities. We'll dive deep into historical growth rates, scrutinise current property prices, and explore unique factors such as population demographics and geographical features that are making waves in these markets. We'll also confront the elephant in the room - the escalating issue of traffic congestion in both cities.
But that's not all! We are ringing in the festive season with our heartiest Christmas wishes to you, dear listeners. As we gear up for the New Year, we're thrilled to reveal a sneak peek into the marvellous content we're cooking up for our blog and website. With new team members joining us, we have more hands to curate and craft informative and engaging content to fill your 2024 with thought-provoking discussions. So buckle up and join us on this journey as we chart the course for an insightful year ahead!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Are you ready to unravel the complexities of tax reform and its potential impact on Australia's fiscal landscape? Together with my co-hosts of Investopoly Podcast, we're set to examine the advantages of GST reform as a fiscal policy tool for economic management and debt reduction, rather than relying solely on monetary policy. We'll discuss the potential benefits of increasing the GST rate for non-essential goods and services as well as shedding light on how this could result in a more balanced wealth distribution across the nation.
As we venture further into the topic, we'll cast a lens on the economic disparities within Australia, and how these might be addressed through GST reform. We'll scrutinize the current economic landscape, the rising cost of living, and how a revised GST structure might alleviate the income tax burden for many Aussies. While the probability of such a reform is low, it's certainly worth discussing and could be a step towards a stronger Australian economy. So, join us as we compare, contrast, and consider the role of tax reform in redefining the future economy of Australia.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Are you ready to unravel the complexities of tax reform and its potential impact on Australia's fiscal landscape? Together with my co-hosts of Investopoly Podcast, we're set to examine the advantages of GST reform as a fiscal policy tool for economic management and debt reduction, rather than relying solely on monetary policy. We'll discuss the potential benefits of increasing the GST rate for non-essential goods and services as well as shedding light on how this could result in a more balanced wealth distribution across the nation.
As we venture further into the topic, we'll cast a lens on the economic disparities within Australia, and how these might be addressed through GST reform. We'll scrutinize the current economic landscape, the rising cost of living, and how a revised GST structure might alleviate the income tax burden for many Aussies. While the probability of such a reform is low, it's certainly worth discussing and could be a step towards a stronger Australian economy. So, join us as we compare, contrast, and consider the role of tax reform in redefining the future economy of Australia.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Why is the property rental yield an invaluable tool in the world of property investment? How can you interpret it to make smart decisions? Today, we're joined by Stuart Wemyss to pull back the curtain on this lucrative topic. Not only will you understand what rental yield is and how it's calculated, but we'll also dive into why they generally range between 2% and 5% in Australia.
We'll be exploring the two main factors that influence rental yields: the size and condition of the property and its location. Stuart will share valuable insights into four possible explanations for a property's rental yield, and how to use this information to determine if a property is investment grade or not. We'll be discussing the importance of understanding the proportion of land versus building value, why a high rental yield may indicate low capital growth, and how to spot if a property is undervalued. If you're interested in property investment, this is a not-to-be-missed episode!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Why is the property rental yield an invaluable tool in the world of property investment? How can you interpret it to make smart decisions? Today, we're joined by Stuart Wemyss to pull back the curtain on this lucrative topic. Not only will you understand what rental yield is and how it's calculated, but we'll also dive into why they generally range between 2% and 5% in Australia.
We'll be exploring the two main factors that influence rental yields: the size and condition of the property and its location. Stuart will share valuable insights into four possible explanations for a property's rental yield, and how to use this information to determine if a property is investment grade or not. We'll be discussing the importance of understanding the proportion of land versus building value, why a high rental yield may indicate low capital growth, and how to spot if a property is undervalued. If you're interested in property investment, this is a not-to-be-missed episode!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Ever wonder how taxes impact your super funds, especially pulled super funds? Get ready to unravel the intricacies of super fund tax treatments and their potential downsides on your balance. This episode offers a deep dive into the realm of unitised products, exposing how capital gains tax liabilities can shrink your super balance, even if you don't sell. We’ll explore alternative direct investment ownership options within super, like a wrap platform or a self-managed super fund, that can shield your balance from these negative impacts.
We won't stop there. We'll also discuss the power of direct investment ownership, including the potential to adopt evidence-based low-cost index investment methodologies, and ethical investing. Plus, we extend our heartfelt thanks to Stephen for suggesting this episode's topic. We invite more such meaningful interactions because, after all, this podcast is for you. Don't forget to share the knowledge and rate us on your listening platform. Until next week, goodbye.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Ever wonder how taxes impact your super funds, especially pulled super funds? Get ready to unravel the intricacies of super fund tax treatments and their potential downsides on your balance. This episode offers a deep dive into the realm of unitised products, exposing how capital gains tax liabilities can shrink your super balance, even if you don't sell. We’ll explore alternative direct investment ownership options within super, like a wrap platform or a self-managed super fund, that can shield your balance from these negative impacts.
We won't stop there. We'll also discuss the power of direct investment ownership, including the potential to adopt evidence-based low-cost index investment methodologies, and ethical investing. Plus, we extend our heartfelt thanks to Stephen for suggesting this episode's topic. We invite more such meaningful interactions because, after all, this podcast is for you. Don't forget to share the knowledge and rate us on your listening platform. Until next week, goodbye.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Looking ahead to Australia's economic future, we're faced with a provocative question - does Australia need a recession now?
This episode promises to stir your thoughts and provide some food for consideration as we delve into the impact of interest rates on inflation and how this tool could be used to induce a deliberate recession. Brace yourself for an in-depth discussion of the implications of rising costs of living, including wages, energy costs, and insurance premiums, on Australians from various income brackets and debt levels. We'll also dissect how businesses may need to increase their charges to sustain their profit margins, potentially triggering a wage-price inflation spiral and an unsustainable economy.
Switching gears, we engage with the potential approach of the Reserve Bank of Australia to manipulate interest rates in an attempt to counter inflation and possibly induce a recession. We promise an enlightening exploration of its possible impact on productivity and inflation, and how this strategy could stabilize the economy for the long haul. However, this episode isn't all doom and gloom; we'll also highlight the potential opportunities in such a scenario to restructure certain industries. But we won't shy away from the possible downside either, emphasizing that a deep recession isn't necessary to gain the desired outcome. Need some insights into Australia's economic future? Prepare for a roller-coaster ride of ideas and perspectives in this episode.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Looking ahead to Australia's economic future, we're faced with a provocative question - does Australia need a recession now?
This episode promises to stir your thoughts and provide some food for consideration as we delve into the impact of interest rates on inflation and how this tool could be used to induce a deliberate recession. Brace yourself for an in-depth discussion of the implications of rising costs of living, including wages, energy costs, and insurance premiums, on Australians from various income brackets and debt levels. We'll also dissect how businesses may need to increase their charges to sustain their profit margins, potentially triggering a wage-price inflation spiral and an unsustainable economy.
Switching gears, we engage with the potential approach of the Reserve Bank of Australia to manipulate interest rates in an attempt to counter inflation and possibly induce a recession. We promise an enlightening exploration of its possible impact on productivity and inflation, and how this strategy could stabilize the economy for the long haul. However, this episode isn't all doom and gloom; we'll also highlight the potential opportunities in such a scenario to restructure certain industries. But we won't shy away from the possible downside either, emphasizing that a deep recession isn't necessary to gain the desired outcome. Need some insights into Australia's economic future? Prepare for a roller-coaster ride of ideas and perspectives in this episode.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Click here to read the full blog including charts.
What if you could double your real estate investment in a decade? Join our host, Stuart Wemyss, as he ventures into the rich field of residential real estate returns, dissecting the figures to expose a fascinating average decade-long return of 9.7%. He pulls apart this promising percentage, exploring its components of 7.3% capital growth and 2.4% net rental yield. Yet what lies behind the volatility of these returns? Wemyss will take you through the highs and lows of the past four decades, bringing the figures to life with his insightful analysis.
But that's not all. We're also delving into the complexities of the Australian rental crisis and the impact it's having on private landlords. Why are they exiting the market? How is above-average rental growth influencing capital growth? And what actions can the government take to encourage more private investors? We're going to analyse these critical issues in detail. Lastly, we turn to the future, projecting the potential wealth impact in 10 years. This episode is packed with in-depth analysis and insights that could potentially have a significant impact on your investment strategy. Prepare to see your real estate investments in a new light.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Click here to read the full blog including charts.
What if you could double your real estate investment in a decade? Join our host, Stuart Wemyss, as he ventures into the rich field of residential real estate returns, dissecting the figures to expose a fascinating average decade-long return of 9.7%. He pulls apart this promising percentage, exploring its components of 7.3% capital growth and 2.4% net rental yield. Yet what lies behind the volatility of these returns? Wemyss will take you through the highs and lows of the past four decades, bringing the figures to life with his insightful analysis.
But that's not all. We're also delving into the complexities of the Australian rental crisis and the impact it's having on private landlords. Why are they exiting the market? How is above-average rental growth influencing capital growth? And what actions can the government take to encourage more private investors? We're going to analyse these critical issues in detail. Lastly, we turn to the future, projecting the potential wealth impact in 10 years. This episode is packed with in-depth analysis and insights that could potentially have a significant impact on your investment strategy. Prepare to see your real estate investments in a new light.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Ready to ramp up your grasp on the property market? Let's do it together as I, Stuart Wemyss, guide you through the labyrinth of property terminologies like never before. We'll start by unveiling the mysteries of the land value, loan to value ratio, value of improvements, comparable sales and calculating the gross rental yield, essentially everything you need to know to estimate the market value of a property. By the end of this, you won't just be a bystander in the property market, but an informed and active participant.
Wait, there's more! We don't stop at mere basics. Buckle up as we navigate through the advanced terrain of property investment terminologies including negative gearing, cash flow shortfalls, borrowing capacity, borrowable equity, and compounding capital growth rate. Learn how to calculate pre-tax and post-tax cash flow shortfalls, borrowable equity, and the compounding capital growth rate. We'll also dissect how net sale proceeds, capital gains tax and land tax can impact the potential returns. Whether you're a seasoned investor or a newbie, this podcast is set to revolutionize your understanding of the property market. So sit back, relax and let's conquer the property market together!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Ready to ramp up your grasp on the property market? Let's do it together as I, Stuart Wemyss, guide you through the labyrinth of property terminologies like never before. We'll start by unveiling the mysteries of the land value, loan to value ratio, value of improvements, comparable sales and calculating the gross rental yield, essentially everything you need to know to estimate the market value of a property. By the end of this, you won't just be a bystander in the property market, but an informed and active participant.
Wait, there's more! We don't stop at mere basics. Buckle up as we navigate through the advanced terrain of property investment terminologies including negative gearing, cash flow shortfalls, borrowing capacity, borrowable equity, and compounding capital growth rate. Learn how to calculate pre-tax and post-tax cash flow shortfalls, borrowable equity, and the compounding capital growth rate. We'll also dissect how net sale proceeds, capital gains tax and land tax can impact the potential returns. Whether you're a seasoned investor or a newbie, this podcast is set to revolutionize your understanding of the property market. So sit back, relax and let's conquer the property market together!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog online.
Are you prepared to conquer the volatile landscape of share market investing? We'll dissect the intricacies of this exciting yet challenging realm. We'll delve into the art of identifying potent markets through historical data, employ evidence-based methodologies to trim down investment risk, and scrutinise the performance of diverse asset classes over the previous decade. Did you know that a mere 7 stocks on the S&P 500 index account for a quarter of its total value and all its returns this year?
As we navigate deeper into the world of share market investing, we'll piece together how a meticulously curated portfolio can be your safeguard against risk and your ticket to maximising returns. We'll talk about the merits of cost-effective indexing approaches tailored to different geographical markets. Plus, we'll unravel the enigma of the law of mean reversion and how it can be wielded to boost your returns. From decoding the US CAPE ratio to analysing the top 10 most valuable stocks, this podcast is your treasure trove of investment wisdom. Whether you're a seasoned investor or a novice, this episode equips you with the strategies you need to successfully traverse the share market's rollercoaster ride of risks and rewards.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog online.
Are you prepared to conquer the volatile landscape of share market investing? We'll dissect the intricacies of this exciting yet challenging realm. We'll delve into the art of identifying potent markets through historical data, employ evidence-based methodologies to trim down investment risk, and scrutinise the performance of diverse asset classes over the previous decade. Did you know that a mere 7 stocks on the S&P 500 index account for a quarter of its total value and all its returns this year?
As we navigate deeper into the world of share market investing, we'll piece together how a meticulously curated portfolio can be your safeguard against risk and your ticket to maximising returns. We'll talk about the merits of cost-effective indexing approaches tailored to different geographical markets. Plus, we'll unravel the enigma of the law of mean reversion and how it can be wielded to boost your returns. From decoding the US CAPE ratio to analysing the top 10 most valuable stocks, this podcast is your treasure trove of investment wisdom. Whether you're a seasoned investor or a novice, this episode equips you with the strategies you need to successfully traverse the share market's rollercoaster ride of risks and rewards.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Are you ready to untangle the complexities of super investing in property with borrowings? We're going back in time to 2007 when the game changed for self-managed super funds. Once the laws allowed these funds to borrow for investment, it sparked a significant rise in borrowing, culminating to almost $45 billion over a decade. But things have shifted in recent years, with borrowing in super declining. What led to this change? And with new lenders on the scene offering irresistible terms, is it time to revisit this strategy? We're unpacking all this and more.
But we won't stop there. We're going even deeper to uncover the concept of borrowing to invest in superannuation. We'll discuss the tax implications of having up to $1.9 million in pension phase and the extra 15% tax on super balances above $3 million. We'll shed light on the pros and cons of this strategy, its sensitivity to changes in legislation and lending products, and why it might be a good idea to keep gearing outside of super. So get ready, it's time to demystify super investing in property.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Are you ready to untangle the complexities of super investing in property with borrowings? We're going back in time to 2007 when the game changed for self-managed super funds. Once the laws allowed these funds to borrow for investment, it sparked a significant rise in borrowing, culminating to almost $45 billion over a decade. But things have shifted in recent years, with borrowing in super declining. What led to this change? And with new lenders on the scene offering irresistible terms, is it time to revisit this strategy? We're unpacking all this and more.
But we won't stop there. We're going even deeper to uncover the concept of borrowing to invest in superannuation. We'll discuss the tax implications of having up to $1.9 million in pension phase and the extra 15% tax on super balances above $3 million. We'll shed light on the pros and cons of this strategy, its sensitivity to changes in legislation and lending products, and why it might be a good idea to keep gearing outside of super. So get ready, it's time to demystify super investing in property.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Ever wondered how you could smartly diversify your investment portfolio, reduce risk and achieve commendable performance over time? What if I told you the answer lies in Exchange Traded Funds (ETFs)? Today, we're breaking down everything you need to know about ETFs. We'll discuss what an ETF is, the process of investing in one, and the fees that come with it. We'll also introduce you to the key players who ensure ETFs run smoothly, and discuss the risks involved and how market liquidity is maintained.
But we're not stopping there. We're also examining how to integrate ETFs into your investment portfolio for maximum advantages. We'll share insights on the liquidity, risk, and performance of ETFs, as well as tips on picking ETFs that align with your investment philosophy. We'll explore the wonders of diversified ETFs and discuss how combining ETFs with managed funds can give you the best of both worlds. What's more? We'll also delve into how ETFs can be a great tool for long-term savings, particularly for children. So sit back, relax, and prepare for a wealth of knowledge on ETFs and their potential role in your wealth-building strategy. This is one conversation you don't want to miss!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Ever wondered how you could smartly diversify your investment portfolio, reduce risk and achieve commendable performance over time? What if I told you the answer lies in Exchange Traded Funds (ETFs)? Today, we're breaking down everything you need to know about ETFs. We'll discuss what an ETF is, the process of investing in one, and the fees that come with it. We'll also introduce you to the key players who ensure ETFs run smoothly, and discuss the risks involved and how market liquidity is maintained.
But we're not stopping there. We're also examining how to integrate ETFs into your investment portfolio for maximum advantages. We'll share insights on the liquidity, risk, and performance of ETFs, as well as tips on picking ETFs that align with your investment philosophy. We'll explore the wonders of diversified ETFs and discuss how combining ETFs with managed funds can give you the best of both worlds. What's more? We'll also delve into how ETFs can be a great tool for long-term savings, particularly for children. So sit back, relax, and prepare for a wealth of knowledge on ETFs and their potential role in your wealth-building strategy. This is one conversation you don't want to miss!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Ever thought about how rising costs of construction can impact your property investment? Brace yourself for a deep dive into the world of property investment with our expert, Stuart Wemyss. With a keen focus on construction costs, we unravel the layers of how a 5.3% p.a. increase from 1966 to 2023 can influence the building value of your property. Together, we'll decipher how these escalating costs are balanced against inevitable factors like depreciation and maintenance. Grasp the golden rule - for a property value to double every decade, the land value must appreciate by 10%. This episode will empower you with the knowledge to make shrewd investment decisions.
We shift gears to discuss the crucial role of land value in property investment. Unearth the secrets of why investing in prime land can yield higher returns. Stuart teaches us the pitfalls of being swayed by short-term performance and why placing your bets on the underlying land value can be a more profitable strategy. Join us as we untangle these complex threads and equip you with actionable strategies and tips to navigate the realm of property investment. With this episode, we promise to arm you with insights to build wealth through property like a pro!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Read the full blog here.
Ever thought about how rising costs of construction can impact your property investment? Brace yourself for a deep dive into the world of property investment with our expert, Stuart Wemyss. With a keen focus on construction costs, we unravel the layers of how a 5.3% p.a. increase from 1966 to 2023 can influence the building value of your property. Together, we'll decipher how these escalating costs are balanced against inevitable factors like depreciation and maintenance. Grasp the golden rule - for a property value to double every decade, the land value must appreciate by 10%. This episode will empower you with the knowledge to make shrewd investment decisions.
We shift gears to discuss the crucial role of land value in property investment. Unearth the secrets of why investing in prime land can yield higher returns. Stuart teaches us the pitfalls of being swayed by short-term performance and why placing your bets on the underlying land value can be a more profitable strategy. Join us as we untangle these complex threads and equip you with actionable strategies and tips to navigate the realm of property investment. With this episode, we promise to arm you with insights to build wealth through property like a pro!
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Watch the presentation on YouTube here.
Imagine a world where you have full control over your finances, where every dollar spent contributes to your joy and standard of living. This is not a dream with no basis in reality; it's completely achievable with an understanding of effective cash flow management. I'm Stuart Weems, here to guide you through this crucial financial maze. This episode uncovers the secrets of eliminating unconscious spending, enhancing your enjoyment per dollar, and the necessity of spending less than you earn.
We'll dissect the three types of expenses – non-discretionary, conscious discretionary, and unconscious discretionary - and reveal different strategies to handle each. You'll learn how to control your unconscious discretionary spending at an aggregate level and the vital role it plays in your financial independence. We'll also discuss the two-account system – a primary account and a spending account – as a simple solution for effective cash flow management. So, join me as we embark on this journey to achieve financial freedom, one dollar at a time.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Watch the presentation on YouTube here.
Imagine a world where you have full control over your finances, where every dollar spent contributes to your joy and standard of living. This is not a dream with no basis in reality; it's completely achievable with an understanding of effective cash flow management. I'm Stuart Weems, here to guide you through this crucial financial maze. This episode uncovers the secrets of eliminating unconscious spending, enhancing your enjoyment per dollar, and the necessity of spending less than you earn.
We'll dissect the three types of expenses – non-discretionary, conscious discretionary, and unconscious discretionary - and reveal different strategies to handle each. You'll learn how to control your unconscious discretionary spending at an aggregate level and the vital role it plays in your financial independence. We'll also discuss the two-account system – a primary account and a spending account – as a simple solution for effective cash flow management. So, join me as we embark on this journey to achieve financial freedom, one dollar at a time.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Watch the presentation on YouTube here.
Curious about how to navigate the seemingly complicated world of share market investing? Join me, Stuart Weems, as I unravel the key principles of investing and illustrate why you don't need to be a Wall Street expert to grow your wealth. Together, we'll explore the merits of a hands-off investment approach, the beauty of regular income streams, and the freedom of liquid investments. We'll also delve into the potential flipside - the volatility that can sometimes come with share markets, and why it's crucial to tread with caution.
In this journey, I'll share insights on simple share market investing, emphasizing the importance of getting advice tailored to your unique circumstances. We'll discuss the advantages of predictable income, the liquidity of investments, and the liberty of low costs, all while equipping you with a simple and straightforward strategy to make the most of your investments in the stock market. So, buckle up for a deep dive into the world of investing, where knowledge is power and with the right information, anyone can master the game of wealth building.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Watch the presentation on YouTube here.
Curious about how to navigate the seemingly complicated world of share market investing? Join me, Stuart Weems, as I unravel the key principles of investing and illustrate why you don't need to be a Wall Street expert to grow your wealth. Together, we'll explore the merits of a hands-off investment approach, the beauty of regular income streams, and the freedom of liquid investments. We'll also delve into the potential flipside - the volatility that can sometimes come with share markets, and why it's crucial to tread with caution.
In this journey, I'll share insights on simple share market investing, emphasizing the importance of getting advice tailored to your unique circumstances. We'll discuss the advantages of predictable income, the liquidity of investments, and the liberty of low costs, all while equipping you with a simple and straightforward strategy to make the most of your investments in the stock market. So, buckle up for a deep dive into the world of investing, where knowledge is power and with the right information, anyone can master the game of wealth building.
If this episode resonated with you, please leave a rating on your favourite podcast platform. It helps me reach more incredible listeners like you. Thank you for being a part of this journey! :-)
Click here to subscribe to Stuart's weekly email.
SPECIAL OFFER: Buy a one of Stuart's books for ONLY $20 including delivery. Use the discount code blog here.
Work with Stuart's team: At ProSolution Private Clients we encourage clients to adopt a holistic and evidence-based approach when making financial decisions. Visit our website.
Follow Stuart on socials: Twitter/X and LinkedIn.
IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
Watch the presentation on YouTube here.
Are you feeling overwhelmed by the complexities of superannuation and its impact on your retirement planning? Fear not! We’re here to break down these financial intricacies, equipping you with the knowledge to retire comfortably. In this dialogue, we address the pressing concerns about fluctuating super rules and government control. We dissect the restrictions on contributions, including the nitty-gritty of concessional and non-concessional contributions and their tax implications, and the potential changes to the age of super access.
Did you know that understanding your superannuation can be the difference between an okay retirement and a golden one? In the second half of our discussion, we delve into the multifaceted world of retirement funding. We give you the tools to calculate how much superannuation you'll need to maintain your lifestyle post-retirement, taking into account crucial factors such as your age. Additionally, we highlight the importance of diversifying your assets to supplement your superannuation and create a well-rounded financial padding for your retirement. This episode is your one-stop-shop for all things superannuation and retirement planning, so tune in and future-proof your finances!
To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/
Watch the presentation on YouTube here.
Ever wonder why property investing is such a profitable avenue? It's not just the properties themselves, but the power of leveraging that plays a crucial role. Welcome to an enlightening exploration where I, Stuart Weems, peel back the curtain on the ins and outs of property investing. I'll be chatting about key insights like the importance of growth over income and the long-term benefits of holding onto your property investments.
In the first part of our discussion, I'll shed light on how property markets operate in two distinct cycles and why understanding these can be a game-changer for your investments. In the second segment, I'll guide you through an uncomplicated approach to property investing. The emphasis here will be on smart financial leveraging, and I'll be demonstrating the concept of compounding capital growth with the help of charts. Whether you're a seasoned investor or a beginner, this episode is set to revolutionize your perspective on property investing. Plus, for those eager to dive even deeper, I've got a link to a YouTube video that will take you further down the rabbit hole. Buckle up for a property investing masterclass like no other.
To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/
Watch the presentation on YouTube here.
Ready to level up your tax knowledge? This episode promises to make you rethink everything you thought you knew about taxes. We're breaking down complex tax concepts and deductions, from understanding ordinary and statutory income to exploring work-related expenses and super contributions. We're paving the way for you to keep more of your hard-earned money in your pocket, demonstrating how to maximize deductions and create a direct connection between your expenses and your income. You'll walk away equipped with easy-to-understand strategies and insights, ready to tackle your tax journey with confidence.
But, we're not stopping there. This episode also pulls back the curtain on Capital Gains Tax (CGT). Ever wondered what could happen if you miscalculated your tax liability? Hint: it's not pretty. We're dissecting everything, from understanding your asset's cost base and depreciation to leveraging small business CGT concessions. We're revealing how to avoid the double taxing trap and ensure your investments are tax-effective. Whether you're a salaried employee or a small business owner, this episode is designed to help you navigate the tricky waters of taxes and ensure you're not paying a cent more than you need to. Buckle up for an enlightening and empowering tax journey!
To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/
Can you imagine opening a third super fund, enabling you to accumulate assets outside of your retirement fund and plan for reduced taxes? What if you learned that you could retire earlier or cut down on work hours without stressing over super balance? Join me in this captivating discussion as we unlock financial planning strategies that propel you towards an early retirement. We'll unravel the power of a third superfund, and I promise you, it's a game-changer! Furthermore, we shed light on the dividend imputation system, a unique feature of Australia and New Zealand, aimed at avoiding double taxation of corporate profits.
As we venture into the intricate world of finance, we also explore how to leverage investment companies or trusts to manage your third fund effectively.
To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/
Click here to read the full blog.
Ever wondered why Perth’s property market remains stagnant despite booming markets elsewhere in Australia? Could Perth, in contradiction of its recent performance, soon be the next growth market? Prepare to have your assumptions challenged as we look at the current state of Perth's property market in a fresh light. Leverage insights from the Real Estate Institute of Australia and explore intriguing historical growth patterns which point to a potential surge in Perth’s property value.
We also take you on a balanced journey through the risks and rewards of investing in Perth. With its high rental yields, a tight rental market, and projected population growth, Perth may seem ripe for investment. But remember, it's not all rosy. There are risks to weigh, such as its reliance on the mining industry. Whether you’re a seasoned investor or a novice looking to enter the market, this episode is packed with invaluable data-backed insights that could change the way you view Perth's property market and your investment strategy. Tune in, and let’s decode the opportunities that Perth presents in the property investment landscape.
Property long term growth chart.
To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/
Read the full blog here.
What would you do if you had the opportunity to revolutionise your financial future? Join us as we navigate the complex world of investing and debt reduction, providing you with strategies and insights to build your wealth. This episode explores the importance of financial buffers, the power of reducing debts before retirement, and understanding how your cash flow responds to interest rate changes. We guarantee you'll walk away with a new perspective on managing your finances effectively.
Change gears with us as we delve into strategies for reducing debt when your income falls short. We evaluate various methods, including selling investments, drawing from your super, and even downsizing your home. We promise to equip you with the knowledge to make informed decisions, exploring the long-term average interest rates on home loans, potential earnings from investing in growth assets after tax, and the benefits of compounding capital growth. By the end of this episode, you'll understand the power of holding onto investments for the long-term, and how it can shape your financial future. Tune in as we guide you along the path to financial success.
To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/
Do you ever ponder the enigma of superannuation returns and how they're impacted by elements such as increasing interest rates and shifting work dynamics? We promise you an enlightening exploration that would shed light on these queries. We chat about the performance of different industry funds during the 2022-23 financial year, despite the tumultuous times, and how they managed to finish above average. We pull back the curtain on the top 8 industry funds, pinpointing the factors that have influenced their performance, particularly the thorny issue of unlisted asset valuation.
Intrigued about where you should be investing your money if you're a long-term player with a high-risk appetite? We tackle this head-on, highlighting the importance of share markets. We also take a critical look at the fees charged by industry super funds in comparison to client portfolios, offering insights on the potential advantages of making a switch. And as a cherry on top, we present a compelling reason why UniSuper may just be the best industry super fund for you. Tune in for a discursive journey into the intricate world of superannuation and industry funds.To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/
Ready to unlock the secret to successful investing that many overlook? This episode promises to reveal the power of patience in building a solid financial future. Inspired by the wisdom of Charlie Munger, Warren Buffet's long-term business partner, we'll explore how discipline and patience can yield incredible investment returns. Unpredictability is part and parcel of the short-term investment game, but when you're in for the long haul, returns become more stable. To illustrate, we'll walk you through a real-life example of a client who learned the art of waiting in property investment.
But the revelation doesn't stop there! We'll also help you grasp the vital role that major industry super funds play in managing your wealth. Get ready to understand the intricacies of the 2023 financial year superannuation returns. And here's the twist - the art of 'doing nothing' can be a game-changer in the world of investments. This episode is a blend of theoretical insights, practical examples, and anticipatory guidance, all aimed at equipping you to build a prosperous financial future. Tune in and elevate your investing prowess!
To subscribe to Stuart's blog: https://www.prosolution.com.au/stay-connected/
Read the full blog here.
Are you ready to uncover the secrets of successful investing? I promise, this episode will equip you with the essential knowledge and strategies needed to lay a solid foundation for wealth-building. As your host, Stuart Weems, we'll be tackling the pivotal first steps in this wealth-creation journey. Drawing inspiration from Stephen Covey, we'll explore the necessity of having a clear goal, understanding the significance of wealth accumulation, and how it can radically alter your financial decisions.
But that's not all. We'll also be diving into the value of your team in wealth-building. Hear the insights on leveraging the experience of others to sidestep costly mistakes and enhance your decision-making prowess in investing. We'll also dissect the crucial aspect of mastering your cash flow, showing how to eliminate unnecessary expenditure and the importance of spending less than you earn. So gear up and join the conversation as we navigate the path to successful wealth-building together.
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Are you ready to challenge conventional wisdom about investing and home loan repayment strategies when interest rates are on the rise? I share why it's essential to rethink your investment tactics in the face of increasing interest rates. We will compare after-tax returns from both scenarios - investing in growth assets or focusing on home loan repayment. By the end of the episode, you'll have a clear understanding of the significance of compounding returns and how they shape wealth building.
In the second half, we peel back the layers of uncertainty that cloud investment returns, emphasizing the importance of long-term strategies rather than chasing short-term gains. I offer strategies for balancing debt reduction and investing, showing you how it's feasible to reduce non-tax deductible debt while simultaneously investing. We'll consider personal circumstances, risk tolerance, and future income expectations to tailor the right approach for you. Tune in and discover how to navigate the turbulent waters of investing and home loan repayments in a high-interest-rate environment.
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Ever thought about the financial impacts of owning a home versus renting? We'll be tackling this head-on today. I'm Stuart Wemyss, your guide through this financial labyrinth, and I'm going to clear up some key misconceptions around capital gains tax exemptions and how they can still apply even when renting out your property. We'll decode the six-year rule and its effects on your exemption. Plus, I'll break down the difference between land tax and capital gains tax, and explain how it impacts your exemptions.
As we venture further, we'll explore how a downsizing strategy could be your ticket to paying off non-deductible debt, even if that dream home is a little out of reach. We'll also navigate the uncertainties of renting; like that all too familiar fear of being displaced if your landlord decides not to renew the lease. And we'll take a realistic look at the cost of maintaining a family home – spoiler alert, it can sometimes be higher than an investment property. Tune in for a wealth of knowledge, insights, and tips to help you blaze your trail to financial stability.
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How long can we expect the current high interest rates to stick around, and what can we do to navigate this challenging financial climate? I share my insights and tips on managing debt and restructuring loans to soften the blow of rising rates, while also taking a look back at interest rates over the past 40 years to make sense of the current situation.
As we explore the impact of these higher rates on consumer spending, I also discuss how Australians have been taking advantage of lower interest rates by building up their buffers and reveal the surprising reasons why people with higher incomes have benefited more from low rates than those with lower levels of debt. Plus, I share two enlightening CBA charts that paint a clear picture of what's to come. Don't miss this essential episode to help you stay afloat in the rough waters of today's financial landscape!
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What if your borrowing capacity isn't enough to allow you to invest in a high-quality property? Should you reduce your budget or consider investing in shares?
Discover the similarities and differences between property and share investments, as well as the benefits of borrowing to invest. Gain valuable insights on investing in the share market, the significance of timing, and the necessity of financial advice when investing large sums of money over extended periods. Don't miss this opportunity to enhance your investment strategies and grow your wealth through careful planning and expert advice.
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What if inflation remains stubbornly high for over a decade? Today, I explore the potential risks of increased inflation and interest rates, based on compelling research by US firm Research Affiliates. We delve into the historical behavour of inflation since 1970 and discuss the significant impact of low interest rates and quantitative easing on the current inflation scenario.
Join me as I examine the ripple effects of higher interest rates on borrowers, the possibility of a wage-price spiral fuelling inflation, and the role of housing costs and energy prices in the consumer price index. I also share insights on portfolio construction during these complex times, including strategies to invest in equities, REITs, and bonds without dramatically reducing exposure. Together, we'll navigate the challenges and uncertainties of the financial landscape, focusing on long-term goals and wealth-building strategies.
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Some people plan to give money to beneficiaries (typically children and/or charities) before they pass away, especially if they consider they have more than enough money i.e., surplus wealth. Often, their thesis is that their kids can make good use of the money now, whilst they are younger, rather than waiting another couple of decades. By that time, they’ll probably already be financially established.
I discuss what you must consider before making an early inherence.
Inheritance tsunami
I’ve stated before that the amount of inheritance (mainly from the baby boomer generation) that is likely to be passed on will increase fourfold over the next three decades. Approximately, $3.5 trillion will be bequeathed over the next decade to reach $224 billion per year by 2050! That’s huge.
However, according to ANZ Private Bank’s research, approximately 70% of intergenerational wealth transfers fail because of family conflicts and other problems. The best way to avoid many of these problems is to gift wealth prior to death.
Inheritances are often received too late in life
Typically, by the time both parents have passed away, most people are already (financially) well established. They have worked hard to pay for the costs of raising a family, repaying a home loan, investing in super and other assets. Receiving an inherence will only make an already strong financial position, even stronger.
Arguably, and putting aside that I think a bit of ‘financial struggle’ is beneficial and necessary, it would be more useful for people to receive inherences earlier in life. It would help them upgrade their home sooner (and maybe get into a good public-school zone) and invest sooner, thereby benefiting from compounding capital growth.
It’s possible that future generations could continue to benefit from early inherence if your children agree to repeating the practice. That is; I’m going to give you an early inherence on the understanding that you will make smart financial decisions, which hopefully puts you in the position of being able to do the same for your children. Of course, nothing is guaranteed especially when gifting monies.
Avoiding family disputes
Most family disputes can be avoided with clear, regular and forthright communication. If all beneficiaries know what their entitlements will be (when you die), a dispute is less likely. However, the best way to avoid disputes is to gift monies whilst you are alive – as you can manage relationships and ensure people are treated fairly. This is a big advantage that results from making an early inherence.
What if they waste the money?
Once you gift monies, you relinquish control over what the recipient does with them. Sometimes, donors worry that recipients may “waste” the money they receive on frivolous items.
However, in my decades of experience, I have found that recipients treat inherited monies often with more care, diligence and respect than they do their own money. I haven’t (yet) come across a situation where someone has “wasted” an early inherence. Admittedly, all my clients are responsible with money.
Of course, it makes sense to consider whether a recipient is likely to make smart financial decisions. If they have a long history of doing so, then it’s likely your gift will be in good hands.
How to work out how much to gift and when
The main risk with making an early inherence is that you give too much away and compromise your own ability to fund your retirement.
The best way to mitigate that risk is to prepare financial projections and be conservative with your assumptions regarding (1) future investment returns and (2) how much you spend each year (living expenses).
For
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Commentators often refer to the price of property relative to household incomes. For example, it is estimated that property in Melbourne and Sydney now costs more than 10 times the median household income.
But is this really a meaningful measure because if it is, property cannot continue to grow at a faster rate than incomes (a point often made).
If prices continue to rise faster than income, how will property be affordable?
At the beginning of this year, I wrote about the factors that have driven property prices higher over the past four decades. I concluded that borrowing capacity together with higher incomes have increased 3.5x since 1980, whereas property prices have increased 4.5x. That is, prices have grown faster than incomes and borrowing capacity growth combined. Clearly, something else has contributed to property growth for it to be affordable for some buyers.
It is worth stating at this point that borrowing capacity is likely to be flat in the future. That is, borrowing capacity will not increase anywhere near it has over the past four decades. That will probably have an adverse effect on property price growth in many locations.
Do locations with higher incomes perform better?
Data analyst, Jeremy Sheppard has done some work on this question and found there’s a weak statistical relationship between income and capital growth rates. The thesis is that people that earn more can afford to pay more for property. Therefore, we should invest in locations that have above average household incomes. A big problem with Jeremy’s analysis is that the data may not be accurate and/or out of date (which Jeremy acknowledges), so this thesis is impossible to test.
I think the reality is that incomes do have an impact, but so do many other factors, so it is impossible to isolate the impact of income alone. Also, do you really need census data to identify the locations that wealthy people want to live in? I think those locations are pretty obvious.
What other factors may be pushing property prices higher?
Approximately, one-third of Australians own their home without a mortgage, one-third own their home with a mortgage and one-third rent. That means that approximately two-thirds of Australians’ (owner-occupier) property decisions are driven by lifestyle goals. Of course, people will draw on financial resources other than income to achieve their lifestyle goals.
Property prices can be driven higher by two factors. Firstly, an appreciation of the underlying land value (which is a function of supply and demand). Secondly, improvements on the land e.g., renovations, rebuild, etc. It is important to remember this when studying how median prices have changed over time. Houses are more expensive because, to some extent, the dwellings have been improved.
I discuss the financial resources that some people use to upgrade their homes and/or invest in property.
Investment returns
Share markets have returned circa 10% p.a. over the past 40 years. Super funds have delivered similar returns (circa 9% p.a.). Some of this ‘wealth effect’ will eventually make its way into the property market as investors use some of this wealth to upgrade, improve their home, and/or invest.
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All investment asset classes move in cycles. Investment returns are almost never linear. As such, investors must expect good and bad periods, which is why patience and discipline are big contributors to an investor’s success.
I suspect that commercial property investors’ patience and discipline are about to be tested. This asset class is facing a lot of challenges. However, as they say, every cloud has a silver lining so there could be good investment opportunities over the coming months and years.
What challenges is commercial property facing?
Commercial property was the asset class that was the most adversely impacted by Covid lockdowns, especially the retail and office sectors.
Commercial property landlords had to provide rent waivers and reductions to retail tenants to help them through lockdown periods. But, unfortunately, not all retail businesses survived which increased vacancy rates.
Employees were also encouraged to work from home for long periods of time. This experience demonstrated that people did not necessarily need to be in the office full-time. As such, most of the office workforce has adopted a hybrid work model that involves working from home 2 to 3 days per week. The consequence of this is that large employers have reduced their commercial office footprint. In addition, businesses have been less inclined to commit to new leases until they can ascertain what long-term working arrangements may look like.
The upshot of this is that tenant demand for office and retail property is very low at the moment.
That said, things are changing - albeit slowly. More employers are demanding that their workforce spend more time in the office. nab is probably the largest corporate leading this charge demanding all senior managers work from the office 5-days per week. I expect other large corporates to follow, especially if the unemployment rate normalises (it’s currently 3.5% - the normal level is circa 5%).
But the real problem is cap rates!
Cap rates is an abbreviated term for capitalisation rate. It is the key component used to value commercial property. Unlike residential property, the value of a commercial property is dependent on the rental income that a property generates (whereas residential property is driven more by the value of the underlying land).
Therefore, to value a commercial property, you must apply a cap rate to its income. The cap rate is the amount of return that an investor demands to invest in that property.
For example, if investors demand 5% income return from property and a particular property generates $100k of net rental income per year, then its technical value is $2 million (being $100k divided by the cap rate of 5%).
Cap rates are influenced by several factors, but the main influencer is the levels of income offered by alternative investment asset classes. For example, if term deposits (which are risk-free) are paying 4.5% p.a., then you probably want circa 6.5% p.a. or more to invest in commercial property, to be compensated for the higher risk.
When interest rates were very low (only 18 months ago), investors were searching for assets that paid higher income, such as commercial property. Investors were prepared to accept lower income returns from commercial property. Last year, cap rates in Melbourne and Sydney typically ranged between 4.25% and 5.50% for office property.
However, now that you can earn more than 6% from investing in a big-4-bank bond (which is virtually risk free), commercial property cap rates must increase.
Using the example above (i.e., commercial property worth $2 million on a 5% cap rate), if we assume the market cap rate rises
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Many people are attracted to borrowing to invest in property because of negative gearing tax benefits. That is, the (income) loss that an investment property generates helps reduce the amount of tax you pay on your salary or business income.
However, investing in shares also offers unique tax advantages.
I thought it would be interesting to quantify and compare the taxation outcomes of these two investment options.
Taxation of share market investments
Investing in shares can result in some attractive tax outcomes.
Tax credits
Australia’s imputation system, which was introduced by the Hawke-Keating government in 1987, is unique to Australia. It seeks to avoid the double taxation of corporate profits. It does that by giving shareholders a credit (called franking credit) for the tax that the company has paid.
For example, if a listed company makes a net profit of $100, it will pay tax at the flat rate of 30%, so its profit after tax is $70. If it pays the profit out as a dividend to shareholders, the shareholders will receive $70 in cash and a franking credit of $30.
Therefore, if the shareholder has no other taxable income, when they lodge their personal tax return, the $30 franking credits will be refunded, meaning that shareholder has received $100 in total (being $70 dividend plus $30 tax refund).
Therefore, investing in Australian shares which pay franked dividends is particularly attractive to taxpayers that have low tax rates such as super funds, family trusts that have adult beneficiaries with low taxable incomes, and so forth.
Even if you are on the highest marginal income tax rate, you are only going to pay 17% of tax on (fully franked) dividend income, because the company has already paid 30%.
If you invest in international shares, and Australia has a tax treaty with the country where the shares are listed, you may be able to claim a foreign income tax offset for the tax that you have been deemed to pay in that country. Although, these credits are not nearly as generous as the Australian imputation system.
CGT
Capital gains tax applies to share investments. If you hold shares for more than 12 months, you will be entitled to the 50% CGT discount, which means only half of the net capital gain will be included in your taxable income.
As a rule of thumb, you can calculate your CGT liability by multiplying the net capital gain by 23.5% (being half of the top marginal tax rate including the Medicare levy; 47%).
Perhaps the biggest advantages of investing in shares from a CGT perspective is the ability to (1) progressively sell and (2) nominate which parcel of shares you are selling.
Selling shares progressively over multiple tax years can help minimise or even avoid crystalising a CGT liability. This benefit cannot be understated.
Selecting which method you use to calculate your CGT liability (e.g., FIFO, LIFO, HIFO, as explained here) can also help minimise CGT liabilities.
Share investments are very flexible which allows you (or more correctly, your holistic accountant) to proactively minimise your taxation liabilities.
Interest and other deductions
If you borrow to invest in shares, the interest you pay in respect to those borrowings will be tax deductible, just like it is with property. Therefore, it is possible to negatively gear share investments, although I would caution against doing so (at least not to the same extent as property), a
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Borrowing capacity has reduced by around 30% over the past year due to the impact of higher interest rates and the increased 3% interest rate buffer that banks must use to calculate your borrowing capacity. This was eloquently depicted in this chart by CBA in February 2023.
I wanted to explore the common strategies that people can use to safely maximise their borrowing capacity.
How to borrow safely
I’ve written several times that building wealth is a marathon not a sprint. Whilst it is good to avoid procrastinating and invest as much as possible, you should never take high risks.
When borrowing, it’s wise to plan for the worst but hope for the best. Look closely at your spending habits to ascertain how much you need to maintain a standard of living. Don’t rely (completely) on variable income such as bonuses. Test your ability to repay at higher interest rates – even if you think they are unlikely. And ensure you have adequate buffers in place to help you navigate any unforeseen changes in circumstances.
As a rule of thumb, if you are borrowing more than 6 to 8 times your total gross annual income, be careful. It could be a sign that you are borrowing too much. Consider the risks. You must have an exit strategy that you can implement if everything goes pear-shaped.
In my experience, it is unnecessary to borrow a huge amount to achieve your goals. People that do accumulate a lot of debt (i.e., what I would consider to be too much) usually do it because they are investing in the wrong properties. Property investing is a game of quality, not quantity. I would rather own one awesome, investment-grade property and have $1.5m of debt than a portfolio of 10 properties with $5.6 million of debt (I’m using an actual example of a portfolio that I saw recently). The former scenario will generate a lot higher risk-adjusted return over the next 20 to 30 years.
My overarching point is, be careful. Don’t overborrow.
Having said that, it is helpful to know what steps you can take to preserve and maximise your borrowing capacity. Here’s a few tips.
Consider using a charge card instead of a credit card
After many years (decades) of actively investing and using different banks, my wife and I ended up accumulating 7 credit cards! Notwithstanding that, they all charge an annual fee which is a waste of money, the aggregate credit limit was 6 figures!
Credit card limits reduce your borrowing capacity because the bank includes approximately 4% of the credit card limit as a monthly expense (to provide for a monthly repayment should you fully utilise the card/s). So, $100,000 of total credit card limits would result in a monthly expense of $4,000 in a banks serviceability calculation, thereby reducing your ability to borrow.
My wife and I always repaid our credit cards in full. We didn’t use them as a source of credit – merely to earn points. Therefore, a few years ago we cancelled all but one card (which we use for business expenses only) and obtained a charge card from American Express which we use for purchases, wherever possible. The advantage is that charge cards don’t have a credit limit because you must repay the full balance each month. So, they don’t impact your borrowing capacity.
Therefore, consider cancelling your credit cards to maximise your borrowing capacity.
If you earn variable income, be careful changing jobs
Many employees have a variable component as part of their overall remuneration package e.g., income that is contingent upon personal and/or company
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The unrefuted trend in all investment markets is mean reversion. It means that a period of below average returns is always followed by a period of above average returns. It is my thesis that investment-grade property in Melbourne looks attractive compared to other markets and that there are several economic tailwinds that may result in the median house prices doubling over the next decade.
The macro environment is positive for property
In short, property prices are driven by the law of supply and demand.
Demand for property is mainly dictated by interest rate settings, unemployment, and access to borrowings (mortgage lending).
Supply is mainly dictated by volume of new construction and consumer sentiment i.e., whether people are willing to buy and sell property. In times of higher uncertainty, most people stop transacting, as we’ve seen over the past 12 months.
Locking in higher discounts now will mean lower future interest rates
All the big 4 bank CEO’s have commented that the mortgage market has become the most competitive that it’s ever been in history. Banks are offering unusually high interest rate discounts and cash incentives to win and retain customers.
This chart (recently published in the AFR) suggests that banks are not generating a high enough return on new loans due to offering significant discounts. That means these discounts probably won’t last. I expect that banks will reduce discounting over the next 6 to 12 months once most of the low fixed rate loans have expired.
As such, there’s a window of opportunity for investors to obtain an interest rate discount of 3% (or more) off the standard variable rate. Your discount will remain in place for the life of the loan.
The chart below sets out interest-only investment interest rates after applying a 3% discount since 2003 (when the data set began) i.e., back testing to see what impact a 3% discount would have had. The average interest rate would have been 4.2% p.a. over the past 20 years (of course, this is theoretical because you would have never received a discount of that size). I think it’s realistic to expect your average interest rate to range between 4% and 5% over the long run. You should do your calculations assuming 6% p.a., just to be safe.
CHART
We need more investors to solve the rental crisis
On average, borrowing capacity has reduced by around 30% over the past year due to (1) the RBA rate hikes and (2) APRA increasing the interest rate buffer that lenders use when testing your ability to repay a loan. This is depicted in the chart published by CBA in its results briefing in February 2023.
CHART
The rental crisis has been driven by a reduction in the number of properties that are available for rent, as I discussed here. There are fewer investment properties for two main reasons being (1) a lot of investors cashed in and sold during 2020 and 2021 and (2) tightening of lending rules since 2017.
The only way to solve the rental crisis is to increase the supply of privately owned rental properties, which is what the government will eventually have to do. They could achieve that by removing the interest rate premium that applies to investment loans (compared to home loans) and reducing the 3% interest rate serviceability buffer.
If/when they do that, it will increase investor demand which will stimulate the market.
High population growth and low unemployment is good for property
Australia’s unemployment rate is only 3.5% which is a historic low. The 10-year average unemploymen
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I was listening to Morgan Housel’s new podcast recently (which I highly recommend by the way), and he said something along the lines of; once you define your investment philosophy, you won’t be distracted by any noise that doesn’t align with it.
It really resonated with me.
Success with investing is more about avoiding mistakes than anything else. Therefore, having a clear, well-defined (evidence-based) investment philosophy will help you avoid getting distracted by any unhelpful ‘noise’, and keep you on the on the straight and narrow.
However, if you don’t have a well-defined investment philosophy, the risk is that you’ll be easily influenced and make financial mistakes.
I thought it might be helpful if I shared my investment philosophy which I can solidify it into four principles.
Principal 1: Short term returns do not help you achieve long term goals
You must align your investment decision time horizons with your goal time horizons.
Most people have a long-term goal of enjoying a comfortable retirement. Retirement will last two to three decades, hopefully longer. Therefore, you must align your investment decision making with that time horizon. That is, ask yourself what the best investment is you can make today that will maximise your wealth in 10, 20, 30+ years from now.
Short term returns do not create long term value. Let me share an analogy. If you operated a business, your long-term goal might be to create a sustainable and profitable business. Of course, you could reduce the price of your product for the next few weeks (offer a discount) to generate more sales this quarter. But that comes at the cost of creating long term value because it cheapens your brand and trains your customers to never pay full price. However, creating brand value might not improve this quarter’s results, but if you do it consistently, you are well on your way to deriving long term value.
The challenge with becoming a successful investor is that good, long-term investments just take time. That means investors must have a strong tolerance for delayed gratification – forgoing some wealth today for a lot more wealth in the future. As Warren Buffett says, the market is very good at transferring wealth from impatient to the patient (paraphrasing). There are no shortcuts to generating long-term returns. You just need to be patient.
Principal 2: You can’t build wealth if you don’t contribute
It is very difficult to create anything out of thin air, including wealth. Most things require some contribution of time, energy, money or something else. Building wealth is no different.
Successful wealth accumulation requires a regular contribution of cash towards growth assets. That could come in the form of servicing investment property holding costs, regular share market investing, additional super contributions and so forth.
Put differently, if you spend all your income, it will be almost impossible for you to build wealth in the long run. That means you need to manage cash flow effectively so that you can regularly invest some of your surplus cash flow. I’ve explained how best to do that in this blog.
To successfully build wealth you must invest on a regular basis.
Principal 3: You can’t pick unicorns
The thing with popular and new trends is that they often feel compelling. By definition, a popular trend benefits from wide acceptance which means a large audience ‘believes’ in the trend. It is easy to get swept up
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Most people struggle with knowing how to invest their money. Do they upgrade their home, contribute more into super, buy an investment property, invest in the share market, or something else?
In fact, this common challenge was the reason that I decided to write my book, Investopoly. I knew that if people understood the fundamental financial planning concepts (i.e., the 8 rules outlined in Investopoly), they might be able to figure out the answer themselves.
Whilst everyone’s situation is different, this blog sets out some common steps that people take at different stages in life.
Starting out…
The first thing you must master, is cash flow management. Once people have their first full-time job, they must learn how to effectively manage their money to create good saving habits. I recommend paying all discretionary expenses from a separate account so that you can track your total spend every week, fortnight or month, as discussed in this blog.
The goal with establishing good cash flow habits is twofold. Firstly, good cash flow habits will serve you very well for the rest of your life. Secondly, if you can save regularly, it proves that you have surplus cash flow which you can use to service a mortgage i.e., you are ready to buy a property.
Once you have mastered your cash flow management, your next most important goal is to buy your first property. Buying property is the best thing to do because of the leverage it allows (i.e., borrowing). People starting out may have a decent income but few assets. Therefore, their main goal should be to accumulate a stronger asset base. Borrowing allows you to use a relatively small deposit to increase the amount you invest. It’s not about property per se, it’s all about gearing, as explained in this blog.
If you have demonstrated that you have surplus cash flow but don’t have enough deposit, you should investigate whether you are able to use a family guarantee to allow you to get into the property market sooner.
Before you start a family
Typically, people in most occupations enjoy relatively regular promotions and higher incomes after they have more than 5 years of work experience. And if they are managing cash flow well, this higher income should translate to more surplus cash flow.
The question is what to do with that additional cash flow.
According to ABS data, more than 75% of couples ultimately choose to have children. This needs to be a considered because starting a family is expensive. Your family’s income will fall, as one or both parents stop working to look after your child and expenses are higher, particularly if you use childcare. You must plan for this in advance.
If circumstances allow, I typically counsel clients to upgrade their property as soon as possible but certainly before starting a family. This could include retaining their existing property and converting it into an investment or selling it to crystalise the equity and reinvest that cash into a better-quality property, albeit a home.
If they do this in advance of starting a family, it leaves them enough time to accumulate a cash buffer (savings), which they can utilise in the future.
Whilst you have young children (starting a family)
Building wealth whilst you have young children (babies) is almost
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Every few months, there’s a story online about an investor in their 30’s that has amassed a property portfolio of 12 properties…and how you can do it too.
Firstly, we shouldn’t be impressed by the number of properties that someone owns, as it doesn’t tell us anything about their wealth (equity). Boasting about the number of properties you own is like a business boasting about the number of employees it has. It’s often an ego trip.
Secondly, there’s nothing impressive about borrowing huge amounts of money i.e., more than what is sensible – that is a recipe for disaster.
The definition of successful investing is achieving the highest return for the lowest risk. There aren’t any shortcuts. Building wealth takes time. A perfect example of this is that Warren Buffett accumulated more than 96% of his wealth after his 60th birthday.
How do people buy 10+ properties?
It might sound impressive that an investor has amassed a larger portfolio of 10+ properties in a short time, but you can’t do that without taking risks. They probably have a lot of borrowings and dealing with 10+ properties would be time consuming (e.g., administration, maintenance requests, and so on).
There’s only two ways that someone can buy so many properties in a short space of time. Either they have a business that is generating a large amount of profit and cash flow, or they have a unethical mortgage broker or lender that has helped them borrow more than a sensible amount. Obviously, the former explanation is legitimate. But the latter is a recipe for disaster. Mortgages are wonderful servants but terrible masters. Borrow carefully. Building wealth is a marathon, not a sprint.
Property was more affordable 40 years ago
In 1980, the median house price was only $200,000 in Melbourne and $315,000 in Sydney in today’s dollars. For example, 40 years ago, a single-fronted, investment-grade, Victorian cottage in a nice street in Prahran (blue-chip suburb in Melbourne) would have cost you about $300,000 in today’s dollars. The same property today would cost circa $1.5 million.
Of course, borrowing capacities and incomes were a lot lower back then (as I discussed in January). However, arguably an investor didn’t have to be as picky as they need to be today because they could buy 2 or 3 (or more) properties in blue-chip suburbs. However, today, most people are hard pressed to be able to afford one investment property, let alone multiple.
These inner-city, blue-chip locations were a lot cheaper because our capital cities were so quite immature. There wasn’t as much congestion, so living close to the city wasn’t as desirable as it is today (and will be in the future). Properties located in blue-chip suburbs didn’t cost much more than ones located in the outer suburbs. A house in Prahran (an investment-grade suburb in Melbourne) cost the same as a house in Bentleigh (an outer suburb – 20km from CBD) in the early 1980’s. Obviously, the supply-demand pressures have changed a lot over the past 4 decades. The house in Prahran now costs $1-2 million more than the house in Bentleigh.
Buying ‘any’ property might work initially
The problem with articles glorifying an investor with a property portfolio consisting of 10+ properties is that in most situations, they have been investing for less than for 10 years. Therefore, it is likely that if they sold everything, paid selling costs, mortgages and CGT, they wouldn’t walk away with much cash – certainly not en
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Share markets have been highly volatile over the past couple of years. Markets fell by circa 30% when Covid hit in March 2020 and then proceeded to boom until the end of 2021, fuelled by government stimulus and zero interest rates. However, markets fell by circa 20% in 2022 after central banks aggressively hiked rates. It’s been a wild ride.
Arguably, these large volatility events should have made it a lot easier for active fund managers to beat the index. Share market mispricing, overreactions and volatility should create profitable opportunities for active managers. I wanted to investigate whether this was the case.
What is an active manager?
An active manager picks a basket of stocks that they believe will generate high investment returns. Active managers can achieve that using two primary methodologies. They can try to identify undervalued stocks on the hope that their market value eventually rises to what they believe is fair value (that is called a value manager). Alternatively, they can identify companies that are likely to generate a lot of growth in the future, with less focus on whether they are fairly valued (that is called a growth manager). The truth is that there are lots of different strategies that active managers use, and it could be a combination of value and growth.
Because active fund managers need to employ a portfolio management team, they typically charge management fees of around 1% p.a.
What is an index fund?
Traditionally, an index fund invests in an index of the most valuable companies. For example, A200 is the lowest-cost Australian market index fund – it charges an investment fee of only 0.04% p.a. (e.g., fee on $100k invested is only $40 p.a.). It invests in the ASX 200 index which is the most valuable 200 companies listed on the ASX.
For example, the total value of the largest 200 companies is $2.1 trillion. BHP’s value (market capitalisation) is circa $240 billion, being approximately 11% of the total index – Australia’s most valuable company. Therefore, if you invest in A200, 11% of your money will be invested in BHP. 7.8% in CBA. 6.5% in CSL and so on.
An index fund is simply a managed fund that invests in a very broad basket of companies. The manager uses a rules-based approach for determining which stocks are included in that basket and how much to invest in each, such as the ASX 200. Because it uses a rules-based approach, it doesn’t need to employ costly portfolio managers and as such, the fees charged by index funds are very low.
What happened last year?
As I said in my opening paragraph, large movements in share markets caused by one or two major external factors often create obvious investment opportunities. Theoretically, active managers should be able to exploit these opportunities to generate higher returns. Therefore, I thought it would be interesting to investigate how active managed funds performed over the 2022 calendar year.
The table below shows that less than half of active managers beat the index in the 2022 calendar year. Only one quarter of active managers in the US and one-third of Australian managers have beaten the market over the past 3 years (i.e., the volatile covid period).
Proportion of active funds that outperformed the index
| | 1 year | 3 years | 5 years | 10 years | 15 years
| US Market | 48.92% | 25.73% | 13.49% | 8.59% | 6.60%
| Australian Market | 42.44% | 34.68% | 18.82% | 21.78% | 16.43%
Source: SPIVA
Longer term results are ev
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Typically, you need a budget of circa $1.5 million to purchase an investment grade house (investment property) in Melbourne, less in Brisbane, and a lot more than $1.5 million in Sydney. Of course, not everyone can afford this budget, so I wanted to discuss how to buy the highest quality property possible within your budget.
This blog will still be useful even if you do have a budget of $1.5+ million, as it will help you understand what “investment-grade” property means.
What makes a property investable?
Regular readers of this blog will know that I always adopt an evidence-based approach when making investment decisions. An evidence-based approach typically means adopting a rule-based approach. That is, apply a set of objective rules to identify the asset/s that are most likely to generate the future investment returns that you desire.
The rules-based approach for investing in residential property involves ensuring a property has three important attributes. Properties that have these three attributes are typically considered investment-grade.
Attribute 1: A persistent imbalance between supply and demand
‘Supply and demand’ is a basic economic concept that explains how many investments work.
The goal with investing is to invest in assets that will generate good returns over very long periods of time. For example, an 8% p.a. return means your investment will be worth 10x in 30 years. Obviously, a 10x return will help you generate a huge amount of wealth.
The most likely way to generate strong capital growth over very long periods of time is to invest in properties that are in finite supply and benefit from growing and excessive demand. When the number of buyers exceeds sellers, prices will rise.
Finite supply means that there is no vacant land within close proximity, which is why well-established, blue-chip suburbs are typically great locations to invest in. A dwelling’s attributes can increase a property’s scarcity too. For example, no one is building art-deco properties anymore. Apartments blocks constructed in the 1960’s that only include 6 apartments are also very scarce – developers would probably build 20+ apartments on these blocks today.
Excessive demand can be achieved by investing in property that the wealthiest 20% of Australians desire, as their incomes and wealth position (and future inheritances) will assist in pushing property prices perpetually higher, for the reasons that I have previously explained here.
It is also very important that a property appeals to a variety of buyers such as families, professional couples, upgraders, downgrades, investors and so on. You must not invest in an asset that only appeals to one type of buyer. This will ensure demand remains consistently high.
Attribute 2: Evidence of past growth
There’s a common disclaimer used in financial services; past performance is not a reliable indicator of future performance. Whilst that might be true for some asset classes and investments, often past performance can be reliable indicator when analysing residential property. The reason for that is that the factors that have driven prices higher in the past tend to be static and factual, which means they will be responsible for driving future growth.
Static means that the positive attributes that make a property desirable tend to remain unchanged for many decades. For example, a property’s proximity to (private) schools, arterial roads, shop
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We are all aware that central banks around the world have been hiking interest rates to reduce inflation back to normal levels. The US economy, and particularly the labour market, have been more resilient than most expected. This means the US central bank might have to hike interest rates higher than in other jurisdictions to tame inflation. A consequence of this is that it will probably send the US economy into recession. And if history repeats itself, stock markets will fall.
If this scenario plays out, what actions should you take now?
There are three economic scenarios
Share markets have been wrestling with three possible economic scenarios as follows:
§ Hard landing: this means that the Federal Reserve’s interest rate hikes achieve their aim of curtailing inflation but at the cost of sending the US economy into recession.
§ Soft landing: this is a Goldilocks scenario where the Federal Reserve hikes rates just enough to cool inflation, but not too high that it causes a recession (or it is able to cut rates in time to avoid a recession).
§ No landing: it is possible that the US economy continues to be resilient, and inflation remains stubbornly high which means the Federal Reserve must hike rates higher for longer.
US labour market is stubbornly robust
The problem that the US central bank has (that the RBA doesn’t) is wage inflation is high at 4.6% over the year ended 28 February 2023. If it cannot cool the labour market and stop incomes rising, it probably won’t be able to return inflation to normal levels. The US labour market is proving to be very robust and although there are some signs that it is starting to slow, data is somewhat mixed.
As reported late last week, the US unemployment rate did rise in February from 3.4% to 3.6% p.a., not because there were fewer jobs but because the participation rate increased (i.e., more people are attracted to return to the labour market and look for jobs). This helped the three-month annualised wage inflation rate slow to 3.6% (compared to the 12-month reading at 4.6%), so there are signs that wage growth is slowing.
This is the most important issue that markets are watching. If we see more data that confirms wage inflation is slowing, a soft-landing scenario might be considered more likely.
The other noteworthy difference in the US (compared to Australia) is that most mortgages (home loans) are fixed for 30 years, so it takes longer for higher (variable) interest rates to cool consumer demand.
What happens to equity markets in a recession?
Most analysts would agree that the US stock market has not priced in a recession. Equity valuations are still relatively high by historical standards with the S&P 500 price-earnings ratio trading at circa 20 times compared to the long-term average of 16.
Share market valuations have not yet adjusted to reflect higher interest rates. Given you can earn more than 6% p.a. on very safe assets such as investment-grade bonds issued by the big 4 banks, riskier asset classes (like shares) must provide much higher returns to compensate you for the higher risk you take. This is called the Equity Risk Premium. Most investors would expect to earn 5% to 5.5% over the risk-free rate (usually the 10-year government bond rate is used as a proxy for the risk-free rate). Given the Australian government bond rate is circa 3.5% p.a., investors need to earn 9.5%-10.0% p.a. for shares to be attractive investments. Based on Research Affiliates model, 10-year future US equity returns are likely to range between 3.1% and 7.9% p.a. That is not enough to compensate you for the risk. So, pri
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Ensuring your accountant collaborates with your financial advisor is important, as they will be able to discuss and workshop ideas to improve your financial position. However, in my 20+ years of experience, this collaboration almost never occurs, unless they work in the same firm.
Theoretically, there shouldn’t be any impediments to these two professionals working together. Practically, it doesn’t happen and depending on the complexity of your situation, it could be costing you.
Accountants and financial planners are different beasts
It is a common misconception that accounting and financial planning roles are similar. They are not. The roles are about as similar as dentist and doctors (general practitioners).
Apart from knowledge and experience which can be vastly different, the next biggest difference is that accountants spend most of their time focusing on what happened over the past 12 months and sometimes on what might happen over the next 12 months. However, financial advisors are more focused on what will happen over the next 10+ years i.e., the medium to long term.
This distinction is very important because the focus is habitual. That is, it’s not a natural tendency for accountants to think about what a client’s financial position might be 5 years from now. The truth is both approaches are complimentary. People would greatly benefit from both an accountants and financial advisors’ perspective.
Be careful asking your accountant for financial advice
It is natural to ask your accountant for financial advice. But there are a few important limitations to consider.
Firstly, their advice will be shaped by their own experiences, which are likely to be limited, as they are not financial advisors. Accountants will often advise their clients to do what they have done for themselves such as simplistic advice like “if you are going to invest in shares, buy the big banks and miners”. But what might be appropriate for them won’t necessarily be appropriate for all their clients.
Secondly, to give financial advice, you must be authorised under an Australian Financial Services license. Most accountants are not. Similarly, to provide tax advice you must be a Registered Tax Agent which most financial advisors are not.
Why don’t financial advisors and accountants typically work well together?
Of course, the reasons may be different in every situation, but I discuss some of the common reasons that I have observed over the past two decades that impede these two professionals from working together efficiently and effectively.
Different ways of doing things
We recently prepared some advice for a financial planning client that uses an external accountant. We recommended they structure their investment in a simple discretionary trust. The client took this advice to their accountant who recommended that they draft a customised trust at a much greater cost. We felt that this recommendation overcomplicated matters and gave rise to unnecessary costs. Consequently, the client structured the investment in personal names to avoid this complexity. The problem is that this structure provides less taxation flexibility and will probably result in a higher taxation liability in years to come.
Unfortunately, the client is the meat in the sandwich. But of course, the clients not going to completely disregard their accountant’s advice.
If this client was also a tax client (i.e., ProSolution acted as their financial planning and taxation advisors), what would have happened is that both our financial advisor and accountant would have vicariously debated which structure was best for the client having regard to all financial planning and taxation matters. I’m confident that the family trust recommendation would ha
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It is stating the obvious that private school education is expensive. If you are uncertain whether you would like to send your kids to a private school, I thought it would be interesting to consider some alternatives and put the costs into perspective.
The public versus private school decision is a very personal one influenced by many considerations, including financial. I acknowledge that many factors may be more important than financial consideration. However, in this blog I would like to focus solely on the financial implications whilst acknowledging that despite the costs and alternatives, many people will still choose to send their children to a private school.
How much will private school fees cost in the future?
Of course, private school fees can vary significantly in different capital cities and regional centres. As an example, secondary tuition fees for many private schools in Melbourne range between $30,000 and $40,000 p.a.
There are two noteworthy factors that must be considered. Firstly, on average, fees tend to increase at a rate that exceeds inflation. When planning for clients, we assume that fees increase at a rate of 5% p.a. As such, 10 years from now, school fees are probably likely to cost between $45,000 and $60,000. Secondly, these fees do not include additional items such as uniforms, books/computer, excursions/camps and so on. It is prudent to allow an additional 5-10% for these costs.
The cost in today’s dollars
Assuming you have a child today and you want to send them to a private secondary school that currently costs $30,000 + 5% for other costs, I project the total cost of secondary school will be $400,000 in future dollars, or $270,000 in today’s dollars. Of course, if you have more than one child and/or send your kids to a private primary school as well as secondary, your total cost will be a multiple of $270,000.
That’s a lot of money and a big drain on your retirement savings. Let’s consider some alternatives.
Buy a home in a good public-school zone
If you don’t have access to a good public school, you could buy a home in a good public-school zone and avoid having to pay for private school fees. According to this research by Domain, property prices can grow at a much higher rate than locations that don’t offer a highly regarded public school.
Of course, it is going to depend on the location and school, but I do not consider it unreasonable to expect that a property’s long term growth rate could be circa 3% p.a. higher in a sort after school zone (in fact, it could be a lot more than this).
Assuming you need to borrow an additional $1 million to buy a home in a good school zone, the principal and interest mortgage repayments will cost you approximately $68,000 p.a. (assuming an average home loan interest rate of 5.5% p.a.). Assuming you purchase this property when you first have the child, the home loan repayments will cost you $1 million in today’s dollars over the 19 years until your child finishes secondary school. But I project this outlay has helped you accumulate $3.6 million in additional equity in today’s dollars (i.e., a 3% higher growth rate), so you are miles in front financially.
But what else could you do with that cash flow? Well, instead of borrowing $1 million to buy a home in a location that offers a good school, you could invest the $68,000 p.a. that you would have otherwise spent on home loan repayments. If you did that, net of all taxes, you would accumulate a portfolio worth $1.36 million after tax (in today’s dollars). That is still much less than your net additional equity in the home in a good school zone of over $3.6 million in today’s dollars.
In summary, not only does buyin
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It has certainly been a wild ride for property investors over the past 6 years.
In 2017 and 2018, the banking regulator demanded banks reduce the volume of interest only loans, particularly to investors. The media called this the “interest only cliff” and predicted that many borrowers would face financial stress when loan repayments switched to principal and interest resulting is higher arrears and default rates. It didn’t.
Then in 2018-2019, Bill Shorten (you will recall that everyone was expecting him to win the 2019 federal election) promised to ban negative gearing and increase capital gains tax which unsettled property investors. Of course, he didn’t win, and the ALP abandoned this policy.
Of course, the Covid years (2020 and 2021) were very kind to property owners. But aggressive interest rate hikes over the second half of 2022 have ruined the party and property prices have retreated to pre-Covid levels in many locations.
Despite a relatively volatile period, it is important to note that property fundamentals remain very robust. In fact, it is vital that investors remain solely focused on these long-term fundamentals and not get distracted by these temporary volatility events.
Rental crisis will only get worse
There is a shortage of rental properties in Australia and as a result, rents are rising quickly. According to Domain, the national vacancy rate was a mere 0.8% with Perth, Adelaide and Hobart essentially reporting close to zero vacancy. Melbourne and Sydney’s vacancy rate has fallen from 2.7% and 1.9% respective to only 1.0% over the year to January 2023.
Over the 2022 calendar year, rents have risen by almost 20% nationally. Of course, these rises are coming off a lower base, due to rental reductions during Covid, but the trend is strong and doesn’t look like it will abate anytime soon. The chronic shortage of rental properties will continue to put upward pressure on rents. You should expect to see a lot of media coverage this year about the growing rental crisis.
Tighter rental laws could be to blame…
Tighter rental laws certainly do dissuade people from investing in property. One of the most attractive advantages of being a property investor is control – you have full control over how you use and improve the asset. Tighter rental laws (that favour tenants) reduces the amount of control investors have over their property (like the ones Victoria rolled out in 2021). They also increase the cost to run a rental property thereby reducing investment returns.
Whilst tighter rental laws have reduced investor demand (and therefore the number of rental properties available), I think it’s only been at the margin. That said, any further regulation would most likely have a material impact on rental supply. Tenants must be protected, but a healthy rental market is equally if not more important.
But I think the main cause of the undersupply is…
There are fewer rental properties in Australia today because there are fewer investors buying property (owner-occupiers have dominated the market) and more investors have sold existing investment properties.
According to data by PropTrack, approximately 15% of vendors are investors (i.e., people selling their investment properties). The proportion of investors selling property increased to between 20% and 25% over the past few years during the Covid property boom. Obviously, many investors took the opportunity to cash out whilst property prices were booming during 2020 and 2021.
F
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It is often debated which is a better investment, property or shares. It is my thesis that property is an okay investment, but not as good as shares. However, when you factor in gearing (the ability to borrow to invest), property becomes a wonderful investment – better than shares.
Property versus shares
The main advantages of shares (compared to property) include:
§ You can outsource the management of a share portfolio to an advisor. However, as a property investor, you may need to spend time to work with your managing agent to deal with tenant issues and/or property maintenance/repairs.
§ Shares can generate a stable level of income with no (or few) related expenses. For example, the ASX200 index has yielded circa 4.5% p.a. for a long time.
§ Shares are liquid and have low entry and exit costs e.g., no stamp duty, real estate agent fees, etc. This means you can invest and divest in small increments.
The main advantages of property include:
§ Most investors feel comfortable borrowing to invest in property, which means you don’t need to make a large upfront cash contribution to be able to invest.
§ The assets tangibility can make investors feel more comfortable.
§ You don’t need ongoing financial advice after you have purchased the property.
§ Investment-grade property provides most of its return in capital growth in return for less income, which is tax effective.
We can debate the pros and cons of shares and property until we are blue in the face, but I think it’s a meaningless debate. It’s like debating which golf club is better. They are all different and you need more than one club to play well.
How do returns compare?
My thesis is that it’s not property that makes property investing so effective. It’s the gearing that does a lot of the heavy lifting. Therefore, an investors decision is not whether to invest in property or shares. Their decision is whether to borrow to invest or not. If it is appropriate to borrow, and they can do so safely, then borrowing to invest in property will likely generate the highest return.
I financially modelled borrowing to invest in a property, holding the property for 25 years, and selling it to realise the cash proceeds after repaying the loan and paying for capital gains tax (my assumptions are in the footnote[1]). Whilst the investor doesn’t need to make a cash contribution (as they borrow the entire cost of the property), they do have to pay for the holding costs i.e., shortfall between net rental income and mortgage interest. The internal rate of return calculates what return you generate from paying for these holding costs in return for making a capital gain in 25 years’ time. I calculated the internal rate of return to be 13.96% p.a. which is very attractive (see chart below).
How much does gearing help?
The return from borrowing to invest in property is so high because of the impact of gearing. That is, an investors cash contribution (i.e., holding costs) is relatively small compared to the capital gains, after tax. If I eliminated the impact of gearing, the investors internal rate of return falls to 7.41% p.a., because the investor must contribute a huge sum of cash at the beginning. Therefore, gearing adds 6.55% towards the total return as depicted below.
CHART
If we compare that to investing in shares i.e., invest over $1m into the share market in one hit, hold it for 25 years and then sell the whole portfolio, the investors internal rate of return would be 10.29% p.a., which is much better (almost 3% p.a.) than an ungeared property investment.
How
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I’m a big advocate of value investing. If you buy high a quality investment for fair price and hold it for the long run, you can’t help but make a lot of money. But if you can buy the same quality asset cheaply (below its intrinsic value), then it’s likely that you will make even more money. This is what value investors attempt to do.
You can adopt a value investing approach with many asset classes, which I’ll discuss later. However, for most of this blog, I’ll use shares as an example because there’s a lot more data available.
How does value investing reduce your risk?
When investing in an asset, you can derive an investment return in two ways; by receiving income and/or the value of the asset appreciates i.e., capital growth. Often, assets provide a combination of both income plus growth.
Receiving income is less risky because you ‘bank’ the return each year. That is, you are less reliant on capital growth to generate an acceptable overall return.
Your capital return will depend on two factors. Firstly, what you paid for the asset (to purchase it). And secondly, the assets future value. Of course, overpaying for the asset initially will diminish future capital returns. Overpaying slightly for a high-quality asset probably won’t have a material impact on future returns, as a quality assets growth with quickly make up for any small overpayment. But a material overpayment and/or buying a poor-quality asset is a big problem that will cost you dearly.
Conversely, if you buy a quality asset for a cheap price, you are less reliant on the overall market organically driving prices higher to generate quality returns. In fact, in this situation, your future capital growth will come from two sources: the appreciation to fair market value, plus organic growth.
A quick history lesson…
The chart below compares how value has performed compared to growth in the US share market since 1979 (using the Russell 1000 indexes). They have performed similarly over the long run i.e., growth has returned 11.3% p.a. and value 11.6% p.a. However, recent performance has been a lot different. Between 2018 and 2021, growth substantially outperformed value as it returned 24.1% p.a. versus 10.5%. Consequently, by historic standards, value is now relatively cheap.
CHART
Why do I think value is likely to outperform over the medium term?
There are two predominant reasons that I think a value approach/methodology is likely to deliver above average returns over the medium term (5 to 10 years).
Firstly, mean reversion is likely to continue to drive higher returns. This has already started to happen. Value outperformed growth by more than 21% in 2022. History suggests that growth will continue to struggle especially since growth has been dominated by only a handful of mega-cap stocks (Apple, Microsoft, Google, Amazon, etc.). This empirical research indicates that mega-cap stocks rarely continue to outperform forever – their performance eventually lags. If history is any guide, it is likely that most of these mega-cap stocks won’t be in the top 10 most valuable companies a few decades from now.
Secondly, a higher interest rate and inflation environment is more challenging for growth stocks. It is not uncommon for growth stocks to burn through cash because they are investing in their business (not always wisely) to generate more growth. In fact, it’s entirely possible (or likely) that growth companies are not profitable. Therefore, they need an e
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It has been very well reported that many mortgage holders will soon be paying much higher interest rates when their fixed rate terms expire. It is estimated that $478 billion worth of fixed rate mortgages are due to expire in 2023.
In addition, borrowers may also have to navigate the end of an interest only term, which typically apply to investment loans.
This blog sets out our advice on how to navigate these changes.
What are your options?
Fixed rate expiry
If your fixed rate is maturing, you have two options. You can re-fix your interest rate for another term or allow the interest rate to roll over onto a variable rate.
Current fixed rates range between 5.39% and 6.10% p.a. for owner-occupiers and 5.69% to 6.70% p.a. for investors (terms between 2 and 5 years). Variable interest rates range between 4.75% to 4.90% p.a. for owner-occupiers and 5.30% to 5.50% p.a. for investors on interest only repayments. As such, fixed rates don’t look attractive for a couple of reasons.
Firstly, it is very likely that we are at or close to the top of the interest rate cycle. So, there’s limited value in paying a premium (i.e., a higher interest rate) to protect yourself against potentially higher interest rates in the future.
This chart shows that the interest rate yield curve over 5 years is relatively flat i.e., it implies that RBA’s cash rate won’t change much over the next 5 years. Fixed rates may become attractive again when/if the yield curve inverts because it reduces the banks term borrowing costs and allows them to offer more attractive fixed rates. Until that happens, we typically recommend rolling over onto a variable interest rate.
Interest only term expiry
Navigating an interest only term expiry is not always straightforward. Usually, all mortgages have 30-year terms. If you elect to initially repay interest only, your loan term typically consists of a 5-year interest only term plus a 25-year principal and interest term. Contractually, the bank doesn’t have to offer you another interest only term – they can insist that you repay principal and interest for the remainder of the loan term. You have two options; request another interest only term or agree to repaying principal and interest.
There are two common matters you should consider being (1) cash flow and (2) interest rates.
The advantage of repaying interest only is that you minimise your monthly commitment. You might want to do that either because you want to divert cash flow elsewhere such as repaying your (non-tax-deductible) home loan or so that you can take advantage of an offset account, as explained here.
The downside to interest only loans is that they attract higher interest rates. In 2017, the banks began charging higher interest rates for interest only loans to dissuade borrowers from requesting them (at the time the banking regulator was concerned that 40% of new loans were interest only). Interest-only loans attract a higher interest rate of 0.26% p.a. (on average) compared to principal and interest investment loans (or a 0.55% p.a. premium for interest only home loans) – that is the premium you pay during the interest only loan term.
Consider your whole portfolio: some questions to ask yourself
We suggest reviewing your whole mortgage portfolio at one time instead of reviewing loans individually. Doing so ensures that you achieve the best overall outcomes.
When reviewing your loan portfolio, it is wise to consider a few matters such as:
§ Will your borrowing capacity change in the future
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It is often suggested that it’s a lot more difficult for people to buy their first property compared to many decades ago. It is true that property is a lot more expensive. However, I would like to suggest that in many respects, buying a property today is easier than it was many decades ago.
I would like to start by highlighting the main advantages that property buyers enjoy today compared to many decades ago. I’ll address the affordability issues once I’ve done that.
Abundant access to information, knowledge, strategies, advice and so forth
How do you get ahead financially? One solution is to get the best advice so that you make the most of your financial opportunities. Often people learn by trial and error, but that can be expensive and waste valuable time. You can fast track your financial success by learning the best way to use your money.
There is an absolute abundance of information that is available on the internet. Most of it is accessible instantaneously at no cost. Blogs, forums, podcasts, books, websites, software and so on. It cannot be underestimated how valuable that is.
I purchased my first property 25 years ago and no such information was available (the internet didn’t even exist… now I’m showing my age). There were a few books about property investing, but not many. The only way to learn about borrowing strategies was by meeting bank staff, but they weren’t particularly knowledgeable or helpful. Therefore, unless you knew a successful property investor, it was hard to access knowledge.
Today, I can find out how best to save a deposit for a property and strategies to mitigate a low deposit. I can find out how to manufacture equity via renovations. I can learn what makes a property investment-grade. I can research specific properties and find out what they have sold for in the past i.e., historic growth rates. I can learn about borrowing strategies, how to increase borrowing capacity and a mortgage broker can compare 30+ lenders in seconds.
As the saying goes, “knowledge is power”.
Much higher borrowing capacity
Thirty to forty years ago, borrowing 3 times your gross income was seen as very high risk. Today, the banking regulator (APRA) classifies a high-risk borrower as anyone that borrows more than 6 times their gross income. That is, I have come across some investors that have borrowed 10+ times their income, although I would caution anyone against borrowing that much. Over-borrowing is very risky. Mortgages are a wonderful servant but a terrible master.
Therefore, by this measure, borrowing capacity has increased by 2 to 3 times over the past few decades.
The challenge is that there are more things to spend your money on today (you can literally buy anything in the world on the internet). That temptation didn’t exist 20-30 years ago. This means would-be property buyers must make sacrifices. If they want to buy a quality property, they’ll have to curtail their spending. You can’t always have your cake and eat it too.
In addition, 30 years ago, it was not possible to borrow more than 80% of a property’s value. Today, owner-occupiers can borrow up to 95%.
Higher earning capacity and more employment opportunities
The internet has made it very easy to connect with people around the world. This means people can explore a lot more job opportunities. In fact, given the increased acceptance of working from home, it is not even necessary for you to live in the same country as your employer.
Whilst these advancements might make the job markets more competitive, for some occupations it opens (literally) a whole world of opportunities. Therefore, first-time property buyers can proactively explore many opportunities to increase their income, thereby increasing their borrowing capacit
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Good cash flow management is by far the most important practice that you must master to be successful at building wealth. I realise that it’s not a particularly popular topic, but bear with me, because it’s an easy thing to master if you know how. It won’t take you much time, and you will feel more empowered and in control as a result.
You can’t expect to build wealth if you spend all your income
Investment returns alone won’t help you build wealth, unless you already have a large investment base. You must contribute some of your own money/savings.
For example, most people that buy an investment property fund its holding costs (i.e., the shortfall between net rental income and loan interest) from their salary/wage income. A property’s holding costs might equate to $20k-30k p.a. on an after-tax basis. Essentially, that is their capital contribution towards this investment (assuming they borrowed the full cost of the property). However, if the investor decided to fund these holding costs through drawing additional borrowings, the interest cost would compound, and greatly diminish investment returns.
In short, you can’t build wealth without doing the hard work of making regular cash contributions into your investment portfolio. If you are not already doing that, you need to find a way to begin. Make 2023 the year you do that.
Unconscious expenditure is the problem. You must minimise it.
Holidays are expensive. And since Covid, holidays have become even more expensive (although that might change over the next 12 to 18 months as higher interest rates temper demand). However, holidays are probably the best example of conscious expenditure. That is, we tend to think very deeply about where we want to holiday, how we get there, accommodation and so on. We carefully weigh up the cost-benefit of the expenditure. As such, holidays tend to provide a high utility per dollars spent i.e., they are good value for money.
However, unfortunately, we do not apply the same diligent approach to all expenses, especially low dollar value expenses. In fact, for some expenses, we don’t spend any time thinking about them. Consequently, we spend money on things that have no impact on our standard of living. These expenses are a waste, as they don’t provide any benefit or enjoyment. Whilst these items tend to be lots of small dollar value items, they certainly add up over the course of a year.
It is easy to reduce (eliminate) unconscious spending
We don’t need to worry too much about non-discretionary expense items such as mortgage repayments, utility bills, insurance, school fees and so on. It’s virtually impossible to over-spend on these items. Of course, we must periodically review them to ensure we are getting the best deal, but other than that, we don’t need to worry about them cash flow management wise.
It is discretionary expenses where over-spending (waste) occurs. Therefore, I recommend paying discretionary and non-discretionary expenses from two separate accounts as depicted in the diagram below.
Diagram
The trick is to transfer a set amount each week, fortnight or month into the discretionary expense account. Use this account to pay for all discretionary expenses e.g., groceries, eating out, clothing, etc. – essentially everything that isn’t a non-discretionary expense. This will help you track and limit discretionary spending. You will also find that (somewhat unconsciously) you will tend to become more conscious about your spending. The silver lining is that your standard of living doesn’t suffer if you elimina
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In 1905, George Santayana wrote; “Those who cannot remember the past are condemned to repeat it.” That’s why it is always worthwhile to reflect on the past year to identify any lessons that we can learn. Below I share the investment lessons that I believe last year taught us.
Review of markets in 2022
Firstly, let’s review what returns various asset classes generated in the 2022 calendar year.
The US market lost around 20%. However, if you were an Australian investor (unhedged) you would have only lost approximately 12% because the Australian dollar devalued (compared to the USD) over the year.
The global share index performed slightly better by losing circa 18% over the year, or still 12% if your investments were unhedged i.e., in AUD.
The UK share market was relatively flat for the year regardless of whether your investments were hedged or not, as both the Australian dollar and British pound lost value over the year by a similar amount.
According to Corelogic, house prices across the largest 5 capital cities fell by 7.1% and apartments by 5.5% over the 2022 calendar year. Sydney was the worst performing market losing 12.1% and Adelaide the best with a gain of 10.1% (Melbourne lost 8%).
Unfortunately, bonds had their worst year on record (or at least since many bond indexes began in in the ‘70s). Bond indexes lost between 6% to 15% over the year, depending on exposure type. Bonds and shares falling in value at the same time has only occurred twice over the past 100 years, so 2022 was a strange year for bonds.
Listed commercial property investment (REITs) values have been hammered by higher interest rates, lockdowns and work from home. REITs lost in the range of 20% and 25% in value over the course of 2022. Global infrastructure fared much better. It was even on an unhedged basis, and down circa 5% on a hedged basis.
Cash and commodities were the best performing asset classes. For example, term deposits rates rose over the second half of 2022 and are now typically paying above 4% p.a.
What can we learn from 2022?
The first lesson we were reminded of is that investment returns are random and unpredictable in the short run. No one can pick which asset class will outperform over the next 12 months. The table below demonstrates how random asset class returns are. There are no patterns (asset classes are colour coded and returns are shown in descending order for each calendar year).
TABLE
The best evidence-based response to the fact that asset class performance is unpredictable is to diversify your investments across most asset classes. That is, have a finger in each pie, so to speak.
The second lesson in 2022 is to have the discipline to make regular investments regardless of how negative sentiment becomes. Anyone that invested in the Australian market index in June and/or September last year is up 11+% already. The video below includes some excellent advice from the late Jack Bogle. This was recorded only a few years before he passed away at 90 years of age. He founded investment firm Vanguard in the ‘70s, so he has many decades of experience. In summary, Jack advises that the last thing an investor should do when the market drops is stop investing!
https://twitter.com/alongsidefi/status/1524003189791547392
Volatility creates great investment opportunities
There is plenty of evidence that demonstrates market pricing is not always effi
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This was the third most popular podcast episode in 2022. My aim for this topic was to give investors an insight into the strategic process that I follow to develop a holistic, long-term financial plan for my clients. The topic obviously resonated with people. I hope you enjoy it and here’s a link to the blog in case you want to read it (instead of listing to the podcast).
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This was the second most popular podcast episode in 2022. My aim for this topic was to educate investors about the fact that investing a little bit each week, fortnight or month is much better than investing on an ad hoc basis. You may have seen the idea that improving something by 1% each day for one year results in a 37x improvement – small, regular improvements create massive results over the long run. The topic obviously resonated with people. I hope you enjoy it and here’s a link to the blog in case you want to read it (instead of listing to the podcast).
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This was the most popular podcast episode in 2022. The idea behind this topic was to share some basic economic principals to help people understand economic commentary, political rhetoric and so on. The topic obviously resonated with people. I hope you enjoy it and here’s a link to the blog in case you want to read it (instead of listing to the podcast).
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As you are aware, the RBA has aggressively hiked rates by 3% p.a. over the past 8 months, so variable home loan rates are now more than 5% p.a. (and investment loans approaching 6% p.a.). Fixed rate borrowers have avoided these higher interest rates. However, a lot of fixed rates will begin expiring next year. As such, many borrowers are facing much higher (40%+) mortgage repayments next year.
These higher interest rates will have a huge impact on consumer discretionary spending and economic growth in 2023.
Many Australians have accumulated large liquidity buffers
Many Australians have enjoyed vastly improved cash flow during covid lockdowns as interest rates were at all-time lows (e.g., fixed rates were sub-2% p.a.) and people couldn’t spend money on their usual leisure activities. Australians did two things with their improved cash flow.
Firstly, they directed some of this cash flow towards improving liquidity buffers such as repaying home loans and/or accumulating cash in offset and savings accounts. According to RBA data, household savings (deposits) grew by over $500 billion (or 21%) since the beginning of the pandemic until June 2022. It is noteworthy that household liabilities have increased by only 12% over the same period.
Secondly, they spent more money on discretionary items. As the chart below from CBA illustrates, during lockdowns, Aussies would spend online and return instore once lockdowns were lifted – Covid didn’t adversely affect spending.
This chart covers the period from January 2020 until the end of November 2022. Total spending is still over 30% higher than it was at the beginning of 2020, although spending on things like retail and eating out has declined over recent months.
CHART
Discretionary spending will be the first to be cut
Faced with the decision of whether to eat out or pay the mortgage, of course virtually everyone will choose to meet their liabilities first.
The chart below illustrates the interest cost of mortgages assuming all mortgages were on variable interest rates (of course, many are fixed, as discussed above). The black dotted line is the projected total household interest bill at the current cash rate of 3.10% p.a. i.e., once all the rate hikes have been passed on. As you can see, once the cheap covid fixed rates expire, interest costs will be the same as they were pre-GFC in 2008 (in real terms). That is likely to have a massive impact on discretionary spending.
CHART
Most borrowers will be ok
I don’t expect a large increase in mortgage default rates. Most borrowers have been tested that they can afford to repay rates 3% higher than when they first apply for the loan (rates have now risen 3%). Therefore, so long as there’s not too many more rate hikes, borrowers should be able to afford these higher interest rates. It might not be easy or comfortable, but borrowers will tend to explore all avenues to stay in their family home i.e., not default on their mortgage.
I remind you that savings (including offset accounts) have swelled by 21% over the past couple of years. Once discretionary spending has been cut, I’m sure that many borrowers will need to dip into these savings, which will go a long way.
Of course, there will be some borrowers that have over-borrowed, or their circumstances have changed, and may experience financial stress and must sell their home. But I think these are likely to be in the minority and less likely to be in investment-grade locations.
Don’t wait for a property crash in blue chip are
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I was interested to watch this YouTube video produced by ETF manager, BetaShares which compared the differing views of Warren Buffett and billionaire fund manager, Ray Dalio.
Both men have been some of the most successful investors over the past 50+ years, yet they have opposing views regarding investing in gold, which I find very interesting.
How well has gold done?
As depicted in the chart below, the (USD) gold price has appreciated by 7.66% p.a. since 1970. However, between 1980 and mid-2002, the price of gold fell by an average of 4% p.a. Between mid-2002 and mid-2011, the price of gold appreciated at an extraordinary rate of over 20% p.a. Since then, gold is relatively unchanged i.e., its currently trading at 2011 levels, so there’s been no (nominal) growth over the past 11 years.
Whilst the very long-term returns (i.e., 5 decades) are quite healthy, it’s clear that gold can experience (10 to 20 year) cycles where it can deliver poor returns.
The upshot is that if you are going to invest in gold, you better get your timing right (buy after a long period of poor returns e.g., 2002) and/or be prepared to hold it for a very, very long time.
Why do people invest in gold?
Firstly, gold is seen as a defensive investment. That is, when investors become concerned about the future returns that growth assets (shares and property) might offer, they seek safer investments, one of which is gold. It is seen as a way of preserving wealth because gold is a scarce metal and as such, is expected to retain its value (as demand always exceeds tight/finite supply).
Secondly, gold can be seen as a better storage of value than currency, as the value of a country’s currency can be volatile. There are many factors that can affect the value of a country’s currency including interest rates, economic stability, inflation rate, current account balance, monetary policy such as quantitative easing and so forth.
Why aren’t I attracted to investing in gold?
Firstly, gold doesn’t produce any income, unlike other defensive assets such as bonds. Therefore, to generate an investment return, the value of gold must continue to rise over time. However, there have been long periods of time when this hasn’t happened e.g., price of gold fell 60% between 1980 and 2002 (i.e., fell 4% p.a.).
Secondly, there is only one way that the value of gold can rise and that is when demand exceeds supply. Approximately 80% of gold is used for jewellery. Therefore, if you invest in gold, you are taking a strong position that demand for jewellery will continue to rise. Whilst that’s probably not a risky bet, I agree with Mr Buffett. That is, gold is not a productive asset unlike a company (stock). Companies have lots of ways they can generate value for shareholders.
What are some better defensive investments?
If investors are concerned about future returns in equity markets and desire lower risk investments, there are a few defensive investment options they can consider.
The most common defensive investments are bonds. Bonds tend to have a negative correlation with shares i.e., when shares fall in value, bonds tend to rise in value (except for only 3 years out of the past 100 being 1931, 1969 and 2022 when the value of bonds and shares fell at the same time). The higher the quality the bond, the safer the investment is. Therefore, AAA rated government bonds are the most defensive options.
Some shares can be more defensive than others.
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The Albanese government’s first Federal Budget last month was a bit of a fizzer in that there wasn’t much in the way of changes that affected investors and superannuants.
However, subsequent murmurs by politicians’ hint at proposed changes that the government may be contemplating. In particular, I wanted to address these potential super changes and how they may impact you.
Higher super contribution taxes for higher earners
In 2011, the Gillard government introduced a higher rate of tax that applies to super contributions made by higher income earners post 1 July 2012. The aim of this new tax was to reduce the tax benefits that super afforded to higher income earners (i.e., higher income earners enjoy a much higher tax saving in dollar terms than lower income earners). This tax is called “Division 293 tax”.
Div. 293 applies to taxpayers that earn over a certain amount. The tax applies to all concessional (including employer) contributions at a flat rate of 30%, instead of the usual 15%. The Div. 293 income threshold is currently $250,000 based on adjustable taxable income. However, between 2012 and 2017 the threshold was higher at $300,000.
It would be an ‘easy win’ for the government to reduce the Div. 293 threshold to raise more tax revenue. Reducing it to say $200,000 would align it to the highest marginal tax rate threshold once the stage 3 tax cuts are implemented post 1 July 2024. It would still be beneficial for higher income earners to make contributions, as it would save 17% in tax (i.e., taxed at 30% of contributed into super or 47% if taken as cash salary).
Introduce a cap on super
Currently, there is no limit to the amount that you can have inside super. When you are retired (i.e., in pension phase), the first $1.7 million is tax free. That is, any income and capital gains generated by this balance is tax free. Any amount more than $1.7million continues to be taxed at the standard flat rate of 15% on income and 10% on capital gains – which is still pretty good.
But if you have over $5 million in super for example, why should you get the benefit of a 15% tax rate? The whole point of lower tax rates in super is that it increases the number of people that can fund their own retirement and not be a burden on the welfare system. But if you have $5 million, you will probably never qualify for the aged pension even if you pay the usual income tax rates.
Capping the amount people can have in super is a no-brainer and should have been done years ago. It would help the government increase tax revenue without costing too many votes.
Reduce the amount of super that is tax-free
As noted above, each person can have up to $1.7 million in super when retired (in pension phase) and enjoy a zero-tax rate. That means the super fund pays nil tax on investment income and capital gains (whilst still enjoying the benefits of franking credits). Also, any amount you withdraw from super as a pension is also tax free. This cap is called the transfer balance cap (TBC).
The TBC was introduced on 1 July 2017 and was originally $1.6 million. However, it is indexed to CPI and increased in $100,000 increments. Therefore, the TBC was increased to $1.7 million on 1 July 2021.
Reducing the TBC would be an attractive way for the government to raise tax revenue as it would only impact wealthier Australians. They
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CoreLogic data indicates that property prices in the 5 largest capital cities have fallen by 7.1% since May, when the RBA started hiking interest rates. Sydney has seen the largest price fall – down by around 10%, and Melbourne has fallen by 6.7%.
But it’s not all bad news. House prices in Brisbane, Adelaide, and Perth are still materially higher than they were a year ago.
I wrote a blog in March in response to fund manager, Christopher Joye’s prediction that property prices would fall 15% to 25% within 2 years if the RBA hiked rates by at least 1%. At the time, it was my view that prices would fall 5% to 7%. This has happened now, and I don’t think we’ll see any more (material) falls for the reasons set out below.
Supply and demand are more balanced
One of the reasons that prices have fallen this year is that it’s no longer necessary to overpay to buy a property. Last year, I wrote that the only way to successfully buy a property in 2021 was to overpay. That’s because potential buyers outnumbered potential sellers.
Buyer demand has fallen (probably due to higher rates, share market volatility and talk of a possible recession) but so has supply i.e., the number of new listings – they are 18% below the 5 year average. As such, the market is relatively balanced (between buyers and sellers) which means there is no need to overpay anymore. Good quality, investment-grade property is still attracting strong buyer demand and is typically selling for fair value.
Of course, some geographic markets might experience different conditions, such as regional towns and beachside locations. It is possible that some locations may experience larger declines in demand and as such, prices may continue to fall.
Most borrowers have factored in higher rates
Most borrowers realised that interest rates would not stay at 2% p.a. forever. Of course, if they were listening to (and believing) the RBA governor last year, they wouldn’t have expected rates to rise this year (the governor was saying they’d rise in 2024). But whether it was 2024 or 2022, most borrowers have been prepared for higher interest rates.
It is true that the historically low rates in 2020 and 2021 did encourage people to borrow more. But not because they thought rates would never rise. Most borrowers realised that interest rates tend to range between 5% and 7% over the long run, so they viewed borrowing in 2020 or 2021 as a bit of a free kick (cheap money for a few years), especially if they fixed, which many borrowers did.
Many existing borrowers took the opportunity to fix the interest rates on their mortgages during 2020 and 2021. These fixed rates will start expiring from next year and as such, repayments will increase substantially – more than double in some cases. This will have an impact on discretionary spending, which hasn’t yet declined.
Also, variable interest rate borrowers haven’t yet felt the full effect of the rate hikes, as there’s a two-to-three-month lag.
The upshot is that most borrowers are prepared for higher loan repayments. There’s a lot of fat in
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There are many large and powerful institutions that have a vested interest in rising property prices. But all levels of government (i.e., federal, state and local) probably have the most to gain, as I’ll explain in this blog. This leads to two important observations.
Firstly, the government is the main contributor to housing affordability pressures i.e., making housing less affordable.
Secondly, government tax revenues are dependent upon rising prices and demand for property. I don’t want to debate whether this is right or wrong. I’m merely interested in highlighting economic and financial reality, as I think it’s helpful to inform personal investment decisions.
The federal government revenue
The negative gearing tax break afforded to property investors has been widely debated since it was introduced in 1985. You will recall that Bill Shorten proposed to remove negative gearing in his unsuccessful federal election campaign in 2019. But its only half of the tax story.
Using ATO data for the 2019/20 tax year, it appears that property investors claimed circa $728.5 million dollars of negative gearing income losses. But this is dwarfed by the taxable capital gains that taxpayers declared in the same year of over $20 billion. Of course these gains come from many sources (not just property investments) including share investments, sale of businesses, and so on. But property is a lumpy asset, so it tends to give rise to large CGT liabilities. Unfortunately, more granular information was unavailable.
I’ve said in this blog many times, the most efficient way to build wealth is to invest in properties that have the attributes to drive strong capital growth over the long run, even if they produce a negative cash flow (because the rental yields are low). The wealth accumulating power of compounding capital growth will eventually dwarf any negative cash flow.
The same is true when it comes to federal government tax revenue. The government generates a lot of (CGT) taxation revenue from rising property prices.
State government tax revenue is highly dependent on property
Australian states and territories generate two main taxation revenue streams from property, being stamp duty (i.e., transfer duty payable when a property is sold) and land tax. These two property taxes generate a lot of tax revenue for the states. In fact, for most states, property taxes are the single largest source of taxation revenue. For example:
§ VIC: budgeted property revenue of $14 billion which accounts for 46.5% of the state’s total taxation revenue.
§ NSW: budgeted property revenue of $16.5 billion which accounts for 41.6% of the state’s total taxation revenue.
§ QLD: budgeted property revenue of $6.5 billion which accounts for 34.5% of the state’s total taxation revenue.
Transfer duty is driven by the volume and value of property sales. The states are responsible for regulating the property market. It should come as no surprise that state governments have been quite lax with regulating these markets and/or enforcing consumer protections. For example, financial advisors have very onerous obligations if they want to recommend a client invests $100k into the share market (regulated by the federal government). However, property buyers’ agents have very few obligations (virtually none) if they recommend a client invest $1m into an investment property. States want more property transactions to generate more tax revenue
Land tax revenue is driven by land valua
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I recently appeared as a guest on The Australian newspaper’s Money Café podcast, where we discussed the FIRE moment. The acronym stands for Financially Independent, Retire Early, which involves living as frugally as possible, investing as much as possible so that you can afford to retire as soon as possible.
A listener that works in the mental health sector wrote into the show to say that she would actively discourage people from retiring early. Instead, perhaps work less, she suggested. She believed that working was beneficial to a person’s wellbeing and mental health.
A UK study from 2013 found that retirement increased the probability of suffering from clinic depression by circa 40% and a physical health conditions by 60%.
Retirement might not be as enjoyable as you expect
Imagine having the whole day to do whatever you want. No deadlines. No emails. No meetings. No obligations. Sounds appealing, right? The problem is that for many people, the retirement honeymoon wears off quickly. It is not uncommon for people to deal with a variety of feelings:
- § Loss of self-worth. For many of us, our occupation contributes a lot towards how we define ourselves and our self-worth. Once we have retired, we no longer see ourselves as “a lawyer, a surgeon, a CEO…”, which can lead to a loss of identity which is often connected to ones self-worth.
- § Miss daily routine. The daily routine of travelling to work, meetings, deadlines and so on adds structure to our day. Without this structure, people can start to feel bored, aimless, and isolated.
- § Hobbies and interests aren’t enough. Hobbies and interests can be great pastimes whilst we are working, as they allow us time to relax and socialise. However, once we stop working, we might find we need activities that offer more than just relaxation.
- § Expectations are different to your spouses. If your spouse wants completely different things from retirement this could create conflict.
I think most people are underprepared for retirement.
There are two important needs that work satisfies
Speaker and coach, Tony Robbins has adapted Maslow's hierarchy of needs to derive 6 human needs to be fulfilled/happy being (1) certainty, (2) variety, (3) significance, (4) connection/love, (5) growth and (6) contribution.
The last two needs are often fulfilled by our occupation.
Growth
Growth refers to the desire to constantly improve and learn more. If you are constantly striving to learn more at work, expand your capability, do work you are proud of, strive for promotions and so on, then it’s likely growth is important to you. If so, you will need to consider how you will fulfil this need in retirement. That could include finding paid or unpaid employment you connect with, studying, taking up a new hobby, travelling the world and so on.
Contribution
Contribution refers to a sense of service and focus on helping, giving to and supporting others. As Tony Robbins says, living is giving. This need can be fulfilled by your occupation if you work for an organisation or business that pursues a cause that you identify with. If this describes you, you’ll need to consider how you will fill this need in retirement. Some solutions to this might include helping/looking after families and/or friends, volunteering or starting your own charity for
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I recently appeared as a guest on The Australian newspaper’s Money Café podcast, where we discussed the FIRE moment. The acronym stands for Financially Independent, Retire Early, which involves living as frugally as possible, investing as much as possible so that you can afford to retire as soon as possible.
A listener that works in the mental health sector wrote into the show to say that she would actively discourage people from retiring early. Instead, perhaps work less, she suggested. She believed that working was beneficial to a person’s wellbeing and mental health.
A UK study from 2013 found that retirement increased the probability of suffering from clinic depression by circa 40% and a physical health conditions by 60%.
Retirement might not be as enjoyable as you expect
Imagine having the whole day to do whatever you want. No deadlines. No emails. No meetings. No obligations. Sounds appealing, right? The problem is that for many people, the retirement honeymoon wears off quickly. It is not uncommon for people to deal with a variety of feelings:
- § Loss of self-worth. For many of us, our occupation contributes a lot towards how we define ourselves and our self-worth. Once we have retired, we no longer see ourselves as “a lawyer, a surgeon, a CEO…”, which can lead to a loss of identity which is often connected to ones self-worth.
- § Miss daily routine. The daily routine of travelling to work, meetings, deadlines and so on adds structure to our day. Without this structure, people can start to feel bored, aimless, and isolated.
- § Hobbies and interests aren’t enough. Hobbies and interests can be great pastimes whilst we are working, as they allow us time to relax and socialise. However, once we stop working, we might find we need activities that offer more than just relaxation.
- § Expectations are different to your spouses. If your spouse wants completely different things from retirement this could create conflict.
I think most people are underprepared for retirement.
There are two important needs that work satisfies
Speaker and coach, Tony Robbins has adapted Maslow's hierarchy of needs to derive 6 human needs to be fulfilled/happy being (1) certainty, (2) variety, (3) significance, (4) connection/love, (5) growth and (6) contribution.
The last two needs are often fulfilled by our occupation.
Growth
Growth refers to the desire to constantly improve and learn more. If you are constantly striving to learn more at work, expand your capability, do work you are proud of, strive for promotions and so on, then it’s likely growth is important to you. If so, you will need to consider how you will fulfil this need in retirement. That could include finding paid or unpaid employment you connect with, studying, taking up a new hobby, travelling the world and so on.
Contribution
Contribution refers to a sense of service and focus on helping, giving to and supporting others. As Tony Robbins says, living is giving. This need can be fulfilled by your occupation if you work for an organisation or business that pursues a cause that you identify with. If this describes you, you’ll need to consider how you will fill this need in retirement. Some solutions to this might include helping/looking after families and/or friends, volunteering or starting your own charity for
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A common question I receive is how much should I invest in property? That is, how do you know when you have enough, and should you start investing in other assets?
It’s a good question because it invites people to consider their goals and develop a long-term strategy to achieve them. I set out some of the factors that you should consider below. But ultimately, it really depends on personal circumstances.
Rule of thumb is you need 20 to 25 times income
The first consideration is the value of the investment assets you have today compared to what you need by the time you want to retire.
As a rule of thumb, you need to accumulate investment assets equal to 20 to 25 times the annual income you require to fund retirement. For example, if you aim to spend $100k p.a. when you are retired, you need to accumulate $2 to $2.5 million of net investment assets by the time you retire. These assets could include equity in investment properties (i.e., net sales proceeds less CGT and outstanding loans), shares and superannuation.
Lifecycle of an investor
If you are a long way from achieving your net asset goal, then it is likely that your investment strategy will need to be more aggressive e.g., borrowing to invest. However, if you are close to achieving this goal, then your focus should be on ensuring the mix of assets are correct.
This video sets out the typical lifecycle of an investor e.g., why it’s best to start with property, then invest in super and shares.
What is the right mix?
Longevity risk is the risk that you will live longer than your financial resources will allow i.e., you’ll run out of money. To protect yourself against longevity, your investments must generate a combination of capital growth and income. Income will help you fund living expenses and capital growth will protect your asset base against the impact of inflation.
For example, if you have $2.5 million of investment assets, your average return might consist of 3.5% income and 3.5% growth. This will provide you with approximately $88k p.a. of income. If some of this income is franked (imputation credits) or from super, you probably won’t pay any tax. In addition to income, the value of your investments will appreciate by $88k, of which you’ll need to spend $12k to top-up living expenses (i.e., to give you $100k p.a.). The remaining $76k will be reinvested and compound. This should ensure your investment assets keep up with inflation i.e., no real change in value. If that happens, theoretically (i.e., mathematically), you can afford to live forever.
Considerations…
I discuss some of the factors that I consider when contemplating whether an investor has the right mix of assets.
Consider the impact of debt servicing costs
Investing in more (investment-grade) property will help you accumulate more wealth over the long run. However, if you are borrowing money to fund these investments, which most people do, it means your cash flow will become more sensitive to changes in interest rates. That’s not what you want if you are approaching retirement or would like the flexibility to enable you to reduce your employment income. In this situation, you really want less debt, not more.
The other consideration is that investing in property absorbs more of your surplus cash flow i.e., funding the shortfall between rental income and interest cost. If you contribute all your cash flow towards funding investment property holding costs, you won’t have any ability to invest in other assets (shares and super) or repay debt. This creates an opportunity cost and might cause you to be further away from retirement, not closer to it.
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Calendar year to date, the stock and bond markets have produced some of the worst returns on record, which is unusual because bonds and stocks are typically negatively correlated. In fact, this has only happened two times over the past 96 years, as illustrated in this chart. Even gold, commodities and property have lost value this year. It’s really been a horrible market for investment returns.
I discuss the key risks that have driven markets lower below, as well as highlighting the investment opportunities that exist as a result.
How high will interest rates rise and for how long?
I think the biggest factor that is creating the most uncertainty is what the terminal cash rate may be i.e., how high will central banks have to raise rates to reduce inflation. I don’t think the market will begin any sustainable recovery until the terminal cash rate becomes clear and ascertainable.
If the terminal cash rate turns out to be lower than what the market has priced in, then it is possible that markets could rebound strongly. In Australia, the market has priced in a terminal cash rate of 4.0%, so it’s entirely possible that the market has over-sold, since no economists expect the RBA to raise rates by another 1.40%. For example, the big 4 banks forecast the terminal cash rate to be 3.1-3.6% which is an increase by another 0.5% to 1.0% over the coming 6 to 9 months.
In the US, its equivalent cash rate is currently set at 3.00-3.25% and the market is expecting a terminal rate of between 4.5-5.0%, so it seems the US Fed Reserve has a lot more work to do than the RBA does in Australia.
My point is that until we see successive data that confirms inflation has begun returning to normal levels, the market cannot accurately price in an accurate terminal cash rate.
Will there be a recession? If so, how deep?
In response to rising inflation, central banks have hiked interest rates faster that anytime in history.
Normally, when a central bank wants to tighten monetary policy, it does so less aggressively so that it can measure the impact that higher rates is having on the economy. This more measured approach allows central bankers to adjust their approach to ensure it doesn’t raise rates too far and cause a recession i.e., slow economic growth too much.
Given most economic data lags by two to three months, central banks are really flying blind at the moment. That is, they won’t be able to measure the impact of current interest rate settings until the end of this year or start of 2023. As such, there’s a risk that they raise rates too fast and too hard and send the economy into a recession. How deep that recession is will depend on how much they overtightened rates. And that is yet to be seen, but it’s a risk that markets are contemplating.
Will there be a nuclear war?
Of course, the most significant geopolitical risk is Putin using nuclear weapons in its conflict with the Ukraine. If it does, the Western alliance will have to respond and of course that could spiral into World War III.
I am certainly not a geopolitical expert, so I cannot offer any commentary about this risk other than to say it’s a risk factor that must be impacting markets.
What damage will energy prices inflict
The price of domestic energy (gas and electricity) is rising around the world, especially in the UK where prices have more than doubled over the past 12 months. These price increases are likely to cause economic pain for residences of northern hemisphere countries as they approach winter.
Residents therefore must tackle higher energy prices at th
The very first article that I wrote for a magazine was published 19 years ago! No wonder I feel old. The article was called ‘Unlimited finance…’. My thesis was that investing in high yield properties, doesn’t magically extend ones borrowing capacity allowing them to invest a lot more.
Some investors believe targeting high rental yielding investment properties will allow them to borrow a lot more and therefore buy more properties. And the more property they hold, the more wealth they accumulate, or so their theory goes. However, the truth is that borrowing capacity isn’t that sensitive to rental yields.
How much does rental yield affect borrowing capacity
I wrote a blog last week highlighting that borrowing capacity is probably the tightest that it’s been in 20 years. The reason is that lenders must add a benchmark interest rate of 3% on top of the actual rate you will pay to ensure you can afford a loan, should interest rates rise further.
Banks will also base their affordability on principal and interest repayments over a 25-year loan term. As such, the benchmark repayments for a $1 million investment loan will be $93,000. Consequently, for an investment property to be borrowing capacity neutral, it must generate a gross rental yield of over 13%, as most lenders shave off 20-30% of rental income to allow for expenses.
Obviously, there aren’t a lot of residential properties yielding more than 13%. As such, even higher yielding investments (e.g., 4-6% p.a.) eat into an investors borrowing capacity.
Lower yielding properties reduce your borrowing capacity by 25%
I spoke to an investor recently that had invested in 3 properties. The aggregate value of these properties was $1.2 million, and the portfolio had $1 million of debt. The gross rental yield across the portfolio was around 5.2% p.a. This investor thought targeting high yielding properties would allow him to borrow more and buy more properties.
It is true that higher yielding properties do increase your borrowing capacity. Let’s look at an example. I assumed each spouse earns $100k p.a. gross, an outstanding home loan of $350k, spend $5,500 per month on living expenses and have a credit card with a $5k limit. Based on these assumptions, I calculated their borrowing capacity as follows:
- If they achieve a gross rental yield of 5.5%, they can invest $1 million in property.
- If they achieve a gross rental yield of 3%, they can invest $815k, a reduction of 18.5%.
- If they achieve a gross rental yield of 2%, they can invest $750, a reduction of 25%.
It’s all about the amount and quality of land
Generally, a property’s accommodation size and quality will determine how much rental income it will attract. Therefore, to achieve a higher rental yield, you must spend proportionally more on building value, and less on land value. But doing so will mean that you will probably accumulate less wealth, as discussed here.
Using the same assumptions that I used in this blog, I have calculated the amount of wealth an investor would accumulate if they invested in a property and sold it after 30 years, repaid the loan and paid any tax liability (CGT). The cash flow holding costs were also included in this calculation.
As the chart below demonstrates, even though the investor that targeted a 2% rental yield and invested 25% less (i.e., $750k versus $1m), they accumulated almost twice as mu
Borrowing capacity has probably never been tighter in the 20 years since I started ProSolution! This is delaying investment plans for some clients. However, my expectation is that this is temporary and an easing in borrowing capacity might not be too far away.
How borrowing capacity rules have changed over recent years
In 2019, the banking regulator, APRA told banks to include a ‘serviceability buffer’ of at least 2.5% above the actual interest rate to test borrowing capacity. In October 2021, it increased this to a minimum of 3%, when actual interest rates were circa 2% p.a.
Therefore, if you are applying for a home loan today, your repayments will be tested at a rate of around 7.55% p.a. P&I over 30 years. Interest-only investment loan applications are tested at an interest rate of circa 8.35% p.a. on a P&I basis over 25 years. This means benchmark repayments for a $1 million home loan would be $84k p.a. (compared to $61k p.a. for actual repayments), and almost $95k p.a. for an interest-only investment loan (compared to $54k p.a. for actual repayments). Therefore, benchmark repayments are now over 80% higher than actual repayments for interest-only investment loans.
To give you some context, benchmark interest rates over the past 20 years have typically ranged between 6% and 7% p.a. It is probably unnecessary for benchmark interest rates to exceed circa 7% p.a. on a permanent basis.
Rising interest rates reduces your borrowing capacity
The issue is that the RBA has hiked rates so quickly i.e., 2.50% over the past 6 months and the banking regulator hasn’t adjusted its benchmark interest rate guidance accordingly. The 3% p.a. buffer was prudent when the cash rate was only 0.10% p.a. but arguably excessive now.
For example, a borrower needs to demonstrate they have over $62,000 of surplus income to qualify for a $1 million investment loan to buy an investment property:
· Rental income @ 3% of property’s value shaded by 70% to allow for expenses = $20,000
· Less P&I repayments on $1m @ 8.35% over 25 years = $95,450
· Add back negative gearing tax benefit = $13,000
· Cash surplus required = $62,450 (which equates to an income surplus of $100k p.a. before tax)
The RBA would like to see lending volumes fall
It is noteworthy that new home loan volumes have been unsustainably high over the past two years, as illustrated in the chart below. New investment home loan volumes have been above average too, but not to the same extent as home loans. This increase in volume was no doubt stimulated by very low interest rates. Now that interest rates have increased, I anticipate volumes will contract and eventually return to normal levels.
CHART
No changes expected until next year
However, I don’t think the banking regulator will make any changes to serviceability benchmark interest rates until new home loan volumes normalise i.e., home loan volumes reduce to between the two blue horizonal lines in the above chart. I expect that will happen this year and therefore leave room for the regulator to normalise benchmark interest rates sometime next year.
I suspect the RBA would be rather pleased that house prices have been cooling over the past 6 to 8 months, as it doesn’t want asset prices to become overheated. Changing the benchmark interest rate too early might restimulate demand for borrowing, which is why I don’t think the regulator (APRA) will make changes until next year.
How you can maximise your borrowing capacity
In the meantime, there may be some things you can d
One of the most interesting things I do is meet many investors every week (i.e., prospective clients). It is something that I have been doing regularly for almost 20 years, so I’ve literally spoken to thousands of investors.
It is interesting because it provides me with the opportunity to reflect on peoples past investment decisions with the benefit of hindsight. There are some common themes. People tend to make one of a handful of mistakes. I think past mistakes provide very valuable learnings.
Mistakes are predictable from the outset
I believe that all financial “mistakes” are completely avoidable. Virtually no financial mistakes (i.e., losses or underperformance) occur because of random bad luck.
They are avoidable if you follow an evidence-based approach. For example, if your share investing methodology involves buying highly speculative stocks, then you only have yourself to blame if you don’t make any money after several years, because the evidence shows that speculation has a very low probability of generating reasonable returns over the long run.
Therefore, based on my 20 years of experience, if you commit one of the mistakes below, there’s a very high probability that you’ll end up with a dud investment. Conversely, if you avoid all these mistakes, you maximise your chances of success.
I must remind readers that I am completely independent. We do not buy property on behalf of clients, so I have no vested interest in you following the below advice. I am merely sharing what I have observed over the past two decades.
(1) Buyers’ agents buying outside of their domicile State
It is becoming more common for buyers’ agents to buy property interstate for clients. For example, a Sydney-based buyers’ agent might buy property in Brisbane. In my view, this is a no-no.
One of the most important things I hope to benefit from when engaging the services of a buyers’ agent is their experience. I know that selecting the right property is part-art and part-science.
The science part incudes all the objective considerations such as past growth, location, land size, land value, zoning/restrictions and so on. The objective assessment is driven mostly by data and a lot of this data is now available for a small cost online. I probably don’t need to pay a professional to collate such data.
However, the art part of selecting a property is obsoletely critical. It requires local area knowledge. Things like, one side of a particular street under-performs, or a block of apartments has always experienced management problems. Or tenant turnover is too high because too many cars get broken into. These are all real examples that I have come across. If I am going to engage a buyers’ agent, I want them to have more than 10 years’ experience in buying property in a particular location. That will ensure they have experienced a few market cycles. They have learnt from past mistakes (we all make mistakes in the first years of practicing our craft).
Given the subjective nature of property, experience is crucial to ensure you don’t make any costly mistakes. The more experience, the better.
(2) Buying a development site without sufficient due diligence
Some investors are attracted to developing property e.g., small-scale development such as building two or three townhouses. In theory it seems like an attractive way to make a quick profit. But it’s certainly not hands off and not without risk either.
Unfortunately, a more recent trend I have come across involves investors buying development sites without undertaking enough due diligence. This has happened even if they used a buyers’ agent or not, which is unfortunate. Obviously, they used
An investment property’s total investment return will consist of rental income plus capital growth. I have written about the importance of maximising capital growth many times. However, often investors are tempted to focus attention on income (when selecting an investment property) too, as they seek to minimise the cash flow cost of holding the investment property.
I propose that this is a mistake with a high opportunity cost. The reason investors make this mistake could be due to (1) not fully appreciating the consequences of their decision, (2) need to adjust their target property attributes or (3) need to reduce their investment budget.
Focusing on income means you must spend more on the building value
The value of a property consists of two components being the land plus any improvements i.e., the dwelling. Generally, land appreciates in value whereas buildings depreciate over time due to wear and tear, which I have written about here.
The table below illustrates this point. If you aim to achieve an overall capital growth rate of 7% p.a. to 8% p.a., which is a reasonable expectation for an investment grade property, then the more you spend on the building value, the greater the rate of land value appreciation you will need to achieve an overall rate of growth of 7-8% p.a.
TABLE
In summary, investors should focus on land value whereas tenants focus on the quality the dwelling.
Opportunity cost of focusing on income
It us unrealistic to expect an investment property to return more than 10% p.a. in total over a long period of time. That is, the gross rental yield plus capital growth rate cannot exceed 10% p.a. Typically, properties that offer higher rental yields will almost always deliver lower growth. This makes sense given the building value drives income but not capital growth.
Therefore, an investor can manipulate the makeup of their return (i.e., how much income and growth they may receive) by targeting different types of property.
The chart below compares the wealth impact of various combinations of income and growth. At the extreme (left-hand si
Often people wonder whether they should be doing more with their cash savings other than leaving them in a savings account. This blog discusses some options and highlights some considerations with each option.
Of course, the information contained in this blog is not personalised advice as it cannot consider your unique situation and goals. As such, you should always consider obtaining personal independent financial advice before making any financial decisions.
Maintain a buffer equal to 6 to 12 months of living expenses
I typically counsel my clients to hold between 6 and 12 months of living expenses in cash savings in case of emergencies. If your income or expenses can be volatile, you should probably hold 12 (or more) months.
Therefore, the options discussed below apply to any cash savings you may hold in excess of this buffer amount.
Contribute into super
You can contribute savings into super either through making concessional (up to an annual cap of $27,500 per person) and/or non-concessional (annual cap is $110,000) contributions.
The benefits of moving savings inside super are twofold. Firstly, it’s a low-tax environment where investment earnings are taxed at a flat rate of 15% and capital gains at only 10%. If you are a high-income earner, it will save tax. Secondly, it will be automatically invested for you in line with your selected investment option e.g., balanced, growth, etc., so it’s a very simple, hands-off way to invest your savings.
The downside to contributing money into super is that you cannot access it until you are older than 60[1] and retired (or 65 if you are still working). Whether this is a potential problem depends on (1) how close you are to being able to access super if you need it and (2) the likelihood of needing to access these monies e.g., if you have plenty of financial resources outside of super, then the likelihood is probably low.
If you are going to move your savings into super, please make sure that your super fund is performing well.
Invest in hybrid securities
A hybrid security is a type of investment that combines bond and share (equity) characteristics. It usually pays a monthly income, like a bond (via a dividend payment). These dividends typically have imputation (franking/tax) credits attached to them, like a share. They will be issued for a fixed term i.e.; they mature like a bond. Subject to certain trigger events, hybrid securities can convert into ordinary shares e.g., bank hybrids will convert into shares if liquidity ratios fall below a certain level.
Rarely are two hybrid instruments the same – they all have unique and complex terms. Therefore, I don’t invest in these instruments directly.
You can mitigate many of these risks and the associated complexity by investing in a managed fund that manages a portfolio of hybrid equities. This will provide you with diversification and the manager will price-in/analyse any conversion risks, thereby minimising your investment risks
We often use BetaShares Active Australian Hybrids Fund (HBRD) to invest client’s monies. It has paid a monthly yield (income) of 5.19% p.a. over the past 12 months (including imputation credits i.e., that is a pre-tax return). This yield is indirectly linked to the RBA’s cash rate. It is important to highlight that the capital value of this fund can vary, but often by only 1% to 2%. However, over longer periods of time, it is reasonable to expect the capital val
I wrote a blog in May warning investors to prepare for lots of bad news, uncertainty and market volatility. My thesis was that rising inflation, supply chain issues and rising rates would cause economic pain. Unfortunately, my prediction was correct, and we should expect the volatility to continue for many more months to come.
It is possible that all you may see are risks and problems at the moment. But in 5 years from now, it is likely you’ll look back and see lots of (missed) opportunities because the rear vision mirror is always clearer than the windscreen.
I’d like to share four rules which can help guide you to make great investment decisions over the course of the next year, and the rest of your life.
Missing the best days of the market is a good lesson and a perfect metaphor
There are lots of charts that demonstrate that if you miss the 10 best days in the share market over a long period of time (say 10 years), it will have a dramatic negative impact on your overall investment returns i.e., you will earn half the returns or less. This chart is a good example.
The lesson is that no one can pick the best days and the worst days. Therefore, if you sell your investments because you are concerned about volatility, you will inevitably miss the best days (best returns) and your overall performance will suffer.
Another way to look at it is, that the best returns come in the years following a stock market decline. The chart below, which covers almost one century of data, illustrates this very eloquently (produced by Dimensional).
CHART
This concept applies to all markets and asset classes including residential property.
Understand that volatility is normal
The event or issue that causes volatility (i.e., market uncertainty) is always unique and unpredictable. An event must be unpredictable to cause the market to fall dramatically because predictable events/issues are already systematically reflected in share prices.
Volatility is normal and it should be expected. Volatility is a very important part of price discovery which ensures the market adequately reflects risks and opportunities. Volatility also aids investment strategies through long horizon mean reversion and/or dollar cost averaging. It is something that should be embraced, not feared.
No one can tell you what will happen in the short term
No one in the world has ever developed a reliable methodology to predict short-term asset class returns. The truth is that no one knows what will happen over the next few months. This chart demonstrates how random returns are. Therefore, that must be your starting assumption when making any investment decisions i.e., you don’t know what will happen in the short term.
If you agree that we cannot predict what will happen in the short-term, then your only option is to ignore the short term and focus on the long run.
Four rules to help you through volatile times
A rules-based approach towards investing is easy to adopt because it guides clear decision making and avoids your decisions being unhelpfully influenced by emotions. And if the investment rules that you follow are routed in evidence-based methodologies, it further helps reduce your risks, as I’ve discussed
A Goldilocks investment strategy means that you are making the most of your financial opportunities without overdoing it and taking unnecessary risk. That is, your level of investing is exactly right (i.e., perfectly balanced).
Underinvesting means that you risk not having enough investment assets to enjoy a comfortable retirement.
Overinvesting means that you have taken unacceptable risks which may compromise your ability to achieve a comfortable retirement.
The goal is to achieve a perfect balance – invest enough to ensure you will meet your lifestyle goals – but not too much that you put your lifestyle goals at risk.
Overinvesting can do a lot of harm
I recall working with a mortgage broking client (not financial planning) for several years prior to 2008. The client purchased 6 investment-grade properties over a relatively short period. After the sixth acquisition, I advised the client to not purchase anymore properties, as I felt taking on more debt would be too risky. The client ignored my advice and purchased two more investment properties – which I only found out about after the fact!
Unfortunately, the GFC hit Australian shores in 2008/2009 and the RBA cash rate climbed to 7.25% which put pressure on the client’s cash flow. Worse still, credit rules and policies were rightfully tightened which locked this client out of their ability to refinance. The client had no choice other than to sell all but two of their properties in the years following 2010 because they wanted to retire.
This client’s story is a perfect cautionary tale. Debt is a wonderful servant, but a terrible master. Borrowing to invest can be a very powerful and beneficial strategy but it must be used carefully. You must never borrow more than you can afford and should consider your ability to service repayments when interest rates rise. For example, what if you are forced to eventually repay principal and interest. Or due to borrowing capacity, you can’t refinance e.g., you are trapped at your current lender. You must consider these risks.
Underinvesting comes with great opportunity cost
Arguably, underinvesting is just as bad as overinvesting. Underinvesting means that you risk not accumulating sufficient investment assets to achieve your lifestyle goals i.e., funding a comfortable retirement.
I wrote a blog earlier this year (here) setting out the three common reasons that tend to cause people to underinvest. It’s worth reading if you suspect that you have underinvested.
Invest enough to achieve your goals
If you are already going to achieve your goals with the investments that you currently own, why invest more? Investing always carries some risk, so why exposure yourself to greater risk if it’s not going to have a positive impact on your life?
Some people will argue that it’s prudent to ensure that your money’s working hard for you.
Other people are driven to continue to invest so that can leave more money to their beneficiaries.
I don’t think there’s a right or wrong answer to the question of; how much is enough? It really depends on your circumstances and risk tolerance.
However, it is worth considering a few things. Firstly, whether it’s necessary to invest more to achieve your goals. If not, are there any other reasons to invest more e.g., to provide more for beneficiaries.
How much debt is too much?
Typically, the most common way people overinvest is by borrowing too much (e.g., the client story that I shared above). There are several factors to determine the right level of borrowings for your circumstances and goals.
Of course, the obvious consideration i
Commentators often refer to the price of property in Australia relative to household incomes. They highlight that property prices have risen two to three times faster than household incomes. They conclude that property growth cannot exceed income growth perpetually.
Obviously, this is unsustainable at a macro level. I’ve written about the factors that contributed to property price growth over the past few decades here. But many of these factors won’t repeat themselves over future decades.
However, I argue that this commentary isn’t relevant to investors if they invest in investment-grade property. My thesis is that if you invest in locations that attract the wealthiest 20% of Australians, it is likely you will enjoy an above average capital growth rate.
Wealth inequality is a terrible phenomenon
Wealth inequality means that the rich get richer, and the poor get poorer in a real and relative sense. It makes escaping poverty more difficult. It robs people of equal opportunities. It’s a terrible phenomenon.
The chart below demonstrates how significant wealth inequality is in Australia. The wealthiest 20% of Australian’s own more than 73% of the total personal wealth in Australia – the 80/20 rule at play.
CHART
It would be lovely to think that Australia will create greater wealth equality in the future, but unfortunately, I don’t think it’s likely. In fact, wealth inequality is likely to get worse, not better. Unfortunately, Covid exacerbated it as higher income earners were typically able to work from home. Rising interest rates and inflation are much less of a concern to wealthier and/or higher income earners. All these things make wealth inequality worse.
Therefore, when making investment decisions, it’s prudent and advisable to assume that wealth inequality will continue. If it does, its likely property price growth rates in blue-chip locations which attract the wealthiest Australians, will materially exceed outer suburbs.
Is there a relationship between average suburb owners’ income and capital growth?
The theory is that if you invest in suburbs where the occupants earn above average incomes (based on census data or similar), then those suburbs will experience higher rates of growth because occupants can afford to pay more. Whilst this sounds logical, in reality, income data is hard to measure accurately, and it's only one component that determines a property buyers’ capacity. This article explored the shortcomings of relying on income data.
Therefore, investing in property isn’t just about investing in locations that attract higher income earners.
Beware of being too data driven
I have written previously that investing in property successfully requires an approach that is almost equal parts art and science. The science element relates to data and analysis – all the objective factors and considerations.
However, relying on data and analysis alone is too risky, as not all data is reliable or meaningful. Data can be out-of-date or not representative of the factor you are trying to measure. And its only half the picture.
The art element is the property know-how including understanding the market, what typical buyers are looking for, being an expert in a geographical location and so on. For example, sometimes there’s no objective reason why some streets (locations) perennially underperform – sometimes
I believe that most people have a very similar tolerance for investment risk. Most people are comfortable achieving a long-term annual return of 7% to 10% if the risk of losing money is very low. In short, I think most people have a low appetite for risk – they prefer to take as little risk as possible and invest in a “sure thing” if the return will be enough for them to meet their goals.
What is a risk profile
Risk is the probability of not achieving your targeted investment returns. This might happen in two ways.
Firstly, the investment might end up being a dud with little prospects of ever delivering the returns you desire i.e., an investment mistake.
Secondly, you might not achieve your returns temporarily, due to intermittent volatility. For example, if you invested in the Australian share market in May 2021, your return just over one year later is zero, as over that time, the market risen, fallen, and subsequently recovered back to May 2021 levels (ignoring dividend income). But this volatility is almost certainly temporary. We know that over multiyear periods (e.g., a decade or longer), the market has always trended higher.
Most people are only concerned by the first risk because they know volatility is normal and are happy to endure it if they will be rewarded adequately in the long run.
That said, some people, albeit a minority, have a low tolerance for intermittent volatility.
How do you measure your risk profile
The traditional way to measure risk tolerance is by asking a series of hypothetical questions to measure your comfort/discomfort with experiencing volatility and investment losses. This questionnaire is a good example, which we use in our practice (it’s based on this paper).
However, I am skeptical that these questionnaires provide reliable information. It’s one thing to predict how you’d feel if your investments fell by 30% of value, but until your experience it, you don’t know for sure. We know that humans have a strong cognitive bias for loss aversion – the pain of losing is psychologically twice as powerful as the pleasure of gaining.
95% of people have the same profile
I describe most people’s risk tolerance below (including my own):
I work hard for my money, so I don’t want to take high risks and risk losing it. I’d be happy to generate a long-term investment return of 7-10% p.a. as I know that if I do that, it will help me build substantial wealth over many decades. But I want to take as little risk as possible to achieve that.
Warren Buffett famously has two rules for investing. In essence, he counsels investors to not take huge risks. Don’t gamble with your money. Only invest if you are convinced that there’s plenty of upside and very little (no) downside risks.
5% of people have very different risk appetites
There are always outliers. Some people will have a very low tolerance for risk and therefore should skew their investments towards safer, low-volatility asset classes.
Conversely, some investors have a very high-risk tolerance and enjoy “betting the farm” in the pursuit of high returns.
But both cohorts constitute a very small minority, arguably even less than 5% of all investors.
At some point, capital preservation becomes more important than capital returns
Investors know that they must be prepared to take some risk to generate inves
Most people would say that finding a good financial advisor has always been a difficult task. Ten years ago, most financial planners received commissions for remuneration, so clients had to navigate endless conflicts of interest. Thankfully, investment commissions no longer exist. The challenge is now finding an advisor with well-rounded experience.
Commissions are banned – it's more about experience and scope
Financial advisors use to receive commissions from managed fund providers which created a conflict of interest, as data showed that they’d only recommend the funds that paid commissions, and the higher fees (resulting from the cost of paying this commissions) greatly diminished net investment returns. In essence, commissions incentivised planners to recommend poor quality investments (managed funds).
Commissions on new investments were banned in 2014 and on existing (grandfathered) investments in 2018. Financial advisors now cannot accept conflicted remuneration arrangements by law e.g., commissions.
Obviously, this was a massive step forward because the existence of commissions was almost wholly responsible for all the poor advice outcomes that people experienced. In a commission-based (or any conflict of interest) world, most advisors core competency was salesmanship, not delivering quality financial advice. But most unsuspecting customers didn’t realise this – often planners were wolves in sheep’s clothing.
This has changed now. Financial advisors no longer need to sell, just advise. Therefore, in my view, when choosing an advisor, you must consider (1) whether they have enough experience and (2) whether the scope of their advice maximises your opportunity i.e., knowledge.
With respect to scope, I’m a staunch believer that holistic advice maximises value, as discussed here (where I shared 6 case client studies). High quality advice is multifaceted because it includes many considerations including tax, super, estate planning, insurance/risk and so on.
The mass exodus of advisors will take years to repair
There have been several changes in the financial planning industry which have resulted in a mass exodus of advisors. In 2018 there were about 28,000 financial advisors in Australia. Around 40% of these advisors have already left the industry and it is predicted that advisor numbers will fall to circa 13,000 by the end of next year.
Of course, there were many shoddy financial advisors that really needed to leave the industry, so that’s a good thing. But more than halving the number of advisors in only five years is a terrible outcome for Australians. Imagine if that happened with lawyers, accountants, or doctors.
The problem is that as older, more experienced advisors leave the industry, there aren’t enough intermediate advisors to eventually take their place. You can’t replicate decades of experience overnight – there are no shortcuts. Therefore, the financial advisor shortage will get worse before it gets better. A lot worse!
Robo-advice has limited application
Robo-advice solutions have been lauded as a cheaper alternative to personal financial advice. Robo-advice is an algorithm-driven software tool that makes recommendations based on the answers to a series of questions. Currently, robo-advice tools provide very limited solutions.
The problem with robo-advice is that it’s a very logical tool. However, the study of behavioural finance tells us that financial decisions can be heavily influenced by emotions. Often, it is difficult to change someone’s mind with logic alone, especially if they did not use logic to make their original decisions. In this situation, a human-to-human relat
If Australia slips into a recession, it will mostly likely be the RBA’s fault. They have completely botched the management of interest rates to the detriment of borrowers, the economy, and the bond market. Here’s why…
In its defence
Firstly, in the RBA’s defence, is has been navigating uncharted territory over the past 2.5 years. There was a lot of uncertainty about what damage a once-in-a-lifetime global pandemic could cause. At the beginning, no one knew how long lockdowns would last for or whether pharmaceutical companies would ever be able to formulate a vaccine. There was a lot of uncertainty and no pandemic experience to guide decision making.
Secondly, the RBA did react very quickly with some good initiatives as soon as Covid hit in March 2020, namely:
§ It slashed the cash rate by 0.75% in March 2020 and then by 0.15% in November 2020, so that the cash rate was ostensibly zero (target rate was 0.10%).
§ It launched its Term Funding Facility where it ended up lending $188 billion to the banks at a fixed rate of only 0.10% for 3 years. The banks used this facility to offer customers very cheap mortgage fixed rates – often below 2% p.a. – which gave borrowers confidence and improved household cash flow during what was a tumultuous period. The RBA closed this facility in June 2021.
§ It also participated in what’s called yield curve control. This means it actively participated in the bond market to maintain the 3-year bond rate at 0.10% (the cash rate), often through buying government bonds i.e., QE.
All three of these measures were appropriate, timely and necessary.
What it did wrong
In my view, the RBA made three critical mistakes.
Firstly, the RBA’s Governor, Lowe adopted the unusual practice of providing forward interest rate guidance. Up until last year, Lowe relentlessly assured Australians that the RBA would not raise rates until 2024. Yes, he did say that his prediction was conditional upon the RBA’s economic expectations, which did not include higher inflation at the time. But my point is that historically, the RBA says very little and lets the free market decide what the future holds.
Secondly, it began raising the cash rate too late and it’s probably hiking it too quickly. I think it was obvious by the first half of 2021 that the Australian economy was very resilient. Sure, lockdowns did cause some economic pain, but as soon as they were lifted, spending bounced back strongly. It has now aggressively increased rates by 1.75% in only four months. The RBA has only done that once before where in 1994 it increased rates by 2.75% over 5 months. It’s aggressive. Perhaps too aggressive.
Finally, without much warning, it abandoned its yield curve control which crashed the bond market! When the RBA first initiated yield curve control, it only took 11 days and purchasing $27 billion of government bonds to get the 3-year bond rate to equal the cash rate i.e., 0.10%. After that initial intervention, the RBA didn’t have to do much at all. However, in July 2021 it announced that it would be winding back its yield curve control and completely abandoned it in late October 2021. Consequently, between September and early November 2021, the 3-year bond rate increased 10-fold i.e., jumped from 0.10% to above 1.00%! This caused bond values to crash and increased borrowing costs for banks and corporates.
Why Australia is different to the US
It is true that other developed countries have been raising interest rates quickly too. The US Federal Reserve has hiked rates by 2.25% this year so far. And the Bank of England has hiked ra
Queensland announced changes to land tax in its state budget in February 2022. On 12 July 2022, it released more detail regarding how these changes will be implemented (see here).
Queensland land tax to rise substantially for interstate investors
Essentially, when determining an investors land tax liability, the Queensland government will consider the value of landholdings in Australia (excluding principal residence), not just Queensland, and apportion the land tax liability accordingly.
This is best explained using an example
Situation: Gary owns an investment property in Queensland with a land value of $800k and an investment property in Victoria with a land value of $1m. Total Australian landholdings are therefore $1.8 million, excluding his primary residence.
Current land tax: Gary is only charged land tax on his Queensland property only at a rate of 1% for the amount above $600k plus $500 (individual land tax rates can be found here). So, Gary’s land tax liability is $2,500 p.a.
Proposed from 30 June 2023: The Queensland government will calculate the land tax payable on $1.8 million and multiple this amount by 44% (being the portion of Queensland land versus total land owned Australia wide i.e., $800k/$1.8m). Consequently, Gary’s land tax liability will increase from $2,500 p.a. to $7,866 p.a.! Yes, a 3-fold increase!!!
There are some practical challenges
If you own an investment property in Queensland and other states, you will have to declare the value of this land with the QRO within 30 days of receiving a land tax assessment or by 31 October 2023, whichever is earlier.
Whether Queensland is able to data match and audit these declarations, is unknown at this stage, but I suspect they will.
What impact will this change have?
These changes don’t begin until 30 June 2023 and a lot can happen between now and then. I expect the Queensland government will receive a lot of resistance and lobbying.
However, assuming these changes are implemented as proposed, this will have a big impact on investors returns and cash flow. Investors will either need to pass on some of these higher holding costs onto tenants in the form of higher rents or they will divest of their property/s, which potentially means fewer properties available to let. Either way, it will almost certainly result in a rental crisis, particularly in Brisbane.
I don’t think it will last
My feeling is that this land tax change will be like the Vendor Duty that NSW introduced in 2005. NSW demanded that Vendors pay a duty of 2.25% when they sold an investment property, in addition to the stamp duty that buyers paid. This ill-conceived tax was scrapped only a matter of months after it was introduced.
If the Queensland land tax changes do come into force on 30 June 2023 as proposed, I think the government will be forced to abolish them relatively quickly as the Brisbane market relies on interstate investors. Strong population growth means that Brisbane needs more accommodation, not less.
Therefore, at this stage, my advice to investors is to hold tight. Do not react to these changes just yet.
Superannuation returns for the 2021/22 financial year were mostly negative. However, we shouldn’t forget that the previous 18-month period (i.e., mid-2020 to the end of calendar year 2021) was stellar, so we must keep a longer-term perspective.
And the winner is…
The table below sets out investment returns for the largest 8 industry funds based on a Balanced investment option (data provided by research house, Lonsec). The table is sorted by 1-year returns, highest to lowest for the financial year ended June 2022. Hostplus achieved the highest return – more about this below.
TABLE
I have selected the relevant pre-mixed investment options that have between 60% and 76% of assets invested in growth assets e.g., shares. This is defined as a Balanced asset allocation. You will note however that some super funds don’t use the Balanced description – some call the option Growth or Core and so on. This highlights that it is important to not rely solely on an investment option’s name. Instead, it is important to examine the actual asset allocation of the option you are considering.
Click here to view a similar comparison for a Growth investment option.
Beware of unlisted assets valuations (or lack thereof)
One of the concerns I have with some of these industry super funds is their lack of transparency, particularly with unlisted investments, as I discussed here last year. Transparency invites more accountability, which is a positive attribute, especially when investing is concerned. That is why I’m so attracted to rules-based and evidence-based investment methodologies – they are completely transparent.
Transparency allows stakeholders to make better assessments as to an investment portfolios inherent risks and therefore likely future returns. Transparency reduces risk too because there’s nowhere to hide fees, risk or underperformance.
I read with great interest this article in the AFR on 20 July 2022. The article suggested that two super funds held an interest in Australian technology company, Canva. These super funds (Hostplus and Aware) adopted two different valuation approaches for their shareholdings as at 30 June 2022. Aware reduced its valuation, as technology company valuations have fallen substantially through the first half of 2022. However, Hostplus didn’t amend its valuation.
Stripe is a large unlisted US technology company (like Canva) and it reported a 28% lower valuation in July, so it seems unreasonable (unethical) that Hostplus hasn’t adjusted its valuation. Coincidentally, Hostplus was the only fund to report a positive return last financial year. Read into that what you will.
Members may eventually pay
In July, the super fund regulator, APRA indicated that it would crack down on valuations of unlisted investments, but it could be too late for some members.
Most super funds are unitised investments which means that the fund calculates the value of members units each day. If a fund has overvalued an investment (which means unit prices are overvalued too) and a member leaves the fund, it will mean they will receive a higher payout (rollover) than what they would otherwise be entitled to if the investment was valued correctly. In this case, the remaining super fund members are left holding the bag i.e., they will wear the full impact of the eventual d
In mid-2021, I wrote this blog: “Don’t buy a property in this market…” because, at that time, many property buyers were over-paying for property just to get into the market. I call it the FOMO premium, for lack of a better term (more about this below). My thesis was that since it’s never wise to allow fear (e.g., FOMO) to influence financial decision making, it was better to not buy property in 2021 if it meant having to overpay.
We all know that the market has cooled somewhat this year. It is now my view that this is a much better market to buy in, if you can find the right asset, of course.
What drove the property boom in 2020 and 2021?
The median house price in the eastern capital cities grew by between 12% and 16% p.a. compounding over the 3 years ended March 2021. I believe this growth was driven by two predominant factors:
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Long-horizon mean reversion; and
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FOMO premium.
The market was mostly making up for lost ground
The chart below illustrates the historic compounding capital growth of the median house price in Melbourne, Sydney and Brisbane for the periods ending March 2022. The “long-term” figures reflect growth over the past 42 years i.e., 1980 to 2022.
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Whilst recent growth in property prices was well above the long-term average and therefore unsustainable, longer-term growth rates are still below the long-term averages with only two exceptions:
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Sydney’s growth rate over the past 10 years exceeds the long-term average by 1.60% p.a. However, growth over 15 years is in line with the long-term average. Therefore, it’s possible that Sydney prices have over-corrected over recent years and could enter into a flatter cycle for the few years; and
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Brisbane’s growth rate over the past 5 years has exceeded its long-term average. It is noteworthy however that growth over 10 and 15 years is still below average, so this market is probably still undervalued and could continue to grow strongly to revert to its mean.
This updated chart demonstrates that property markets tend to move in two distinct cycles: a flat cycle followed by a growth cycle. To a large extent, this is what happened in Melbourne and Sydney after posting house price declines over the 3 years prior to the beginning of Covid. As demonstrated, the 5-year growth is still below average.
The FOMO premium
Australia’s reaction to Covid throughout 2020 and 2021 fueled demand for property:
§ The cash rate was ostensibly cut to zero. The RBA lent cheap money to the banks which they used to fund very low fixed rate loans, often at rates below 2% p.a.
§ Higher income earners were able to preserve their incomes because their occupations were able to be conducted from home, unlike lower-income earners that worked in retail, hospitality and travel, for example.
§ Due to the lockdowns, higher-income-earners spent less and saved more – they enjoyed much larger levels of surplus cash flow.
§ And finally, people were spending more time at home which invited them to reflect on whether their home adequately suited their lifestyle needs.
These factors conspired to create a lot of demand for property, particularly from higher income earners who considered upgrading their home (i.e., demand was mainly fueled by owner-occupiers, not investors).
In early 2021, the co
You must invest in residential property primarily to benefit from the power of compounding capital growth. Any tax benefits (negative gearing) are merely a positive consequence of this investment, not the reason for it. That said, of course it makes sense to maximise your taxation deductions wherever possible.
Make it easy for yourself
Maintaining accurate and complete taxation records is necessary to ensure all tax deductions are captured and treated correctly.
I encourage my clients to utilise their property managers services to make record keeping as simple as possible. This involves asking your property manager to pay for all property specific related expenses on your behalf. For example, if you receive a bill, forward it to your property manager and request they pay it. You may need to transfer some money into their trust account if there’s not enough rental income to pay for it, but that’s not a big deal. In fact, having your bills mailed/emailed directly to your property manager streamlines this approach.
The advantage of getting your property manager to pay for all expenses is that it will be recorded in the end-of-financial-year income and expense summary that they will provide you. At the end of the financial year, you just need to provide your accountant two pieces of information: (1) the rental summary and (2) a summary of interest and bank fees. This makes record keeping very simple.
Summary of most common tax deductions
The ATO publishes taxation statistics for each tax year (the most recent data is from the 2018/19 tax year). This data covers the 2.8 million investment properties that are owned by 2.2 million taxpayers. The most common tax deductions were:
| Deduction expense | Proportion of total deductions
| Interest on loans | 47%
| Capital works deduction | 8%
| Council Rates | 7%
| Property Agent fees/commission | 6%
| Plant depreciation | 6%
| Repairs and maintenance | 6%
| Body Corporate Fees | 5%
| Water charges | 4%
| Insurance | 3%
| Land tax | 3%
| Other inc. cleaning, garden, adverting, etc. | 5%
Source: ATO
Interest and bank fees
Interest and mortgage related fees will likely be your biggest tax deduction so it’s critical that you ensure its complete and accurate. I wrote this blog in 2020 which lists ten rules to follow to ensure you maximise your interest deductions.
Most banks provide year-end interest summaries (accessible via internet banking) which summarises the amount of interest charged in respect to each loan account. If you refinanced or restructured your loans during the year, you will need to include any interest charged in respect to loan accounts that were subsequently closed.
In addition, you will need to identify all banking fees changed during the financial year. This includes monthly account fees, any once off fees (such as variation or discharge fees) and any borrowing costs (the deduction for any upfront borrowing costs that exceed $100, such as Lenders Mortgage Insurance, must be spread over 5 years). These fees are often debited to transaction accounts (not loan accounts).
Depreciation tax deductions
There are two types of depreciation tax deductions that you can claim in respect to residential property, being (1) capital works and (2) deduction for the decline in value of plant, equipment and fittings such as air conditioners, stoves and so on. Based on the ATO statistics above, these items account for 14% of total deductions claimed, so they can be material. Any depreciation claimed (or that you were entitled to claim) will reduce a property’s cost base for CGT
It’s been well documented that property prices rose significantly over the course of 2020 and 2021. According to the Real Estate Institute of Australia, median house prices in eastern capital cities rose between 30% to 40% over those 2 years.
However, unfortunately apartments underperformed compared to houses in a big way. I wanted to discuss why this occurred and consider what growth prospects apartments might provide in the future.
Apartment prices are low relative to houses
The chart below compares the median price of apartments to median price of houses from March 1980 to March 2022 (source: REIA). On average, the median house price has ranged between 1.2 and 1.4 times higher than the median apartment price in Melbourne and Sydney.
CHART
However, since house prices increased strongly during 2020 and 2021, the median house price is now almost 1.6 times the median apartment price in Sydney and Brisbane, and over 1.9 times in Melbourne. This is because the price of houses rose strongly over this time whereas the price of apartments barely changed.
Covid negatively impacted apartment values
Apartments are typically owned by people on lower incomes or investors.
It has been well documented that lower income earners suffered the most during Covid lockdowns, as typically their occupations do not lend themselves well to working from home and/or their industries were closed e.g., hospitality and retail.
Investors that owned apartments during Covid were asked to provide rental discounts/waivers and were restricted from vacating tenants and/or increasing rent.
Consequently, throughout 2020 and 2021, apartment vacancy rates rose, rental incomes fell and of course, investors avoided this segment of the market.
Conversely, Covid had a positive effect on house prices
Homeowners tend to earn higher incomes than apartment owners, especially in blue-chip suburbs. These higher income earners were able to work from home during lockdowns and as such, they didn’t suffer any reduction in income. In fact, because they were in lockdown, they found they saved a lot more money which strengthened their financial position.
Falling interest rates also helped higher income earners as it increased their borrowing capacity and ability to service debt. Together with an increased focus on lifestyle such as having a home office and/or relocating to a tree or seaside location, prompted more higher-income earners to upgrade their house. As such, houses enjoyed very strong buyer demand.
What drives the gap between apartments and houses?
Of course, it makes sense that houses cost more than apartments. Houses provide a larger amount of accommodation and provide the benefit of a direct land holding. The supply of houses in a blue-chip suburb is fixed because subdividing a block and constructing multiple dwellings tends to be uneconomic for developers (due to the high cost of the land) or restricted by governing municipalities.
However, the price gap between houses and apartments cannot continue to grow perpetually. Eventually, fewer people will be able to afford to buy a house in a particular location/suburb. These people either must move to a more affordable location or buy an apartment instead of a house. As such, demand will increase for apartments and that will translate to price growth (due to the law of supply and demand).
Cost of new apartments will rise
Apartment buyers have the choice to buy a new apartment or an existing one. Often, buyers are attracted to a shiny and new building (however, I strongly recommend you steer
Banks will usually offer higher interest rate discounts to new customers to win their business. But, of course, the banks never offer these higher discounts to existing customers, unless they ask for them.
Whilst this has always been the case, it is noteworthy that interest rate discounts have increased substantially over the past 10 years. This means the gap between what interest rates existing and new customers are being charged has also widened to the extent that it is becoming more important that you (or your mortgage broker) review your loans at least annually.
New customers are enjoying higher discounts
A decade ago, interest rate discounts (i.e., discount off the standard variable rate) typically ranged between 0.70% and 0.90% p.a. Today, we are obtaining discounts of up to 2.95% p.a.[1]! This means it’s very likely that new customers are paying significantly lower interest rates than existing ones, particularly if they haven’t renegotiated their loans for a few years.
The chart below is compiled by the RBA and illustrates that new customers (orange line) are, on average, being charged lower variable interest rates than existing customers (purple line) – see yellow highlighted box. As you can see, this gap has widened considerably over recent years.
CHART
What drives home loan discounts?
Management remuneration packages (i.e., senior banking executives) tend to be linked to shareholder returns i.e., the share price. Bank share prices will be affected by factors such as (1) growth in mortgages compared to their peers and (2) net interest rate margin (which essentially is the gross profit generated by mortgage lending). A positive or negative change in these factors will tend to have an influence on a banks’ share price.
For a variety of reasons, banks can experience phases where they produce better results (i.e., high growth and margins) than their peers. Conversely, the reverse is true too. Therefore, when a bank underperforms, it must make up for lost growth and buy a greater share of the (mortgage) market. It does this through discounting, either through broad based promotions or more often, offering higher customer-specific discounts to win new business.
For example, in its recent half-yearly presentation in May 2022, Westpac confirmed that its investment mortgage loan book experienced a decline of 6.6% since September 2020 whereas its competitors, such as CBA, maintained its level of investor lending. Therefore, it is not surprising that Westpac is now offering higher interest rate discounts to win new investment loan customers.
All the banks ebb and flow between being more and less aggressive regarding pricing (discounting) which creates useful competition for proactive borrowers and mortgage brokers.
Automated re-pricing of mortgages
At ProSolution, we have recently implemented an artificial intelligence tool that periodically re-prices our clients’ mortgages. Using a range of data, it calculates what variable interest rates our clients should be paying and then automatically submits a request to their lender/bank to match that pricing.
With the growing popularity of fintech, I’m sure it won’t be long before similar tools to be available to consumers.
What to do if you don’t have a mortgage broker
It is advisable to proactively review your loans if your mortgage broker doesn’t do that on your behalf (or you don’t have a mortgage broker).
To do that, you must first research which lenders will offer you the highest discount. That will depend on many factors including your LVR, total lending, number of individual loans, whether you have any exist
An understanding of basic economic principles will set you in good stead to understand financial commentary, political rhetoric and make your own assessment of economic risks and opportunities. That is not to suggest you need to become an economic expert but understanding some basic principles will go a long way.
The foundation of economics: the law of supply and demand
The law of supply and demand is the cornerstone of economic theory.
The law of demand states that as the price of a product or service rises (holding all other factors constant), the level (quantity) of demand for that product or service falls. Basic logic supports this principle because fewer people will be able to afford the product as the price increases and/or an increasing proportion of people will consider it uneconomical to buy it at that (higher) price. The demand curve is downward sloping, as depicted in the diagram below.
The law of supply is the opposite to demand. That is, the higher the price of a product or service, the higher the quantity of the product or service supplied by the economy (i.e., business). Again, this is common sense because as the price of a product or service rises, so does its profitability, so businesses therefore want to produce more.
Diagram 1
The intersection of the supply and demand curves is the equilibrium price. This is the is the price at which the producer can sell all the units they want to produce, and the buyer can buy all the units they want.
Diagram 2
A current example
A current example of the law of supply and demand at work is reflected in the price of lettuce – a topic being discussed in the media lately. As we know, supply has contracted due to supply chain issues and floods. Consequently, the supply curve has shifted left, and the price has risen to find a new equilibrium (i.e., equilibrium moves from A to B in the chart below). When supply returns to normal, so will prices.
Economic output and growth
The economic health of a country is primarily measured using Gross Domestic Product (or GDP). This measures the market value of all the goods and services that a country produces. The formula to calculate GDP is:
GDP = Consumer spending + Government spending + Investment + Net exports
Consumer spending is driven by factors such as employment, age growth and consumer confidence. When consumers are confident, they feel comfortable spending more and GDP rises. Approximately 50% of Australian GDP is generated through consumer spending.
Government spending includes everything that the government spends money on including equipment, infrastructure, public service payroll, etc. Approximately 25% of Australian GDP is generated by government spending, although it’s been higher in recent years due to Covid support measures.
Investment refers to private domestic investment including investments in businesses (e.g., buildings, plant and equipment, etc.), residential property construction and business inventories (stock). Approximately 22% of Australian GDP is generated by investment.
Net exports are calculated by subtracting the value of all imports from the value of all exports. Approximately 3% of Australian GDP is generated by net exports (i.e., approximately $50 billion of exports less approximately $40 billion of imports). High commodity prices have contributed a lot to GDP growth.
G
Many investors consider future trends when making investment decisions. Popular examples of investable trends include the growing demand for green energy, mainstream adoption of electric vehicles and cybersecurity.
The thesis is that if you can correctly spot/predict a trend in the early stages, then you can invest in the companies and sectors that are best positioned to benefit economically. This is called thematic investing.
What is thematic investing?
Thematic investing is an approach that seeks to capitalise on megatrends and/or long-term structural changes. Most thematic trends tend to relate to three broad categories being (1) demographic change, (2) technological innovation and (3) climate change.
The goal is to invest in sectors or companies that are likely to benefit substantially from these changes. For example, electronic vehicles (EV’s) will likely benefit from increasing consumer demand because of an increasing focus on climate change. If you agree with this thesis, then you may be attracted to investing in not only EV manufactures but the downstream industries such as battery, sensor manufactures, rare material miners (e.g., lithium – Australia is the largest exporter of lithium) and so on.
Can you pick trends with consistent accuracy?
The main challenge with thematic investing is that it’s a higher risk strategy because it relies on your (trend) expectations materialising. Our expectations can often be shaped by our world view, personal experiences and the dominant narrative of the day. However, these things may not be useful when making investment decisions.
Also, because these themes are based on future outcomes, we must realise that expectations, products, technology and so on can change very quickly. Again, using EV’s as an example, whilst some valuable advancement have been made, there’s still plenty of opportunity for significant development in the future. Challenges such as battery storage, manufacturing costs, faster charging, battery recycling all need to be addressed. And the solution may not rest entirely with lithium batteries, but an alternative technology that is not discovered yet.
How trends ultimately play out is inherently difficult to predict.
Do you need to pick trends?
An argument can be made that you don’t need to pick trends because when themes eventually materialise and result in value (profitable businesses/sectors), they will eventually be included in traditional share market indices.
The chart below was shared in a presentation by Research Affiliates about 2 years ago. It lists the top 10 most valuable global companies in each decade since 1980. As you can see, the top 10 change a lot from one decade to the next. This demonstrates how share indices change over time as new technologies and industries emerge and others become redundant.
Chart
The best performing thematic ETF’s over the past 5 years have been cybersecurity, technology (even despite recent volatility) and healthcare. These trends are reflected in indices as the technology and health care sectors now account for 35% of the total global index.
Of course, the main downside with index investing is that you miss the first mover advantage i.e., investing when a product, tech or industry is in its infancy. But also, it is important to recognise that you also miss out on a lot of that risk too. The risk is that you invest in several thematic investments and only 1 out of 10 end up producing quality returns, which wouldn’t be an uncommon outcome.
&n
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&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 downward pressure on fixed rates. Firstly, the interest rate yield curve will eventually adjust to something closer to reality. Secondly, if the market expects that the RBA will have to cut rates next year, fixed rates may fall.Therefore, my general advice to borrowers is to remain variable for now and consider fixing next year, depending on rates, of course.If your loans are fixed, prepare for higher rates nowIf you were lucky (smart) enough to fix your interest rate last year, it is entirely possible that your interest rate is below 2% p.a. You will need to prepare for when your fixed rate matures and the interest rate reverts to variable, which is almost certainly likely to be higher. I suggest borrowers manage their cash flow as if their interest rate was variable.For example, if your loan is $1 million, your monthly interest cost would be $1,670 if your fixed rate was 2% p.a. However, if your loan was variable and consequently your interest rate was, for example, 3% p.a., your monthly interest cost would be $2,500. Therefore, I recommend that you start putting aside $830 per month (in savings) in preparation for higher interest rates.How does higher rates affect investment holding costs?When contemplating borrowing to buy an investment property (or home), you must consider whether you will be able to afford to meet holding costs when interest rates rise. I tend to advise clients to prepare their calculations based on an interest rate of 6% to 6.5% p.a. Of course, interest rates are currently a lot lower than that, and may not rise above 6% p.a. for a long time, but it’s prudent to be conservative.The table below estimates how much it will cost to hold an investment property on an after-tax basis (i.e., including negative gearing). I have profiled two property scenarios: an apartment for $750,000 generating a gross rental yield of 3% and a house for $1.5 million generating a gross rental yield of 2%.See Chart. If you have any concerns about whether these holding costs are affordable, then you must consider reducing your budget or not investing in property.In summaryInterest rates are certainly on the rise but are expected to remain below the long-term average. And if prices of goods and services remain alleviated (mostly due to supply chain issues), it is very possible that interest rates will need to be reduced again.
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) Getting the client ready for financial adviceWhen we initially met our client who practised as a dentist in Adelaide, he was interested in obtaining a financial plan. However, there were several matters that needed to be addressed before he was ready for that. He was navigating a change in working arrangements, which required taxation advice and services. His lack of personal insurances left his young family exposed. And he needed to borrow money to constructing a new family home, which was complicated by the fact that he was about to become self-employed.Our team worked together to deliver a solution so that his taxation matters were optimised and streamlined. We obtained a loan approval to construct his home and ensured his insurance cover adequately protected his family given his change in employment and debt levels.Our accountants needed to work with our mortgage brokers to achieve the required loan approval. Our insurance advisor worked with our accountant and mortgage broker to better understand what cover was necessary and how to structure it. All this work could be completed without the client’s involvement.Now that this preparatory work has been completed, we are currently working on developing a long-term financial plan for this client.(4) Marrying up career and financial plansWe have worked with this client over the past 8 years. Initially, as she just started her dental career, we helped her purchase an investment-grade property. After a few years it became obvious to her that she wanted to eventually own and operate her own dental practice.Whilst she was looking for a suitable dental practice to buy, we continued to invest in super and property, whilst at the same time, ensuring we had sufficient financial resources to allow her to purchase a dental practise.She recently purchased a dental practise, and we were able to help her negotiate the acquisition, complete financial due-diligence, structure the purchase, obtain funding (loan), whilst ensuring it fits perfectly with her existing plan and investments.This multidisciplinary and holistic approach gave our client the comfort that she has optimised career and personal financial objectives over the past 8 years. She is now in a very strong financial position.(5) Best use of existing assetsAfter retiring as a partner of a global professional services firm, this client required advice on how to best utilise his property and superannuation assets to enjoy a comfortable retirement. This strategy included the downsizing of his family home and potentially sub-dividing another property. We needed to consider several taxation matters including structuring intercompany loans (Div. 7A), minimising CGT, land tax, etc., so it was critical that our accounting and financial advisory teams worked closely together.We were able to develop a strategy that minimised taxation and fees as well as allowing the client to enjoy spending a large amount on travel whilst he’s fit and healthy to do so.(6) Optimising ownership structuresIt is a common complaint of accountants that they do not offer proactive advice. Whilst there are many reasons for this, one impediment is that they do not have a full understanding of their client’s situation and plans.Our accounting team identified this client owned a substantial parcel of shares in a non-trading company. Consequently, the client wasn’t getting the full benefit of the imputation (franking) credits. After discussing this with the client’s financial planner, it was decided that these shares should be transferred into the clients SMSF, which would be substantially more tax effective.This was an easy opportunity to identify and implement because all that was required was a simple conversation between two professionals (accountant and financial planner) in the same office. This collaboration is what drives value. The client didn’t need to facilitate this.Working in the same office is not enoughEnsuring that our team continue to adopt a holistic approach to their work takes continual effort, training, coaching and systemisation. It is not enough to work in the same office together and expect collaboration to “just happen”. Unfortunately, it is too easy to become too focused on the work at hand without seeing the big picture.Therefore, if you are looking to engage a holistic firm, it is important to understand what actions they take to ensure this happens. A firm’s culture and leadership will have a big influence on this.Perceived downside to using the same firmSome people feel more comfortable using different firms for accounting and financial planning, as they feel that each firm might keep an eye on each-others work. Whilst this might be true at the extremes (e.g., an accounting firm might identify if a financial planning firm was making highly speculative investments), it is unlikely that each firm will have sufficient information, experience and time to review the other firm’s work. Spreading your work across multiple firms provides no benefit and circumvents your ability to enjoy holistic advice.This is not a sales pitchI did not share the above client stories to convince you how wonderful we are. I shared them solely because they demonstrate that many financial transactions and decisions involve several interrelated considerations.In the absence of having a holistic firm look after all your financial matters, it is your responsibility to:(1) identify any all risks and opportunities; and(2) determine what information is relevant, which advisors need to be informed and when.Unfortunately, most people don’t have the skill and experience to do, which means opportunities and risks get missed.You maximise your financial opportunities when you have one team looking after you that has deep experience in all matters including super, shares, property, tax, insurance, borrowing and so on.Your financial complexity will dictate how important a holistic approach is for you. For example, if you are self-employed with complex business income structures, then you would be mad to not ensure your advisors adopt a holistic approach. However, if you’re an individual employee with very few investments, a holistic approach is probably not that important.
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 one relatively reliable indicator could be if historic growth over the past 6-7+ years has been materially above or below the average, that could be a sign that the market cycle will change soon. For example, if the growth over the past 7 years has been say > 13%, then it’s likely the market will soon enter a flat cycle. Apart from that, timing the property market is less important, because the likelihood of a significant fall in value is low (based on historical data), unlike with shares (NASDAQ example above is case in point).However, non-investment-grade property markets can be more volatileSome (non-investment grade) property markets can exhibit higher volatility and experience share price declines. For example, beachside markets that are dominated by second homes (i.e. not primary owner-occupier homes) are good examples of this. In these markets, timing becomes more important.Time will be less important in the long runInvestment timing can have a big impact on your returns in the short run. For example, if you hold an investment for less than a year, then the ‘timing’ when you made the investment can have a big impact on your short-term return. However, the longer your own the investment for, the investment’s fundamentals will be mainly responsible for your long-term returns. In short, normal volatility will have an impact in the short run but very little impact in the long run.The only exception to this is if you invest before a market crash/correction. For example, if you invested in the Australian market in September 1987, just before the market crash, your investment would have lost about 45% of its value by February 1988 – not a good start. If you held that investment today, you would have generated a return of only 3.4% p.a. (excluding dividends). Holding that investment for almost 35 years still hasn’t made up for the unfortunate timing.Should you sell if an asset-class is over-valued?If markets move in cycles, then what you could do is buy when the asset is under-valued, sell it when it becomes over-valued and reinvest those proceeds in another under-valued asset class. Whilst this approach has merit, it is often difficult to identify market cycles in real time with perfect accuracy.A less aggressive approach would be to reweight your asset allocation every year or so. This involves reducing exposure to asset classes that appear over-valued (i.e. taking profits) and reinvesting these monies in asset classes that are likely to deliver above average returns i.e., under-valued. Maintain a diversified asset allocation means you don’t have to guess which baskets to put your eggs in.Don’t ignore timing but quality and time are more importantI would like to leave you with three insights:1. Small timing mistakes don’t matter if you optimise your investment quality and hold the investment for the long term.2. You must avoid making big timing mistakes, as its unlikely time will make up for them e.g., invest just prior to a 30%+ crash.3. Timing is less important for residential property, due to its lower volatility rate.Therefore, the saying should be amended to read; “time in the market is more important than timing the market, as long as you don’t invest before a crash!”.[1] 95% of annual returns will be between -10% and +26% (being average return -/+ two standard deviations).
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&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 respected commentators think it’s likely to be less than this, maybe closer to 2%. The upshot is that interest rates need to rise by 2% or more as soon as its economically affordable.Share market corrections are typically a bit messyOver the past few years, I have written a lot about irrational share market valuations, particular in the technology sectors. Of course, I wasn’t the only one that suggested these market valuations made no sense and had to eventually correct. That correction is well and truly underway. The technology heavy NASDAQ index is down 30% this year. The NASDAQ index includes over 3,600 stocks and almost half of these companies have fallen by 50% or more from their pandemic highs.A share market valuation rerating like this is always a bit messy, because even fundamentally sound companies also get caught up in the negative sentiment. That is, their stock prices fall too, albeit to a much lesser extent.It certainly seems like share market fundamentals (e.g., profitability, strong cash flows, proven business models, strong balance sheets, etc.) once again matter to the market and that is good news for evidence-based investors. It just might be a bit of a bumpy road in the short term but in the longer-term, sound stocks/indexes/strategies will emerge victorious.Property market sentiment has soured very quicklyThe property market was going gangbusters throughout most of 2020 and 2021. The popular theme was that property prices were set to rise sharply for many years and you’d better get in quick! There was a lot of FOMO. This led me to write a blog in mid-2021 advising readers to not buy property in such a buoyant market (at least not if you have to overpay, which was the case in most circumstances).The property market has changed a lot since the beginning of this year. The FOMO has evaporated, and the constant talk of inflation and higher interest rates has cooled demand for property.Frankly, this is wonderful news for any would-be property buyers. The best time to buy property is when its unpopular to do so. But the hardest time to buy property is when its unpopular to do so (because it feels risky).I expect that the negative sentiment surrounding the property market (including predictions of price falls) will become louder over the coming months. If that’s true, it will be an excellent market to buy an investment-grade property.The best time to invest is when…It is entirely possible that rising prices (inflation) and interest rates will cause economic pain, particularly for lower income earners. In fact, it could cause a temporary recession. If that happens, there will be pressure on the RBA to cut rates again.The extent of economic pain is highly dependent on how long it takes for supply chains to return to normal. This is dependent on many factors outside of Australia’s control including China relaxing Covid lockdowns, the Ukraine war ending and the normalisation of commodity prices.Often, the best time to invest is when its unpopular to do so.Therefore, please do three thingsI invite you to do three things over the next 1 to 2 years.Firstly, expect more bad news than good. Expect volatility. Expect negative predictions. Expect to feel uncertain.Secondly, focus on maximising medium to long term investment returns. I expect the market over the next 1 to 2 years will offer some excellent medium to long term investment opportunities. At the same time, it is entirely possible that your investments may not generate investment returns over the next 24 months. Your ability to generate attractive medium-term returns will depend on whether you have the discipline to execute on your investment strategy over the next 24 months.Finally, don’t get spooked by volatility and negative sentiment and make wholesale changes to your strategy/investments. The economy is in relatively good condition and if supply chains were normal, we wouldn’t be in this position. These are temporary issues and remember to always focus on the long term.
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 will includes a testamentary trust. This can be a delicate conversation and one that is not always possible to have. Sometimes referring them to a good estate planning lawyer can be a good way to indirectly deal with this issue.Record keeping can create nightmares – try to get in front of this issue if you canIt is not uncommon for a client to receive an inheritance from a family member that has owned direct Australian shares for many decades e.g., they purchased CBA or BHP shares when they listed (IPO).If the investor hasn’t maintained good records over many decades, it can make it very difficult for my clients to work out the tax cost base for each share holding. It is possible to access share registry information, but it can be time consuming to piece all this information together. Therefore, if you have a family member in this situation, realise that they may struggle to maintain good records as they get older. In this case, it might be advisable to engage their accountant to do this or move their investments onto a wrap platform as it will manage all tax reporting obligations.(B) Planning to leave an inheritanceThis section discusses the matters you may need to consider if you would like to leave some money to your beneficiaries or suspect that you won’t spend all your wealth in retirement.Look after yourself firstOften clients tell me that they would like to be in the position to help their children in the future such as helping them buy their first home. This can be one of their main motivations for building their personal wealth.The challenge with planning for this event is that it is often unclear which child will need what help at what time. Therefore, my advice is to look after themselves first and foremost. That is, take all reasonable steps to maximise their own personal wealth. If they do that and put themselves in a very strong financial position, then there will be lots of opportunities available to them to help their children in the future.Most inheritance is received too late in lifeThe average age that people receive an inheritance is 52. By this age, most people have already bought their first home, managed to get their mortgage under control and are very well established. In one sense, most inherences are received too late in life. Therefore, it makes sense to consider gifting monies to your beneficiary’s whist you are still alive.I have always thought that struggling to buy your first home is a rite of passage. It teaches people the value of saving, delayed gratification, cash flow management, the power of compounding growth and so on. If you agree with this, then you’ll also agree that it’s good to help our kids, but not help them too much – we don’t want to make it too easy, or they won’t benefit from this important life experience.If you do make gifts whilst you are alive, you should ensure that an offset clause is included in your will. This will allow your executor to take into account the gifts you have already made to even up the distribution of your remaining estate fairly.And of course, it’s important to have a well-thought-out financial plan to ensure you aren’t giving away too much money, too soon and putting your own retirement at risk.How to avoid family conflictThe risk of family conflict is very difficult to predict. As I said above, family and money rarely mix well. But there are some things you can do to minimise this risk.Firstly, be as open as you can about your plans and wishes. If one party is excluded from your will, or will receive less, its best to be upfront about it with them and share your reasonings.Secondly, it is much better to give money away whilst you are still alive. That way you are in control and can deal with any conflict that may arise. You also will enjoy seeing how your gifts help your beneficiaries.Finally, if the risk of conflict is high, keep assets out of your personal name and therefore out of your estate. There are few options to achieve this such as using a family discretionary trust, owning property in joint names (as ownership automatically passes to the remaining joint tenants upon death) and nominating specific people in your super fund’s death benefit nomination form i.e., not your estate or personal legal representative.Of course, if you have financial complexity, it is best that you obtain personalised financial and legal advice.A huge transfer of intergenerational wealthOver the next 20+ years, there is going to be a huge transfer of intergenerational wealth. This will create planning opportunities for those receiving this wealth, as well as opportunities to pass remaining wealth onto future generations. Professional management will minimise risk and ensure wealth is maximised.
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) quality assets and (2) time. When it comes to the impact of time, there are no shortcuts.(3) Minimise transactional costsChanging your investments or strategy just because you’re impatient destroys wealth, due to transactional costs and taxes. That is not to say that you should never make any changes. Of course, if you have a dud investment or recognise that you have made a strategic mistake, you must fix it as soon as possible, almost irrespective of cost. But making a change simply because you’re impatient i.e., the market hasn’t delivered returns in the time frame that you expected despite the asset quality being acceptable, is a mistake that must be avoided. In the long-run, fundamentals will drive returns.When it comes to investing, often, the best thing to do is nothingMost investors are influenced, to some extent, by fears and uncertainty. Humans are hardwired to predict and avoid risky situations. Therefore, we are susceptible to being influenced by negative news. Of course, that’s why media outlets thrive on negativity.But what we must remind ourselves is that fundamentals never change. And negative events come and go – but fundamentals are everlasting. Take the pandemic as an excellent example. It was a global phenomenon – as big as a negative event can get. But it too will pass, and investment markets will get back to normal, as we have already started to see.Therefore, if your original investment decision was based on sound fundamentals, using an evidence and rules-based approach, then you must not make changes to that investment unless there’s overwhelming evidence that long-term fundamentals have changed.Heed Queen Elizabeth II’s adviceIn the Netflix series The Crown, Queen Elizabeth II said “To do nothing is often the best course of action, but I know from personal experience how frustrating it can be.” I know this is a historical drama series, and its uncertain whether the Queen actually said this, but the statement really resonated with me. That’s because it eloquently describes exactly what it’s like for successful investors. You feel tempted to make changes when you shouldn’t. Or delay investing simply because you’re unsure. It’s like logic and emotion are having a tug-of-war inside your head.In times of high uncertainty/volatility, buy but never sellHigh levels of uncertainty, often created by negative news, tends to be a fantastic buying (investing) signal – take Covid and the GFC as an example. In the short-run, markets completely ignore fundamentals. If you have the discipline to drown out all the noise (sometimes it’s easier said than done) and focus solely on fundamentals, it can be an opportunity to make good investments.Similarly, when the conventional wisdom is that there are no risks and there’s only upside, often that could be the best time to sell (if you need to do so as part of your strategy).The best thing is to do nothingIf you have invested in high-quality, fundamentally sound assets, the best thing is to drown out any negative noise and do nothing. In the long run, the investors with the most patience receive all the financial rewards.
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 “you can’t manage what you do not measure”. These sayings couldn’t be any more perfect for wealth management. The fact is that if you do not track your progress, how on earth do you know if you are heading in the right direction. Also, the mere fact that you start measuring something means that it almost always improves, which is called ‘the Hawthorne effect’.The key number to track is your net worth, as it reflects your surplus cash flow (i.e., how much you have saved, repaid debt, or invested) and any change in asset values.I recommend that you review two net worth calculations. Firstly, compare your current net worth to what it was 1 or 2 years prior. Consider what worked well (and you should repeat) and what didn’t work so well. Secondly, as discussed in this blog in January, forecast your net worth in 12 months’ time. This will give you an opportunity to consider whether you need to adjust your approach over the course of the next year.Measuring your net worth every month won’t necessarily provide you with meaningful information and in fact, might tempt you to make short-sighted changes. However, tracking your net worth every 6 to 12 months is best practice. If you do that, there’s a very high probability that it will improve because it encourages you to take action.Take responsibility for your moneyTaking responsibility for your money means that you take ultimate responsibility for ensuring that your financial position continues to improve. It is your money, and you cannot delegate this responsibility. That is not to say that you cannot delegate the responsibility for day-to-day management to a financial advisor, for example. Of course, you can. But just like any CEO, whilst it’s not their “job” to do the work, it’s their job to ensure the work gets done correctly.Looking after your money is a lot like looking after your health. If you don’t look after it, you are the one that ultimately suffers. You can ignore health issues but that’s not a long-term solution as they aren’t going to disappear. In fact, they almost always get worse. The same is true with money. However, unlike with health (e.g., exercise), when it comes to building wealth, you can delegate all the hard work. The only thing you need to do, just like a CEO, is to take responsibility for ensuring you make progress. That means stepping in to correct any issues when they arise.Taking responsibility for your money does not require a large time commitment – maybe 1 to 2 hours per year to review results and meet with your advisors to make financial decisions. But if you fail to invest this time and take an interest, you will be the one that ultimately pays the price.The results from ‘unremarkable actions’ compoundConsistency beats intensity every day of the week!As Simon Senik explains, intensity is like going to the dentist whereas consistency is like brushing our teeth twice a day. If you go to the dentist but never brush your teeth, your teeth will fall out. Brushing your teeth one time only won’t produce any long-term results. But brushing them twice a day produces remarkable results. The same is true for building wealth.Completing these four relatively unremarkable actions consistently over many years will produce remarkable financial results.
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 qualityproperty 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 (or semi-retirement), additional investment income and/or liquidity gives you more options.As such, it is not uncommon for investors to benefit from a change of asset allocation which may necessitate a property sale.Case studyI recently developed a plan for a client where he and his wife owned two investment properties and they had diligently repaid all associated debt over the past one to two decades. One of the property’s was okay from an investment return perspective. The other was a dud. If he retained both assets, he wouldn’t be able to retire within the next two years, because the net rental income from two properties was insufficient. Therefore, my advice was the sell the dud investment property and invest these monies in shares. This will derive a higher level of income and allow him to access the capital, if required.The way I look at it, is the investment in property has been a forced savings plan for this client. Sure, he could have selected a better-quality asset and generated higher returns, but he didn’t. At least he’s gradually repaid the loan. But now it’s time to cash in these savings to help him transition to the next phase of his life i.e. retirement.Take profit to reinvest in better opportunitiesMost investment markets move in boom-and-bust cycles. That means there are times when asset classes can be fundamentally overvalued or undervalued.Sidebar: it is worth noting that the investment-grade residential property market is a lot less cyclical than all other investment asset classes. It tends to switch between either growth or flat periods, as displayed here. I’ll blog about why that is in the future.The commercial property market is a good example of a cyclical market. There are times when certain types of commercial property or geographical locations are under or overvalued.Case studyMy wife purchased a commercial property during the GFC in 2008 (in hindsight, 2008 was a great year to buy property because there was a lot of negative sentiment). The tenants of that property (a tech company) offered us a ridiculous amount of money to buy that property in 2020, which we accepted. At the time, we were receiving a rental yield of 6.6% p.a. (on the original investment) after expenses. The sale price meant we generated a capital growth rate of 9.2% p.a. over 12 years. A 15.8% p.a. return (income + growth) is unsustainable. Mean reversion tells us that a period of below average growth always follows periods of above average growth. As such, we cashed in and invested our money in more attractive investment opportunities. It is worth noting that we were able to eliminate the CGT liability by making a super contribution and the sale helped us upgrade our home.Whilst residential property tends to be less cyclical (as noted above), some geographical markets can be exceptions. A good example is coastal/beachside regions. These markets can experience boom and bust cycles. Most recently, these markets have benefitted greatly during the Covid period, and I cannot help but think this market segment is overvalued.Sometimes, it makes sense to crystalise a profit, especially if it allows you to adopt a more suitable asset allocation, invest in markets that exhibit opportunities for better returns or eliminate non-tax-deductible debt.Property upgrade (particularly a home)Another common reason to sell an asset is due to borrowing capacity restrictions.Our Credit team developed a strategy for a client that recently relocated to Melbourne (which is a smart move, of course). He owns a property in Sydney (previous home) which is worth $2.8 million with a mortgage of $1.2 million. This client has two options. Sell his Sydney property and buy a quality home in Melbourne for $3-3.2 million. Alternatively, retain the Sydney property as an investment and buy a home for less than $2 million.In our view, the second option was inferior because it would mean owning an inferior asset ($2 million was an insufficient amount to buy a quality asset in the client’s desired location). This client could sell the Sydney asset now and avoid paying CGT due to the main residence exemption. He could then reinvest that equity in a superior quality asset, thereby marking his equity work harder for him on a tax-free basis.Sometimes borrowing capacity limitations necessitate selling a property. As long as you are buying the same or better-quality asset and transactional costs are minimal, its likely you will be better off.Don’t forget to plan the long gameYou should only sell an asset after carefully considering all the pros and cons. There are many factors to consider including taxation outcomes, cash flow, investment strategy and so on. The context that a personalised long-term plan provides also aids this decision.Let me be clear. I’m not advocating selling assets. The point that I’m attempting to make is to not necessarily be quick to discount selling assets, as sometimes it is necessary to help you move forward.
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 avoid getting bogged down in detail during this strategy formulation stage. The goal is to develop a high-level strategy only i.e. what assets to invest in and when. If you get too detailed at this stage, you will likely confuse yourself and suffer from information overload.Step 2: Develop the detail that underpins your strategyOnce you have determined a high-level strategy, the next step is to formulate the detail that underpins the strategy.Your investment methodology and philosophyMost importantly, you will need to consider how you will invest in various asset classes. That is, what methodology you will use. Anyone that is a regular reader of this blog knows that I’m a staunch believer in only using evidence-based investment methodologies. Using evidence-based strategies dramatically reduces your investment risk.If your strategy includes investing in shares, what approach will you use; (1) diversified, low-cost, and rules-based, (2) picking direct shares yourself or using a broker, (3) using an active fund manager and so on.If your strategy includes investment in property, what methodology will you use. Will you invest in investment-grade property, try to identify a growth market, undertake property developments or something different?My book, Investopoly outlines the evidence-based methodologies that I follow myself and the reasons why.How to invest your superannuationYou will need to decide how to invest your superannuation. Will you use a retail fund (no! should be the answer), industry super fund, a wrap platform or set up your own Self Managed Super Fund?Borrowing strategyIf your strategy includes borrowing to invest, then you will need to engage with an experienced mortgage broker so that they can develop a borrowing strategy to help you implement your plan. Their role is to help you obtain the required level of borrowings in the most cost and tax effective manner.Ancillary planning mattersNow that you have formulated a clear strategy, it will be easier to work out how much insurance you need and how to structure your estate plan.Your current asset base, borrowing plans and cash flow position will inform you how much insurance you may need (such as income protection, Life and TPD). It will also help you understand how you can minimise the cost of this over time. That is, as your financial position strengthens and your financial commitments reduce (kids are older, home loan repaid, etc.), you typically need less insurance cover. For example, you may need a lot of cover today but expect that you need dramatically less cover in say 10 years’ time if your strategy goes to plan.Your financial plan and asset ownership structure will dictate how your will should be structured and other estate documents. It is important these documents align with your overall strategy.Step 3: Implement, review and refineOnce you have defined your personal investment strategy, you can begin implementing it. A typical strategy implementation includes:§ Strategically divesting of any under-performing assets.§ Optimise super which could include switching to a superior super fund.§ Make property investment/s. If the plan is to purchase 2 or more properties, we must develop a strategy regarding the timing of said investments. We must consider borrowing capacity and market opportunities.§ Commence regular share market investing, often monthly.§ Refer client to an estate lawyer to draft estate planning documents (wills and power of attorneys).§ Implement insurances to ensure strategy/financial risk is minimised.§ Complete taxation planning including set up of any structures or restructure.Navigate inevitable life changesIf there’s one thing that never changes its change itself. Therefore, it is unlikely that everything will go perfectly to plan. You will probably have to adjust along the way, but at least you’ll have a framework and context for doing so.Reviewing investment performanceYou must regularly review the performance of each investment and your progress compared to your plan, to ascertain whether any adjustments are necessary. Remember to always play the long game which often requires a lot of patience and discipline (a topic that I discuss in the coming weeks).Ad hoc or strategic?It stands to basic reason and logic that developing a long-term strategy will ensure you take the most efficient path to achieving your financial and lifestyle goals. Therefore, investing the time and money to develop your own personalised financial strategy will pay substantial dividends for the rest of your life.
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) until 30 June 2024.Small business will also be entitled to an additional 20% deduction for any costs incurred on business expenses and depreciating assets that support their digital adoption, such as portable payment devices, cyber security systems or subscriptions to cloud-based services. An annual cap of $100,000 will apply and this initiative expires on 30 June 2023.The ATO is beefing up data matching and its compliance activitiesThe Budget included several initiatives that will give government departments access to more real-time data including reporting of family trust distributions, sharing payroll data with states and territories and so on.In addition, the government announced it will spend an additional $650 million on anti-tax-avoidance activities which is expected to yield $2.1 billion in tax revenue.Economic outlookThe government expects Australia will run a budget deficit for at least another 10 years.Inflation is forecasted to cool over the coming years from 4.25% in 2021/22 down to 2.75% by 2023/24 as supply chain disruptions abate.The unemployment rate is predicted to reach an almost 50-year low of 3.75% in the September 2022 quarter. However, wage growth is not expected to exceed 3% until 2022/23, which is what the RBA has previously said it wanted to see before it raised interest rates.Australia’s government debt is forecasted to peak at almost $1.2 trillion by 2025/26 which equates to circa 45% of GDP – less than half the amount of other developed economies including Canada, UK and the USA.Overall assessmentThere’s not that much in the budget to get excited about, and that’s a good thing. My concern was that the Morrison Government would go to greater lengths to buy votes and as a result, contribute towards inflationary pressures. Whilst it has splashed a bit of cash around, I don’t think it will be inflationary. It’s a relatively responsible budget which is a good thing, especially after all the stimulus provided during the Covid period.
It is very common for people to make an initial investment e.g., buy a parcel of shares or an investment property, but fail to make any further investments for many years or decades. Why does this happen? What is paralysing their ability to make investment decisions?Perhaps you don’t have enough timeWe use lack of time as an excuse for not doing many things. But if we are honest with ourselves, if the matter was important to us, we’d make time. It’s easy to let our time get absorbed by the matters that appear urgent at the expense of the matters that are important. Or sometimes we tackle the seemingly ‘easy’ tasks first – the easy wins – and procrastinate on the more complex matters. You can never maximise your position without good time management and discipline.But when it comes to building wealth, lack of time is a very poor excuse. If you think investing successfully will absorb a lot of your time, then its likely you've got the wrong advisors or adopted the wrong approach.Many of my clients wouldn’t spend more than a few hours a year thinking about or dealing with their investments.Maybe it feels too riskyMaking a choice about where to invest your money can feel risky because you fear making a mistake. Financial mistakes can be costly. And you have worked hard to get to your current financial position, and you don’t want to jeopardise it.Often, we think the solution to minimising this uncertainty (risky feeling) is getting more information. As such, we postpone making a decision so we can research more, talk to more people, listen to more podcasts, observe markets and so forth.But this approach rarely works because it’s not the lack information that matters. It’s the lack of experience.Experience helps us decide when and how to use the knowledge we have. Knowledge is only useful when we know how and when to use it. In this case, it’s best to ask a ‘who’ not ‘what’ question.Whilst a lack of experience might be preventing people from investing regularly, I think there’s a bigger reason.Maybe insufficient capacity to investIt is possible that you haven’t invested more because you do not have the capacity to do so e.g., cash flow, cash savings and/or borrowing capacity. If you fall into this category, then this blog isn’t about you. The blog is about people that have the capacity to invest more but have not done so.It’s impossible to make confident financial decisions without any ‘context’If a person stopped you in the street to ask you for directions but didn’t know where they were heading (i.e., destination), would you be able to help them? Of course not. The same is true for investment decisions.If you asked me whether you should buy an investment property, how could I give you an answer without knowing what your financial and lifestyle goals are and your plan to achieve them. It is possible that investing in a property would hinder your abilities to achieve these goals.One of the most valuable outcomes of developing an evidence-based investment strategy is that it provides you a clear context for making all financial decisions. Such important decisions can include where, when and how much to invest in the future, whether buying a beach house will compromise your ability to enjoy a comfortable retirement, whether you can afford to make a career change (that results in a lower income) and so on.Context is your missing ingredientIt is my thesis that most people fail to progress their investment journey because they have a lack of context. They don’t know where they are heading or how to get there.Making an initial investment is an easy decision because we all know we must do at least one thing. But making subsequent investments can be more difficult because it’s not always clear which investment option compliments your existing investments.How do you map out an evidence-based investment strategy?In the next couple of weeks I’m going to share the three steps that I follow to map out a long-term investment strategy for my clients. I have refined this process over the past 20 years, and it works tremendously well. Completing a similar process for yourself will provide the necessary context that I refer to above, and that is incredibly valuable as it helps you avoid making mistakes and keeps you on the right track.
Even though its compulsory to invest money in superannuation, many people do not understand their options once they retire.This blog provides a summary. However, of course, everyone’s situation is different. Some super funds have different rules and there may be exceptions to some rules, so it’s important you receive personalised advice from an independent financial advisor.When can you access your super?The rules that govern when you can access super are contained in the SIS Act and they are called the ‘conditions of release’. There are three ways you can access your super benefit:1. You have reached your preservation age, which is age 60 for most people (or sooner if you were born prior to 1 July 1964), you have ceased employment and have no intentions of becoming reemployed in the future;2. If you have reached your preservation age but are younger than 65 and still working, you are able to commence a Transition-to-Retirement Income Stream (TRIS) pension; or3. You are 65 years of age, regardless of employment status.These minimum rules apply to all super funds. Super funds are permitted to impose tougher rules than outlined above, so it’s important to check with your super fund.You have two optionsWhen you retire you generally have two options:1. Withdraw your full super balance as a lump sum; or2. Start an income stream pension.If you are a member of a defined benefit fund, you may have additional options such as commencing an indexed lifetime pension.If you opt to take your benefit as a lump sum, some of your benefit (i.e. the “taxable – untaxed element”) may be taxed at a rate of up to 17% and the “taxable – taxed element” will be tax-free.Given the tax advantages of leaving your money in super (outlined below), most people are much better off to opt to start an income stream pension.Consequences of starting a pensionYou can start a pension by rolling over your accumulation account into a pension account. You can roll over up to $1.7 million into a pension account (this is a lifetime cap – called the transfer balance cap). Any account balance that exceeds $1.7 million must be retained in your accumulation account.Pension super accounts attract a zero-tax rate. That means you do not pay any tax on any investment income or capital gains that your super balance generates.If you commence a pension, you must withdraw a minimum pension amount, which is based on your age. For example, its 4% of your super balance at the beginning of the financial year if you are younger than 65, or 5% if you are aged between 65 and 74. There is no maximum i.e. you can withdraw as much as you like from super each year. Again, typically, the goal is to preserve your super balance as much as possible as it’s a zero-tax environment.All income that you receive personally from an income stream pension is tax-free if you are 60 years or older i.e. it does not attract any personal income tax.If you withdraw money (pension) from super but don’t spend it i.e. its more than you need, you may be able to put it back into super via making a non-concessional contribution. If you have less than $1.7 million of super in total, and are younger than 74, it is likely that your annual non-concessional contribution cap is $110,000 (if you are between 67 and 74, you may have to meet the ‘work test’). You will need to establish an accumulation super account to make these contributions. You can then roll over (combine) this accumulation account into your pension account if you are still under the $1.7 million lifetime transfer balance cap.In summary, if you retire at age 60, you must draw at least 4% from super. This income is tax-free and your super’s investment earnings are also tax-free.How are pension payments funded?If your super is invested with an industry super fund (or similar), then you don’t have to worry about the funding of pension payments, as the super fund will look after it. All you need to do is ensure you have selected the most appropriate investment option.However, if you have a SMSF or wrap product, you will need to consider how you fund pension payments. This is particularly important if you have invested in residential or commercial property, as these assets are relatively illiquid and can cause some planning challenges.It is possible that you will need to fund pension payments from a combination of investment income (dividends and interest) plus the gradual sell-down of investments. This is something your financial advisor will assist with.How much super do you need?In retirement, most couples spend between $80,000 and $100,000 p.a. excluding big holidays.You can use this calculator to find out what your super balance may be by the time you reach retirement age. Multiple that balance by 4%, it will tell you how much income you may receive from super[1]. If it’s less than your desired amount, then it’s a sign that you must invest more in and/or outside of super.It is common (and preferrable) for my clients to fund living expenses in retirement from several sources including super pensions. Put differently, its uncommon for super pensions alone to fund all living expenses. That’s why it’s important to begin your investment journey as soon as practical.[1] If you start a super pension at 60 and draw the minimum percentage amount, it is very likely that your balance will last at least to age 100.
Vocal market commentor and fund manager, Chris Joye wrote in the AFR in November last year that Australian house prices could fall by 15% to 25% after the RBA starts increasing interest rates (here’s a copy of that article).Of course, there are many property doomsayers that perpetually (and often inaccurately) predict property market crashes. However, Chris is not one of these people. In fact, Chris’ predictions are usually quite accurate. However, on this occasion, I disagree with his prediction, and I share the reasons why below.However, more importantly, I wanted to discuss what impact rising interest rates might have on the property market.It’s interesting that almost everyone disagrees with the RBAThe RBA has persistently reminded us that it will not raise the cash rate until inflation is sustainably within its 2% to 3% band. And for that to be the case, the wage inflation rate must be sustainably in the 3% to 4% range, according to the RBA. Price inflation can’t remain sustainably high unless it’s supported by rising wages. Last week, wage inflation printed at 2.3% p.a., so we are some way off the RBA’s target.Despite the RBA’s clear indication, the market stubbornly predicts that interest rates will rise quickly over the course of this year. In fact, this chart shows the money market is currently pricing in 7 to 8 rate hikes (of 0.25% each) over the next 16 months. This seems over ambitious.So, why would the market ignore the RBA’s commentary and price in more rate hikes? The RBA’s in full control of the cash rate, so shouldn’t we listen to it? It’s like your child telling all her friends that she thinks she’s coming to the party when she’s grounded. I suspect the answer is that markets are imperfect, especially in the short run.It is worth noting that Australia is in a much different position to the US. In the US, inflation is very high (at 7.5% p.a.) which is underpinned by historically high wage inflation (at 4.5% p.a. which is a 40-year high). One of the main problems is that the US participation rate hasn’t bounced back like it has in Australia and other countries, which results in a tighter labour market. The high Covid death rate per capita in the USA might be responsible for this.It is therefore very likely that the US (Fed Reserve) will hike rates by 1% or more during 2022, but the RBA is likely to do very little until wage inflation increases.Higher rates do impact asset valuesTheatrically, increasing the cash rate should result in lower asset values. There are a few fundamental reasons for this.Firstly, as it becomes more expensive to borrow money, people become more careful with how they invest these borrowings i.e. they are more careful to not overpay for a property. Also, demand for new borrowings falls. Less capital flowing into the market results in lower demand and all things remaining equal, it will lead to lower prices.Secondly, as interest rates rise, lower-risk investment options such as term deposits become more attractive, compared to higher risk options such as shares or property. Many investors prefer lower risk options but have been forced to invest elsewhere (in higher risk investments), whilst interest rates are close to zero.Therefore, theoretically, higher rates should lead to lower asset prices.Firstly, owner-occupiers don’t care about financial theoryAs the ABS’ chart below illustrates, owner-occupiers have been responsible for driving property demand since May 2020 (dark blue line) – contributing an additional $10 billion per month of lending compared to pre-pandemic levels. Whilst investor lending has increased too (orange line), it was coming off a lower base and has only recently increase by circa $5 billion per month from mid-2021. Investors were a bit late to the party as property prices had already risen substantially by mid-2021. Therefore, I conclude that owner-occupiers have driven prices higher during the pandemic, not investors.Loan volume chart Owner-occupiers are influenced by financial theory to a much lesser extent. People buy (upgrade) homes primarily for lifestyle reasons, not financial. Decisions tend to be relatively long dated i.e. a 10+ year time frame. Home buyers tend to think very carefully about affordability and factor in higher interest rates – it’s more a question of affordability than asset valuation. Finally, and perhaps most importantly, a home is not a discretionary asset (unlike a pure investment such as stocks). It’s a necessity and people know that the same home will probably cost a lot more in 5 to 10 years from now, irrespective of what happens to interest rates. Therefore, they buy when they can afford to do so.Secondly, demand has been driven mainly by higher income earnersIt has been well documented that Covid lockdowns and restrictions over the past two years have adversely impacted the lowest 40% of households by income (here and here, for example). Conversely, the highest 40% of households by income are typically in a stronger financial position compared to the start of Covid. The main reasons for this are that lower income occupations typically are not able to work from home. In addition, higher income earners have saved an unusually high amount over the past two years (lower spending due to lockdowns). In fact, nab economics estimate that Australian’s have saved $240 billion during the pandemic. Most of these savings would have been accumulated by higher income earners since the “average” Australian tends to have relatively low savings.In short, I posit that higher income earners have been disproportionately responsible for driving higher property prices (through higher demand), which is what I expected back in October 2020.If we agree that Covid restrictions are less likely from hereon in, consumer spending patterns should normalise, including spending on international travel. That may reduce higher-income earners savings rates, but it’s likely they are well prepared for higher interest rates.It is also worth noting that lending rules have tightened significantly in recent years which includes testing affordability at much higher interest rates. If you have obtained a new mortgage over the past 5 years, its likely higher interest rates won’t cause too much stress.At best, there’s a weak relationship between growth and interest ratesThe chart below illustrates the annualised median house price growth since 1980 in Sydney, Melbourne and Brisbane. I have inserted the average standard variable mortgage interest rates in the grey rectangle below each growth period. You will note that there’s not a very strong relationship between interest rates and property prices. I suspect that’s because home buyers make an ‘affordability’ assessment rather than a ‘valuation’ assessment. If home buyers conclude they can service the required mortgage, they will proceed with the purchase because they know in the long run, property prices almost always trend higher.Chart: interest rates versus property price growth Covid distorted demand and that will probably normalise this yearThe property market has benefited from an unusually high level of demand over the past 18+ months and this demand is likely to normalise.Firstly, FOMO drove many people to buy property. Commentators predicted that interest rates would remain low for a long period of time and that would lead to higher property prices, so people rushed into the market before prices become more unaffordable.The work-from-home wave created substantially higher demand for regional properties, particularly in coastal locations.Finally, since many people were spending less money on travelling and going out during lockdowns, they redirected these financial resources towards the property market.Things are changing with the reopening of international boarders (and therefore overseas travel), the prospect of Covid restrictions is unlikely, talk of higher interest rates, and higher property stock levels. These factors should result in a more balanced property market.But the value proposition hasn’t really changed all that muchLow interest rates stimulated demand for housing during 2020 and 2021. Even if rates increase by 1% over the next 1 to 2 years, they are still low relative to the past few decades. And due to much higher household and government indebtedness, interest rates won’t have to rise by much to cool inflationary pressures. It is conceivable that the neutral mortgage interest rate could be circa 5% p.a.Therefore, from an owner-occupier’s perspective, the value proposition hasn’t changed that much i.e. housing is still relatively attractive due to interest rates being relative low compared to the past few decades.Property prices will be closer to intrinsic values, which means losses for some recent buyersThe chart below was produced by Coolabah Capital and shows the change in property prices since 1850. It puts into perspective the magnitude of the price growth that occurred last year.Property growth since 1850We can argue that the market value of a property is what someone is willing to pay for it. However, it is obvious to me (and lots of other people) that some purchasers were clearly overpaying for property throughout 2020 and 2021. That is, they paid more than its intrinsic value. It is unlikely that level of exuberance (over-paying) will extend into 2022. A more balanced market should result in more reasonable prices.That means people that did overpay over the past 1 to 2 years might find themselves in a situation where comparable properties are selling for less than what they paid.Medium term outlook will be driven by a healthy economyI would not be surprised to see one or two quarters of small (immaterial) negative property price growth eventually i.e. after the RBA starts raising interest rates. However, I would be most surprised to see prices retreat by 15% to 25%, as predicted by Chris.In my view, the property market will be driven by very sound fundamentals over the medium term:§ Interest rates remaining below the average rate over the past 20 to 30 years.§ A low unemployment rate.§ Population growth due to the return of overseas immigration (skilled migrants and students).As such, quality property assets will continue to perform well.
The value of a property consists of two components being the land plus any improvements i.e., the dwelling. Generally, land appreciates in value whereas buildings depreciate over time due to wear and tear.It is possible to manufacture equity in a property by making improvements e.g. renovating/rebuilding the existing dwelling or constructing multiple dwellings. This occurs when the end value of the property exceeds its cost e.g. spending $100,000 on a renovation improves its value by $150,000, thereby “creating” $50,000 in equity.This blog considers the merits of this strategy.The theory (maths)As noted above, a property’s value is the aggregate of the land value plus the building value. In investment-grade locations, it is not unusual for the land value to represent at least 60% of the total value and the improvements 40%.If we assume the long-term capital growth rate for these types of assets is likely to be in excess of 7% p.a. (which isn’t uncommon), then the land must appreciate at a higher rate to offset the building’s depreciation to result in an overall appreciation rate of 7% p.a. If we assume that the building depreciates by 2.5% p.a., then the land must appreciate by 13.3% p.a.For example, if a property is worth $100, then the building value is $40, and it will depreciate by $1 p.a. (being 2.5%) and the land value which is $60 will appreciate by $8 (being 13.3%). Therefore, its total value after one year will be $100 - $1 + $8 = $107, being a 7% p.a. growth rate.Therefore, to maximise your expected rate of capital growth, you must spend as much as possible on the land in return for spending as little as possible on the building.Capital improvements create a once-off value appreciationIt is common for the market value of a newly renovated or constructed property to exceed its hard cost. This occurs for a few reasons:§ Completing building works takes several months or years. In addition, there’s a lot of work involved in coordinating and meeting with architects, buildings and so forth. Not everyone wants to go through that process. As such, buyers may pay a premium to secure a move-in-ready dwelling.§ Undertaking building works is not a riskless exercise. Things can go wrong including cost blow outs and so on. As such, some purchasers will pay a premium to avoid these risks.§ Newly constructed or renovated properties are more marketable/appealing because they are in better condition. Their improved marketability means they will attract a higher price.§ Subdividing creates value because you create more affordable parcels of land. For example, a developer might construct 4 townhouses on a 1,000 sqm block of land. There’s a lot more people that can afford to buy a townhouse on 250 sqm of land compared to a house on 1,000 sqm of land.The market will discount properties in disrepairFor the same reasons that newly constructed or renovated properties command a premium, properties that are in disrepair tend to attract discounts. That’s because fewer buyers have the time and appetite to buy a property that needs refurbishment.To maximise your capital growth, it is best to maintain the dwelling in a state that is in keeping with buyer expectations.Benefits from making capital improvementsRenovating or rebuilding an investment property can give rise to a few possible benefits:§ Improved rental yield – typically tenants will pay a higher rental rate for dwellings in better condition, larger accommodation or more amenities.§ Depreciation benefits – capital works can typically be depreciated at a rate of 2.5% p.a. and plant and equipment (i.e., fixtures and fittings) over its useful life (which typically ranges from 6 to 10 years). For example, a $250,000 renovation that includes $70,000 of plant and equipment could result in an annual depreciation deduction of $11,500. This would result in a $5,400 p.a. tax saving if you are on the highest marginal tax rate.§ Value appreciation – as discussed above, it is not uncommon for the value uplift to be greater than the construction cost, thereby improving your equity position.Of course, funding the cost of the renovations gives rise to a higher interest bill (if funded via a loan).Financial analysisUsing actual properties/situations, I considered three different scenarios that involve making capital improvements to investment properties. The key financial modelling assumptions are listed at the end of this blog.Scenario one – cosmetic renovationPurchase a single-fronted, period house in Fitzroy North for $1.5 million and spend $250,000 on a cosmetic renovation e.g. new bathroom, kitchen, floor and window coverings, paint, etc. The unrenovated rental income would be $500-$550 per week. Post-renovation, the rental income would increase to $750-800 p/week.The alternate to this strategy is to purchase a house for $1.725 million that is in good condition, doesn’t need any renovations and rents for $600 per week.The chart below illustrates that both options are relatively similar from a financial perspective, and it really depends on the opportunity to add value/create equity. The greater the scope to do that, the more favourable the renovation option will be.Chart 1Scenario two: full rebuildPurchase a rundown house on 800 sqm in the blue-chip suburb of Indooroopilly, Brisbane for $1.5 million. Demolish and build a 4-to-5-bedroom family home with a pool at a cost of $1.2 million. The completed value of the property is estimated to be $3 million. Its rental income will increase from $400 per week to $1,500 per week.The alternate to this strategy is to purchase a second investment property for $1.1 million (total cost of $1.2 million).The chart below illustrates that the rebuild scenario is better in the shorter term (over first 8 years), which makes sense due to instant equity and improved cash flow by circa $26,000 p.a. (due to higher rental income and depreciation tax deductions). However, in the long run, buying another property with a strong land value component creates a lot more wealth. About $1 million (approximately 30%) more wealth in today’s dollar over 20 years, due to the power of compounding capital growth. Land compounds in value, buildings don’t. This aligns with the theme in last week’s blog about playing the long game.Chart 2Scenario three: small developmentPurchase a development site for $1.5 million. Demolish the existing dwelling and construct two townhouses for a total cost of $1.2 million. Completed townhouses will be worth circa $1.7 million each and will rent out for $800 per week (each).The alternate to this strategy is to purchase two investment properties for $1.3 million each (total cost of $2.8 million, which is the same as the development option).The outcome is like scenario 2 but not as stark. The develop option is better over the first 11-12 years. But over 20 years, the ‘buy and hold’ option creates more wealth by circa $640,000 in today’s dollars (or 16%).Chart 3You can make capital improvements in the futureYou can always renovate or rebuild a property at any time. However, one thing you cannot change is the land size, orientation and location. Whilst the cost of building does increase over time (partly driven by tighter building regulations), the cost of land increases at a much faster rate. Therefore, at least initially, I always counsel clients to invest most of their money in land as reasonably possible.Future use of your investment propertiesOne advantage of developing, rebuilding and renovating properties is that you can ensure you have a sustainable and desirable building style that align with modern requirements. This will ensure it appeals to tenants and maximise your rental income. And if you plan to bequeath your property(s), your beneficiaries may enjoy a higher quality of accommodation e.g. for some people a newer townhouse may be more desirable than a 100+ year old Victorian cottage. This is a matter of personal preference.Improving the property is different from maintaining itIt is important to maintain your investment property so that it’s in good tenantable condition. It also needs to be in the condition that buyers expect. As I have written inthis past blog, you can delay maintaining a property but never avoid it. A poorly maintained property will eventually demand repairs (otherwise it becomes untenantable) or if you sell it in disrepair, it’s likely it will sell at a discount.Building deprecates. Land appreciates.The outcome of my analysis stands to basic logic. If buildings depreciate, then it stands to reason that you should invest as much as possible in the land value. Firstly, you want the highest quality land. Secondly, you want as much of it as your budget will allow.______________Financial modelling assumptions: Financial projections include current property rental incomes appreciating by 3% p.a., less related property expenses (higher expenses are included for older dwellings), land capital growth, interest expense at 5% p.a., tax benefits and depreciation deductions on capital improvements, and building improvements are depreciated at 1.25% p.a. to determine future value (which is half of the tax rate of depreciation to reflect rising replacement costs over time). Investors value is calculated as the aggregate of net equity plus cumulative negative cash flow which is discounted back in today’s dollars.
In my book, Investopoly, I outlined 8 investing rules that if followed, will help you build wealth and avoid making costly mistakes. These 8 rules are evidenced-based which I have refined over the past 20+ years.Rule number one is; play the long game. Arguably, it’s the most important rule because I’ve observed that this is the most common mistakes investors make i.e., they don’t play the long game. Whilst this rule is simple to understand, its often very challenging to follow.Short term profit does not create long term valueWhich investment option would you prefer (you can only pick one)? Invest in an index (share) fund which will accumulate $500,000 of additional wealth over the next 10 years or follow a “stock tip” which will generate a $50,000 profit within 9 months?Unfortunately, many investors would pick the stock tip option. They might justify their decision by planning to invest in the long-term option after they have banked a quick profit, but they rarely do. Instead, they search for the next short-term hit. To many, making a quick profit feels less risky than waiting 10+ years for a much larger gain.Three reasons short-term opportunities are inferiorI recently came across an investment opportunity to complete a 4-townhouse development which was projected to generate between $460k to $550k in pre-tax profit (which equated to a return of between 15% and 18%). It may take 2 to 3 years to complete this development.Of course, an alternative to this investment is to purchase a high-quality, investment-grade property and hold it for the long term. This is a better option for 3 reasons (which is why I didn’t pursue the property development).(1) Risk-adjusted returnsRisk refers to the chance that your actual returns will vary from your expected returns i.e. that the investment doesn’t achieve what you expect. Low risk investments produce very predictable returns, such as term deposits – as the return is virtually guaranteed. An investment’s volatility rate is a good measure of its risk.You cannot compare two investing options without also comparing their inherent risk. This is called a risk-adjusted return.Over long periods of time, a high-quality investment property (house) should produce an average capital growth rate of at least 7% p.a. to 8% p.a. plus a net (after all expenses) rental yield of at least 1% p.a. I have previously calculated that Australian property has a historical volatility rate of circa 10%.Property developments can present several risks including cost blowouts, failure to achieve your desired sales price due to changes in the market, adverse changes in planning rules and so on. For the sake of this example, lets apply a volatility rate of 30% (for comparison, the share market’s volatility rate is circa 20%).The Sharpe ratio is a commonly used methodology for calculating risk-adjusted returns. A higher Sharpe ratio is better as it means you receive a high return per unit of risk.§ Development option: Return of 15% to 18% p.a., risk of 30% = Sharpe ratio of 0.48 (range is 0.43 to 0.53)§ Long-term hold: Total return of 8% to 9% p.a., risk of 10% = Sharpe ratio of 0.65 (range is 0.60 to 0.70)This shows that the long-term hold option provides the investor with a higher return relative to its risk.(2) Perpetual returnsThe advantage of investing in assets that are expected to generate adequate returns over very long periods of time is that they benefit greatly from the power of compounding capital growth (as illustrated in this chart).The challenge with short-term investment opportunities is you must find another equally attractive investment opportunity soon after each investment completes. This can be challenging, risky and time consuming – it’s very unlikely that you’ll be able to find an endless amount of consistently profitable opportunities.(3) TaxesTaxes erode wealth. Delaying taxes (such as capital gains tax) allows you to reinvest pre-tax profits to benefit from a greater amount of compounding capital growth. This is a disadvantage of short-term investment opportunities, as you must pay tax (capital gains tax) when you exit the investment, leaving you less to reinvest.A long-term financial comparisonI have compared the two investment options above i.e. complete a $3 million property development every 3 years versus investing in a $3 million investment-grade property[1]. The chart below set out the after-tax (income and CGT) wealth in today’s dollars. It is relatively even over the first decade until compounding growth kicks in. Over 30 years, the ‘buy and hold’ option produces over 80% more wealth – over $3.2 million better off in today’s dollars. The chart eloquently proves the benefit of playing the long game.There is one very important factor that this chart does not include. That is the amount of time these two options require. Buy and hold strategies are very ‘hands-off’ and may require just a few hours each year, on average. However, property developments can be quite time intensive including project managing, dealing with inevitable challenges, planning rules, due-diligence, feasibility studies and so on.Why are people attracted to short-term profit?For some investors, banking a quick profit feels less risky. Some people don’t want to wait 10 to 20 years to generate substantial equity. Earning a quick profit helps them feel like they are making progress.Another driver is impatience. Young investors are more susceptible to this because they have a small asset base and want to build it quickly whereas seasoned investors that have already achieved a level of financial security don’t have the same sense of urgency.A quick profit won’t change your lifeMaking $50,000 profit on a stock tip is a good outcome. It’s nice but it’s not going to change your life or retirement strategy. However, making the decision to invest in a high-quality, long-term investment will have a huge positive impact on your wealth, and your life.How to play the long game§ Ask yourself; what can you invest in today that will maximise investment returns over the next 10+ years. I find 10 years is long enough to force you to focus on sound fundamentals but short enough to conceptualise.§ Resist the temptation to make a quick buck. If you do want to pursue something that’s short term, ensure it doesn’t come at the cost of compromising/delaying your long-term strategy.§ Appreciate that investments that have the fundamentals to generate good returns over very long periods of time are far better than investments that generate a once-off profit.§ Ignore all short-term noise e.g. media, spruers, etc. It’s designed to grab attention and sell advertising or product, not inform investment decisions.Wealth transfers to the investors with most patience and disciplineWe are all tempted by short term investment opportunities from time to time. That’s why it’s important to regularly remind ourselves that short-term investments do not generate long term value. It takes discipline to play the long game. Long term investments require a fair amount of delayed gratification and patience. It’s not always easy. But all the evidence demonstrates that it’s the most successful path to build wealth.[1] Returns are risk adjusted. In development scenario each development generates a pre-tax profit of $450k in today’s dollars and after-tax profits are reinvested conservatively earning 6.5% p.a. (interestingly, the analysis was quite sensitive to this factor). Buy and hold strategy includes the after-tax cash flow cost of holding a $3 million property assuming interest rates of 5.5% p.a.
There is one property investing golden rule that is more important than everything else. And if you nail this ‘one thing’, you are guaranteed to build wealth over the long run. This statement might sound sensationist, but I honestly cannot overstate this point.The golden rule is that the quality of the property you invest in will drive its long-term investment returns. If you invest in an average quality property, your long-term returns are likely to be average. Of course, if you want above average returns, you must invest in above-average quality property.This golden rule applies to all other assets classes as well, including shares, bonds, commercial property and so on.What does ‘quality’ mean?A quality property has the necessary attributes that sustains a level of buyer-demand that perpetually exceeds supply. This imbalance of supply-demand results in appreciating value/prices in the long-run. A high-quality property is often referred to as investment-grade.It is worth discussing the factors that impact supply and demand.In investment-grade locations, supply is fixed or diminishingSupply is probably the easier of the two factors to understand and ascertain. Supply refers to both land supply and dwelling type/style.Regarding land, it is important that the supply of land is fixed and finite. Consider a well-established, blue-chip suburb. In these locations there is rarely any vacant land available, often within a 10km to 20km radius. And there is no way that any new land can by ‘released’ for sale. However, in outer suburbs, land supply can be abundant due to land releases within a 20km radius. The further a property’s location is away from available vacant land, the tighter supply will be.Property type and style also affect supply. For example, in high land value locations, the supply of houses rarely changes, because its rarely economical to complete small sub-divisions in high-land-value locations, so the number of houses/townhouses remains unchanged. However, the supply of apartments can more readily change e.g. when a developer buys a commercial site and builds a residential tower. An example of a property type on the opposite end of the scale is Victorian houses. Virtually no one is building Victorian houses anymore, so their supply is finite. In fact, some probably get demolished every year, so supply is probably diminishing.Buyer-demand perpetually exceeds supplyBuyer-demand refers to the size of the pool of potential buyers that desire to own property in a particular location and can afford to do so.Demand substantially exceeds supply When the number of buyers exceeds the number of sellers, property prices tend to rise. Of course, that’s because buyers must be willing to pay more to successfully purchase a property.It is important that you invest in locations when buyer demand substantially exceeds supply. Notionally, there might be 10 buyers for every one seller. This level of imbalance in supply and demand will ensure that property prices will withstand changes in supply (e.g. an unusual number of properties for sale) or demand (e.g. an economic recession causes buyer demand to reduce). Despite what happens, it is likely that the number of buyers will always exceed the number of sellers and prices will be supported.Demand is diversifiedWhen considering a property investment, it is wise to consider who might like to own said property. It is important that the property appeals to a variety of types of buyers. Again, notionally, if you have 10 potential buyers (as mentioned above), 3 of them might be self-funded retirees, 3 investors, 3 owner-occupier upgraders and so forth. Ensuring that your property attracts a diversified pool of buyers will ensure it benefits from a sustainable and a robust level of demand.Property that attracts buyers willing and able to pay moreCan property prices continue to rise forever? When considering this question, the media often compares average household incomes to average property prices and draws the conclusion that housing is becoming more unaffordable. Of course, this is a meaningful microeconomic analysis. However, its less important for property investors.You must invest in a location that attracts higher income earners and wealthy people. The wealthiest 20% of Australians have almost 3.5 times more wealth than the average Australian. That is why its meaningless for investors to compare average incomes to average property prices and draw conclusions, unless you plan to invest in an “average” property. Instead, if you invest in locations that attract the wealthiest 20%, then it’s more likely that buyers will be able to continue to afford to drive property prices higher over time.Factors that drive demandDifferent locations are driven by different factors and rarely are two locations the same, so it’s important to understand the nuances of each market/location. That said, I’ve listed below some of the common factors that drive demand in investment-grade locations.§ Amenities. This includes necessities such as supermarkets, family doctor, dentist and so forth. Equally important is entertainment amenities including cafes and restaurants, entertainment venues, parkland including running and bike tracks and so on.§ Proximity to employment opportunities. Whilst we might believe this is less important post-Covid, I think the long-term impact has been overstated. There will always be substantially better employment opportunities in large capital cities for most industries.§ Schools. This can include sort after public school zones as well as desirable private schools. Proximity to schools can contribute a lot towards capital growth.§ Culture/community. It’s a positive attribute for a location to have a good community vibe/feel. This is often present in local shopping strips and the mixture of businesses adds a lot to this attribute. Some inner suburbs lack this and it’s to their detriment.§ Healthcare. Proximity to hospitals is important to some buyers, particularly older folk.§ Transport. This includes good public transport easily within walking distance as well as major arterial roads.When doesn’t this rule apply?A property’s quality might not be responsible for driving investment returns (capital growth) in the short-term. In the short-term, popularity can drive growth. This has been particularly evident over the past couple of years (through Covid) in many coastal locations. The popular trend has been that “since business will now be conducted online (Zoom), we can all move to the coast and enjoy a better lifestyle”. This thematic has driven unusually high levels of price growth in these markets.If your investment decision is based on a trend, then you must have a well-defined exit strategy. Because if prices are not underpinned by sound fundamentals, prices will eventually correct i.e. either prices will fall or there will be zero growth for many years. This has been proven, yet again, in the share market over the past month. Therefore, you must exit the investment before a price correction occurs.Don’t underestimate this golden ruleIf you are going to obsess about one thing, it should be investment quality (applies to all investments including property). If you get the quality right, and everything else wrong, it is likely that you’ll still successfully build substantial wealth.My advice is if you are going to direct any energy towards investing, it should be solely focused on asset quality, and all other matters (tax, borrowing, etc.) should be outsourced to your advisors.
This is the second part of a two-part blog about investing in commercial property (you can read part one here). Now that you have a broad understanding of commercial property attributes, the next topic to discuss is how you can successfully invest in commercial property.Why type of commercial property do I recommend?Personally, at the moment I invest in commercial offices, and recommend the same to my advisory clients.Not retail propertyI do not invest in retail property because the profit margins in the retail sector have been under increasing pressure and landlords are not immune to the impact of these pressures. Rental yields are already relatively low in the retail sector, and they could be compressed further, which will adversely affect asset values. Overall, I don’t find this sector attractive.Not industrial propertyWhilst the high rental yields that industrial property offers is certainly very attractive, there are two downsides. Firstly, industrial properties tend to have a single tenant (i.e. no tenant diversification) which could lead to protected periods of vacancy (3-6 months is not uncommon). Secondly, these assets tend to provide very little (no) scope for improvement.I prefer offices for these reasonsI am more attracted to office buildings because it offers tenant diversification i.e. an office building might have 20-40 tenants, so the likelihood of a materially lower income due to vacancy is lower. In addition, office buildings can provide scope to add value to the asset. There are two primary ways to do this.Firstly, you can ensure the building offers the same amenities that newly built towers do. That can include a refurbished foyer/atrium (so its attractive for staff and clients to visit), end-of-trip facilities (such as showers, bike racks and so on), offices that are already fit out and ready to be occupied, etc. These capital improvements are all aimed at achieving a higher rent per sqm.Secondly, you can improve the landlord’s relationship with the tenants. Ensuring tenants are well looked after and satisfied with the building is critical in reducing tenant turnover/vacancy and maximising rent. Weighted Average Lease Expiry (WALE) is a key metric that is used with office buildings to measure the strength of the property’s income stream. Increasing the WALE, reduces the capitalisation rate, which increases a buildings value.Investment option: Direct ownershipOne option is to purchase a commercial property to own directly i.e. you own 100% of the building, just like you would do with residential property. Of course, one downside with this option is that if you have a limited budget, you may need to compromise on the quality which is never a good idea.Whilst it is highly dependent on the type and location of the property, I suggest that you need a budget of at least $2 million to invest in a satisfactory commercial property.One of the advantages of having a direct investment is that you have absolute control over the asset. You can decide who will occupy it and what you do with the property in the future, especially if it has an alternative use.If the property only has one tenant, which is likely unless you have a large budget, then the risk that a vacancy adversely affects your investment income is also high. It is not uncommon for vacancy periods to be 3 to 6 months, even longer if you have to offer the tenant an incentive (e.g. rent-free period).My wife and I have invested in direct commercial property and enjoyed excellent returns (sold in 2020 because we received a stupid offer). It is our view that these assets are currently being sold for unreasonably high values. Commercial property tends to be cyclical, so if it presents value in the future (maybe when interest rates are higher), we will reconsider it.Investment option: Shared ownershipIt is possible to co-invest in commercial property with other investors (often called investor syndicates). This typically comprises of a group of investors that purchase a building often using some debt (e.g. borrowing 45-50% of the purchase price). Often the asset is owned in a unit trust and each investor owns units in the trust (fixed entitlement).There are several commercial property businesses that arrange property syndicates. Like with anything in the financial services sector, you must be extremely careful with who you deal with. This is particularly the case with commercial property syndicates, as I think most of them make very poor investments. You want a team that has extensive experience (runs on the board), skin in the game and most of all, high integrity and morals.Syndication offers many advantages. The main one is that you can level up on quality because you have a higher budget. There are lots of buyers in the sub-$10 million market (super fund and wealthy individuals), so the deals tend to be less attractive. However, offices that sell for say $20 to $80 million tend to be too expensive for individuals, but too small for institutions, so there is less buyer demand and therefore more attractive opportunities.The other advantages are that the risk of suffering a reduced income due to vacancy is lower because a large building will have many tenants. If you have a large sum to invest, you can spread that across several buildings, to increase your diversification. Finally, the investment manager will manage the whole process to maximise your returns e.g. asset sections, acquisition, capital improvements, property management and so on – it is truly a hands-off, passive investment.The main disadvantage of this investment is that the units you own in the unit trust can be illiquid. That is, if the investment turns bad, you will probably struggle to find someone willing to buy these units from you. This is true for most investments (it’s always hard to sell a dud investment). The best way to mitigate this risk is by having the right investment manager and ensuring the property is a good asset.Some might consider lack of control (compared to direct ownership) as a disadvantage, but I don’t. I’m not a commercial property expert – it’s not my day job. I think it’s wise to leave investment management to the experts. I like it that an expert that I know, and trust is looking after my best interest.Investment option: Real Estate Investment Trust (REIT)The final option is to invest in a Real Estate Investment Trust (REIT) which can be offered in the traditional management fund form or ETF. REIT’s are pooled investment vehicles that invest in in Australian or global property, simar to managed share funds.According to data compiled by S&P Dow Jones, between 60% and 80% of actively managed REIT’s fail to bench the index. Therefore, I adopt the same approach with REIT as I do to manage shares. That is, I use low-cost, passive index’s, not actively managed funds to invest in this sector (such as this Vanguard fund, for example).I tend to avoid Australian REIT’s because they have too much exposure to retail property e.g. shopping centres.Whilst this option definitely has merit, I consider shared and direct ownership to be superior because you have more control over the quality of the underlying asset that you are investing in and therefore can select something that is well-priced and offers scope for improvement.Commercial property must be a part of a larger planDeciding to invest in commercial property without a long-term financial plan is like asking for directions without disclosing your designation. A long-term plan provides necessary context. It helps answer the question; should I invest in commercial property? If so, when and how much.Commercial property is a wonderful investment which I invest in personally (only hold syndicated investments now) and recommend many of my clients do the same. It compliments other investment classes and I encourage you to consider it.
I believe that most people would be well-served by investing in various asset classes, including shares and property. I do not believe that any one asset class is superior. They all have their pros and cons which you can balance out in a diversified investment portfolio, which could include commercial property.Commercial property does have some wonderfully attractive attributes but it’s important to introduce it into your portfolio at the right time (stage of life) and of course, invest in the right asset using the right methodology.I will explain this in a two-part blog. This first part will provide an introduction to commercial property. The second part will consider how to successfully invest in this asset class.Attraction to commercial propertyMost investors are very familiar with residential property as an investment option. As I have highlighted in this blog many times, residential property is a growth asset because it provides most of its total return in the form of capital growth and proportionately very little income.One of the main attractions to commercial property is that it typically provides a higher level of income, which may be particularly attractive if you are close to retirement, or you already own a few residential investment properties.Types of commercial propertyCommercial properties can have a varying array of attributes and no two properties are likely to be identical. That said, there are three broad categories of commercial property:§ Office: An office building is usually a multi-level building that has multiple tenants. These buildings are typically situated in central, well-established locations (CBD or suburban hubs), which adds to their scarcity and tends to drive capital growth.§ Retail: this includes retail shops in suburban shopping strips, mixed-use premises, and specialised properties such as service stations and restaurants. Because these assets are typically located in high-demand locations, they tend to generate lower rental yields.§ Industrial: this includes industrial sheds, bulky goods centres (bunnings) and the so on. These assets tend to be located in outer, fringe locations and as such may offer higher rental yields.How does commercial differ from residential?Given most people have an understanding of residential property attributes, I thought the best way to introduce commercial property is through making a comparison with residential property.Rental yieldWith regard to rental income, there are two main differences between commercial and residential property.Firstly, a commercial tenant pays for most of a property’s expenses including rates, insurances, maintenance and so forth. The only exception to this may be land tax. In Victoria, if the lease is covered by the Retail Leases Act 2003, the landlord cannot on-charge the cost of land tax to the tenant. However, as property is regulated by the states, rules may vary from state to state. Suffice to say that given a commercial tenant pays for almost all expenses, it means these investments tend to generate a lot more income than residential properties.Secondly, rental yields tend to be higher than residential, especially for office and industrial properties. Office rental yields tend to range from 4% to 6% p.a. Industrial rental yields can range from 4% to 9% p.a. This compares favourably to residential houses which typically yield circa 2% p.a. gross (in Melbourne and Sydney), which might be reduced to just over 1% p.a. after all expenses (of course, well-located residential houses more than make up for this with capital growth).What drives commercial property values?Investment-grade residential property values are driven by the underlying land value. When demand exceeds supply, the value of the land will appreciate. That is why well-established, blue-chip suburbs are attractive to invest in.However, the value of a commercial property is almost always driven by its rental income stream. Investors will apply a capitalisation rate to the property’s income stream to determine its value. A capitalisation rate reflects the investors desired rate of return.For example, if a commercial property generates $100,000 of annual rental income and if the investor desires an investment return of 5% p.a., then this investor would be willing to pay up to $2 million for this property (divide annual income by capitalisation rate).An investor would consider many things when determining a capitalisation rate including the financial strength of the tenant (e.g. government tenants tend to be lowest risk) and the strength and length of the existing lease over the premises. Longer leases are typically more attractive to investors if they are on attractive terms, of course. If the building has multiple tenants, investors use WALE as a measure of the strength of the building’s income stream. The cost of capital (i.e. interest rates) also influences capitalisation rates. The less risky a building’s income stream is considered, the lower the capitalisation rate.Sometimes investors will be prepared to buy a commercial building on a low capitalisation rate if they expect the property to appreciate in value (i.e. capital growth). This was the case 20 years ago in Melbourne when retail shops on Chapel Street (South Yarra) were selling on yields of only 1-2%. Suffice to say that approach hasn’t turn out well for investors!Lower LVR’sMost banks will lend residential property investors up to 90-95% of a property’s value. That means an investor only needs to contribute 5-10% plus costs (stamp duty).However, for commercial properties, maximum loan to value ratios (LVR) tend to be restricted to 65-70% (sometimes 80% but that usually attracts materially higher interest rates). This means investors need to have more cash or equity in existing property to be able to invest in commercial property.A decade ago, commercial interest rates used to be much higher than residential mortgage rates. However, today, interest rates for commercial and residential property are often materially the same.GSTResidential property almost always does not attract any GST consequences, unlike commercial property.Sometimes GST is payable on the purchase price of a commercial property, especially if there is no pre-existing lease. If there is a pre-existing lease/tenant in place, then the sale will typically be treated as a going concern and GST will not be added to the purchase price. Purchasers should clarify this and ensure the purchasing entity (e.g. company or trust) is registered for GST, just in case, so they can claim a GST refund if necessary.Commercial rent usually attracts GST. That means you will need to charge the tenant GST and lodge a quarterly (maybe annual) Business Activity Statement (BAS) with the ATO.When can commercial property provide capital growth?It is possible to enjoy capital growth as well as income from a commercial property. This tends to occur in two circumstances:1. The property is located in a highly desirable location or is available for an alternative use. For example, a property located in a previously industrialised location that is becoming gentrified and could be converted/developed into a residential building (e.g. Collingwood in Melbourne).2. The investor improves the property’s rental income stream. That could include replacing ‘risky’ tenants with safer tenants, increasing the lease term or WALE, making improvements to the property to increase the rental amount (e.g. for office buildings that can include refurbishing the foyer/atrium, providing end-of-trip facilities, pre-fitted offices, refurbishing the lifts and so on).Commercial property investors should not expect to enjoy a high level of capital growth and a high rental yield (income) perpetually. Typically, the market will correct, and high growth commercial properties will tend to generate very low rental yields. Your total (income + growth) long-term return typically will not materially exceed 10% p.a.When is it appropriate to invest in commercial property?It is usually not appropriate for clients to invest in commercial property until they have established a sound investment asset base in less risky assets such as shares and residential property. There are three predominant reasons for this:1. As stated above, investing in commercial property requires you to have substantial equity in existing (residential) property or a large cash deposit, so you need to have a strong asset base to begin;2. Commercial property is a higher risk investment compared to residential because it is impacted by the vagaries of the prevailing economic climate. This can include periods of lower/no income and/or volatility in values. However, since residential property is a necessity (we all need somewhere to live), it tends to be less volatile and the best asset class to begin with; and3. There are some excellent commercial property investment options (which I’ll discuss next week), but they tend to be restricted to wholesale investors only.Next week: Commercial property investment optionsIn the second part of this blog (out next week), I will discuss your options for successfully investing in commercial property.
Last week, I shared what risks and opportunities investment markets could offer us during 2022. These market expectations helped my wife and I set our personal, relationship, business and financial goals for 2022.It is stating the obvious to so say that goal setting is important. I believe that if you aim at nothing, often that is exactly what you will achieve; nothing! Goal setting gives you more control over where your life is heading. Drive the bus. Don’t merely be a passenger on it.Part 2: Goal setting processThis blog sets out the goal setting process that my wife and I followed this year. However, I must say that I don’t think there is a right or wrong goal setting approach. It’s simply about finding the approach and process that suits you. Hopefully this blog gives you some ideas and a broad framework.Some tips I have learnt over the yearsI have two tips that I would like to share with you to help you set goals.Firstly, make sure your goal is specific, realistic and measurable. For example, a goal of “get fit” or “lose weight” is useless because it’s too vague. You must be specific, so that you can measure your progress.Secondly, don’t be afraid to set a low bar, especially if this is the first time you have set this goal, or you have failed to achieve it in the past. Remember, some progress is better than none at all and you can always increase the goal/target during the year. For example, you might be super motivated to get into shape this year and be tempted to set a goal of exercising 6 days per week. The problem is that for most people, this will be too hard to stick to for the whole year. And the reality is that if you exercised 3 times per week for say 42 out of 52 weeks, it would go a very long way to helping you achieve your end goal. Also, don’t set too many goals. Unrealistic goals are very demotivating.For example, to illustrate these two tips above, my health goals read like this; (1) exercise for 40 minutes at least 3 times per week – I track this (and other goals) using an app called Easy Habits, (2) never eat after 8:30pm and (3) I can eat whatever I want one day per week (i.e. one cheat day).Remember, when it comes to completing goals, consistency way more important than effort. Just 1% of improvement/effort every day for a year will result a 37x improvement.Step 1: Review last years goalsThis first thing we do is review last years goals. There are two reasons for this.Firstly, it is important to identify any goals that you haven’t achieved and decide whether to include them on this year’s list.Secondly, it’s wise to consider why you haven’t achieved any goal. If it was circumstances beyond your control, then it’s probably appropriate to include the goal again this year. However, if there are other reasons, then perhaps you can improve your implementation such as creating some form of accountability. Or perhaps it’s just a case that the goal isn’t that important to you, which is fine of course, but means maybe it shouldn’t have been a goal in the first place.Step 2: Forecast this year’s cash flowMany goals are dependent upon cash flow e.g. holidays, home improvements and virtually all financial goals. Therefore, I find it logical to start with forecasting our surplus cash flow for 2022. This allows me to prioritise my investment goals and whatever cash flow is left over after that can be allocated to lifestyle goals. This informs me about how ambitious our lifestyle goals can be.Firstly, you need to forecast what your income will be. If you are self-employed, you will need to complete a business cash flow forecast. If you are an employee, it’s probably relatively straight forward.Secondly, you need to add up all outflows such as tax, loan repayments, any investments you plan to make such as additional super contributions and general living expenses. Most outflows are easy to forecast. However, the one item that many people struggle with is general living expenses i.e. how much they spend, and a guestimate is not good enough. My wife and I track how much we spend on discretionary and non-discretionary items each month. This helps us accurately forecast our cash flow (as well as monitor our spending). This is very easy to do – using two separate bank accounts as described here. If you are not already doing this, make it your most important goal for 2022!Basic expenditure tracking/management is the cornerstone of money management. It is imperative no matter how high your income is. You must have good cash flow management practices before you are ready to start investing.Step 3: Set financial, relationship, personal and business/career goalsWe set goals across four categories to ensure we have a balanced focused during the year:1. Financial – this is self-explanatory. These goals are guided by our long-term financial plan. Our long-term plan determines what steps we must take over the next decade to ensure that we meet our long-term retirement/lifestyle goals.2. Relationship – we believe that a wonderful marriage takes deliberate effort, so we always set goals to ensure our relationship is as strong as it can be.3. Personal – health goals tend to dominate this category for me, but it’s important to set at least one personal goal.4. Business/career – this category isn’t only about money but can include goals such as working fewer hours, doing more work that you connect with and so on.Step 4: Forecast net worth at end of 2022I like to prepare a forecast personal asset and liability statement which determines our family’s net worth at the end of the next 12 months i.e. December 2022. Whilst any change in existing asset values is outside of your control, the main intention with this step is to reflect the financial impact of the goals that you have set. That is, how much you have allocated towards additional investments, debt reduction and so on.This will put your goals into context and allow you to assess whether your goals are aggressive enough. It will also help you next year when you assess whether you have achieved your 2022 goals.Step 5: Revise and optimise over the course of JanuaryMy wife and I work on our goals throughout January. We add, delete and refine the goals that we’ve set to ensure they all resonate with us. We have found that reviewing and editing our goals two or three times over the course of January is a very worthwhile process.Stick your goals up where you will see themOnce we are comfortable with the goals that we have set, we will print them out and stick them up in a place that we will see them every day. We find somewhere in the bedroom or bathroom is a good place as you are forced to look at the at the start of each day.Time for action!Of course, the most important part of goal settling is taking the actions that will cause you to achieve those goals. A journey of a thousand miles begins with a single step (Chinese proverb). Seeing your goals each day will remind you to take one step each day. Good luck.
It is stating the obvious to say that goal setting is important. The fact is, if you aim at nothing, often that is exactly what you will achieve; nothing!Each year my wife and I set personal, relationship, business and financial goals. We almost always achieve all the goals we set for ourselves each year. I want to share the process which we’ve just completed and share what I think 2022 might bring us investment-opportunity-wise, as this will help you set realistic goals.Part 1: Investment risks and opportunities that 2022 might bringOn one hand, you should never let markets dictate your investment strategy or decisions. Market sentiment almost always reflected short-term fears and greed – neither of which are any use when making long-term financial decisions. However, understanding markets is helpful in prioritising which goals are most important to implement in the next 12 months.For example, if you plan to invest in shares and property, but feel shares are wildly over-valued, then you could conclude to invest in property in 2022 and reconsider shares in 2023.Therefore, I think it is useful to consider what opportunities and risks markets might present during 2022.Australian property market in 2022The challenge with forming a view on the property market is that the past 12 months has been influenced by very slow supply i.e. fewer investment grade houses for sale. As such, some buyers have been driven by FOMO and been prepared to overpay for property just to “get into the market”.Listings in Brisbane are about one third below their usual volume and stock levels in Melbourne and Sydney are also lower, although certainly not to the same extent as Brisbane. Listing numbers in regional locations, particularly beach-side locations, are also chronically low.If supply remains tight i.e. there are fewer properties than there are buyers, property prices will continue to appreciate, albeit at a slower rate than in 2021. Supply will eventually increase because higher prices encourage more sellers to come to market. However, I don’t think that will happen until the Covid risk disappears. Of course, no one knows when that will happen!Price becomes more important the further you move down the quality scaleFor the sake of this example, let’s assume that Covid evaporates over the course of 2022 and that 2023 brings us a normalised property market i.e. supply returns to normal levels. It is very possible that we may see prices pull back by 5-10%. That’s because there is no longer any pressure to overpay to buy a property. For example, properties that were selling for $1.2-1.3m range may sell for $1.1-1.2m range, which may fairly represent their intrinsic value. If this happens, people that overpaid for property in 2021 might find themselves in a paper-loss position for a short period of time. In short, the consequence of overpaying could be that you accumulate very little equity in your property over the first few (2-4) years of ownership.If you plan to buy a property (e.g. a home) in a non-investment-grade location, then it is increasingly important to not overpay for property. The further down the quality scale you move, the more the price/value assessment becomes. That’s because high-quality, investment-grade locations tend to benefit from strong price appreciation, and this strong growth quickly makes up for the financial impact of overpaying. However, in lower growth locations, the consequence of overpaying can sting for many years.I must highlight that when buying an investment-grade property, the quality of the property is vastly more important than the price you pay, as discussed here. Overpaying slightly for the right property is not concerning.In short, I think 2022 will continue to be characterised by below average supply which will drive prices. If your goal is to buy property in 2022, my advice is to be diligent and patient. That is, definitely pursue that goal but also make friends with the possibility that if you cannot find the right property for the right price, that you may not complete this goal in 2022.Share market risks and opportunitiesI think growth stocks are the biggest risk in the share market at the moment, but it is impossible to forecast how that might pay out over the course of 2022. You would need to adopt implausible assumptions to justify the value of some growth stocks. Many of these growth stocks are unprofitable, burn through cash and have never paid a dividend – yet they are valued at multiples of hundreds of billions of dollars (or one trillion in Tesla’s case).At some point, the market will no longer support these valuations and growth stock share prices will correct. This could happen dramatically (e.g. stock market crash) or gradually. It is impossible to predict when this will happen and what the impetus will be.Also, it is important to keep in mind that higher inflation will have a negative impact the value of growth stocks (because higher inflation leads to higher interest rates which results in a higher cost of capital and consequently lower valuations). It’s worth noting that there is a risk that higher inflation will persist for longer than expected.My approach towards investing in the share market during 2022 will be to avoid over-priced growth stocks. I will also tilt towards geographical markets and sub-asset-classes that exhibit the best medium-term return prospects. In short, my investment decisions will be guided by what I think will maximise returns in the medium term and I won’t be concerned by what might occur in the short term i.e. throughout 2022.Commercial property marketThe commercial property market is still very healthy, even the office market, which you might find counter intuitive given the impact of Covid and WFH. Investors are willing to buy commercial assets on low yields (meaning they will pay a higher price for a property to secure its rental income stream). This is probably driven by low interest rates i.e. term deposits are paying very little interest, so investors are looking for alternatives. You might assume that investors buying a $50 million commercial building would be well-informed, diligent and savvy investors, but that’s not always the case.I expect the commercial property market will continue to perform well during 2022 driven by low rates. However, when interest rates eventually do rise, investors that have either over-paid or invested in a sub-investment-grade assets could suffer losses. Therefore, when investing in this sector, its critical to invest in the right property for the right price. I will release a two-part blog about investing in commercial property in early February.Interest ratesInflation is creating upwards pressure on interest rates, particularly in the US. I don’t think there is much doubt that supply chain disruptions are contributing substantially towards inflation. What is less certain is how long it will take to fix supply chains and to what extent it dampens inflation.Unlike in the US, we haven’t seen any substantial wage inflation in Australia. The reopening of international boarders (which opens the door to international students and foreign workers) will hopefully address workforce shortages, particularly in hospitality, and reduce the likelihood of wage inflation pressures.In short, I don’t expect variable interest rates will change during 2022. However, I would not be surprised if fixed rates rose during 2022, as they reflect future interest rate expectations.Omicron and the economyIt has been well publicised that the omicron outbreak has produced lockdown-like economic consequences, including less travel and lower than normal retail spending. Whilst this will have an impact on GDP in the first quarter, if this current omicron wave abates in the second half of January, as expected, it is likely that economic activity will rebound and recovery quickly.Use this information to set personal goalsNext week, I will share the goal setting process that my wife and I recently followed to set our financial, personal, relationship and business goals for 2022. We use above market expectations for 2022 to ensure that our goal setting was realistic.
For my final podcast for 2021, I thought it would be interesting to look back to see how various investment asset-classes performed. This is important for two reasons. Firstly, it is wise to benchmark your investment returns so that you can assess relative performance. Secondly, it serves as a salient reminder about the cost of delay and procrastination.Short-term returns are unimportantIn isolation, short term returns are meaningless. That’s because your focus as an investor must be on maximising medium to long term investment returns. What can I invest in today that is likely to generate the highest returns over the next 5 to 10 years? That is the question you must ask yourself.Therefore, it’s important to highlight at the beginning of this blog that you should not put too much importance on short-term (i.e. 1 year) investment returns. Resist the temptation to guess what asset class will perform best next year. Instead, ask yourself which asset class or investment will produce the highest returns over the next 5+ years i.e. between 2022 and 2027.Share marketsIt was a year of two halves in share markets this year. The first half benefited from strong price appreciation, particularly for value stocks. The second half was adversely impacted by a few things including the risk that higher inflation may not be transitory, interest rate hikes occurring sooner than expected, central banks tapering QE and more recently, the potential impact of the new Omnicom variant.The table below sets out returns until the end of November 2021 for the main geographical markets.https://www.prosolution.com.au/wp-content/uploads/2021/12/Equity-market-returns-table.pngEmerging markets predominantly include China, Taiwan, South Korea and India. They have been impacted by all the concerns listed above plus many Chinese-specific matters including diplomatic and trade-related tensions, Evergrande default (that occurred last week), tech industry crackdown and economic growth concerns.This has conspired to make emerging markets the most attractively priced sub-asset class, behind the UK market, as illustrated in the table below.Expected returns are calculated by Research Affiliates, LLC using various evidence-based valuation models. Total return is the aggregate of income + earnings growth + change in valuation multiples.https://www.prosolution.com.au/wp-content/uploads/2021/12/Expected-share-market-returns.pngBond marketsAustralian bond investment returns this year are the worst since 1994. The Bloomberg AusBond Composite 0+ Yr Index lost 3.23% in the 12 months to the end of November 2021. Australian corporate bonds have performed slightly better losing circa 2% over the same period.Global bonds have also produced negative returns over the past 12 months – the Bloomberg Global Treasury Scaled Index (hedged) lost circa 1.5%.Bond values have been adversely impacted because the market has factored in the risk that interest rates may rise sooner than originally anticipated due to inflationary pressures. This is a lot more likely in the US than it is in Australia. Comparatively, it appears that the Australian bond market has overreacted to this risk.I should highlight that bonds play an important role in a portfolio’s asset allocation because they are negatively correlated with shares. That means when shares rise in value, bonds tend to fall and vice versa. Given share markets are trading close to all-time highs, arguably maintaining bond exposure is even more important today.Global property and infrastructureGlobal property and infrastructure investments are regarded as defensive investments (i.e. safer) because they tend to have long-term contracted revenue, so their future cash flows are more certain.Global property includes real estate assets such as shopping centres, industrial properties, offices, resorts and so forth. Infrastructure includes assets such as utilities (water, gas, electric), toll roads, pipelines and other large, capital-intensive projects. Returns for these two asset classes to end of November 2021 are set out below.https://www.prosolution.com.au/wp-content/uploads/2021/12/Pppty-and-Infra.pngThree issues have impacted returns over the past 12 months. Firstly, Covid lockdowns are adverse events because they reduce traffic and therefore revenue. Secondly, low interest rates positively impact these investments as these products tend to rely on debt funding. Thirdly, government fiscal policy throughout Covid tends to be focused on increasing infrastructure spending.The 12-month returns reflect the fact that these asset-classes fell substantially between February and October 2020, due to Covid.Direct residential propertyI probably don’t need to spend too much time discussing the residential property market considering I write regularly about this market in this blog throughout the year. The table below sets out price changes in each capital city to the end of November 2021.https://www.prosolution.com.au/wp-content/uploads/2021/12/Residential-property.pngWhilst growth over the past 12 month has been substantially higher than average, it is important to note that growth over the past 5 years has been below trend as discussed here and that it appears the rate of price growth has normalised in recent months.Direct commercial propertySome of our clients invest in direct commercial property, as advised by us. As a rule, we tend to avoid investing in retail commercial property, due to well-documented profit margin pressures that most retail business have endured, particularly over the past 10 years. Whilst rental yields for industrial property are attractive, they tend to have a single-tenant profile which we don’t feel is appropriate. As such, we deem the most appropriate sector to be commercial office.Given Covid lockdowns and greater adoption of working-from-home, you may assume that the commercial office market has been adversely impacted. However, that is not the case. There is a lot of demand for high-quality commercial office buildings, and they have continued to sell for record amounts. There are two reasons for this. Firstly, low interest rates have inflated asset prices. Secondly, wealthy investors can look beyond the work-from-home rhetoric and see long-term value.Of course, some segments will perform better than others, and a building’s attributes and location matter the most, but overall, we are very optimistic about future returns in this market, particular with our evidence-based methodology.What will you do differently in 2022?Did you make any investment mistakes during 2021? If so, what can you do in 2022 and beyond do so that you don’t repeat these mistakes?You would generally be well-served by adopting this 3-step approach:1. Only adopt evidence-based methodologies. 2. Focus on a time horizon of 5 to 10 years. Ask yourself, what will matter in 5 years from now? Will Covid matter? Probably not. Interest rates? Maybe, but they have probably already been factored in. Demographics? Yes, certainly. Asset fundamentals? Definitely. Most of the “risks” discussed in the newspapers today probably won’t matter 5 months from now, let alone 5 years! 3. If the consequences of making a mistake are unacceptable to you, seek independent, professional advice.
Paying Capital Gains Tax (CGT) isn’t necessarily a bad thing because it means that you have sold an asset and made a profit, which is better than a loss, of course. That said, I’m certain that most people would prefer to pay less tax, not more. Therefore, it’s important to understand the ins and outs of CGT.Capital Gain Tax basicsThe amount of tax you must pay on any capital gain is calculated using the below formula (for any asset purchase after 20 September 1985).See here. (A) Net sale proceeds – this includes the amount that you received less any direct selling costs such as advertising expenses, agent fees, legal fees, brokerage and so forth. If you have gifted the asset or sold it to a related party for less than market value, then your net sale proceeds are deemed to be equal to its market value.(B) Cost Base – this includes the total cost of the asset, which is what you originally paid for it plus any related costs such as brokerage for shares, stamp duty and buyers’ agent fees for property, legal fees, professional fees and so forth. You may be able to include any holding costs and capital improvements in your cost base if you haven’t already claimed a tax deduction for them. The cost base will be reduced by any depreciation or amortisation claimed on the asset during the ownership period.(C) 50% discount – if you have owned the asset for more than 12 months and you are a resident for Australian Tax purposes, you are entitled to reduce the net capital gain by 50%.(D) Marginal Tax Rate – The final step is to multiple the discounted capital gain by your marginal tax rate. For example, if you earn between $120,000 and $180,000, your marginal tax rate is 39% (including 2% Medicare levy).An exampleLeo purchased a property in 2002 for $550,000. The total costs associated with the purchase was $33,000. Leo sold the property in December 2021 and received $2.1 million net of all selling costs. As such, the gross gain is $1,517,000. The discounted gain is $758,500. And as Leo earns over $180,000 p.a. from his job, the whole gain will be taxed at the highest marginal rate of 47%. Consequently, Leo will have to pay $356,495 of tax when he lodges his tax return after 1 July 2022.What if you make a capital loss?A capital loss occurs when your net sale proceeds are less than your cost base. Capital losses can be used to offset capital gains. However, capital losses cannot be used to offset other income (such as employment income). Instead, you may carry a capital loss forward to use it in future years if/when you make a capital gain.Main residence exemptionYou are permitted to claim a CGT exemption on your home if (1) you and/or your spouse live in it, (2) you have not used it to generate an income e.g. rented it out and (3) the land is 2 hectares (2,000 sqm) or less.Your spouse and you can only nominate one main residence at any one time. Therefore, if you have two homes (e.g. a city residence and a beach-side property), only one of those properties can be deemed as your main residence.Various rules apply for different situations such as your main residence being on multiple titles e.g. adjoining vacant land, you have multiple dwellings on the same title, or you subdivided your main residence. In these circumstances, it is very important to obtain professional advice from a holistic accountant.Converting a main residence into and investment propertyIf you rent out a former main residence, you may only receive a partial main residence exemption:1. If you occupied the property immediately after you purchased it, your cost base will be deemed to be equal to the market value on the day that it first became available for rent; or2. If you initially rented the property to a tenant, and occupied it thereafter, your main residence exemption will be pro-rata by the number of days that you occupied the property. For example, if you purchased a property and rented it out for 2 years, then occupied it for 5 years and then rented it out again for 3 years before selling it, then 50% of the gross gain can be disregarded under the main residence exemption (as you occupied the property for 5 out of the total 10 years you owned it).If you rent out a former home and don’t claim another property as a main residence, you can continue to claim the main residence exemption for up to 6 years. This is called the-6-year-rule which is explained here. If you re-occupy the property prior to the end of the 6-year period, it is possible to reset this exemption for another 6 years. If you do no re-occupy or sell the property before the 6 years has expired, you will lose this exemption.A company is not entitled to the 50% discountA company is not entitled to use the 50% discount. As such, a company is taxed on the gross capital gain (i.e. items A minus B above).If a company is eligible to be treated as a base rate entity, its tax rate will be 25% (for financial year 2021/22 and beyond). The maximum rate of tax payable by an individual is 23.5% (being the highest marginal rate less the 50% discount), so this company rate of 25% is only marginally higher.However, if the company doesn’t qualify as a base rate entity, its tax rate will be 30%, which is prohibitively higher than an individual’s rate. If you are going to use a company to invest, care must be taken to ensure your business income structure allows you to benefit from the lower company tax rate.Discretionary family trustIf a family (discretionary) trust crystalises a capital gain, it can distribute that gain to variously individuals and/or entities. Because trust distributions retain their tax nature and attributes, the capital gain will be taxed according to the beneficiary’s tax position. For example, if it is distributed to individuals, they will be entitled to the 50% discount, are able to offset capital losses and so forth. If it is distributed to a company, it will not benefit from the 50% discount. Essentially, the capital gain flows through to the beneficiaries.SuperannuationSuper funds are concessionally taxed. In accumulation phase (i.e. pre-retirement) a super fund is taxed at a flat rate of 15%. A super fund can apply a CGT discount of one-third if it has held an asset for more than 12 months. As such, the effective rate of tax on capital gains is only 10%.In retirement (pension phase), the rate of tax is nil on all income and capital gains.Inherited assetsWhen you inherit assets, you inherit their original cost base and nature of the asset. This means if you subsequently sell the asset, you will be taxed on the full gain i.e. based on the predecessor’s cost base. In our experience, when inheriting assets that have been held for many decades, tax records can be difficult to obtain which can be challenging.If you are selling the predecessor’s former home, you may be able to utilise the main residence exemption.If the predecessor purchased the asset before 20 September 1985 (i.e. pre-CGT), then your cost base is deemed to be the market value as at the date of death.Minimising Capital Gains TaxOf course, you want to retain as much of any capital gain as possible, which means minimising your CGT liability. There are various ways you can do that, including:1. Crystalising the CGT event in the financial year that is most economical e.g. in retirement.2. Selling assets in the right order e.g. sell assets that are expected to crystalise a capital loss first.3. Gradually selling assets over many years – which is easier to do with shares.4. Proactively determine/plan the best use of your main residence emption.5. Structure asset ownership taking CGT liabilities into account e.g. trust or super fund. This is easier to do if you have a well-considering long-term strategy.Warning: don’t rely solely on this summaryWhen it comes to tax, there’s almost always special rules, treatments and exemptions that depend on your circumstances (e.g. the Small Business Capital Gains Concessions). Whilst the above summary is accurate, it is important that you seek personalised tax advice to ensure these rules can be applied in your circumstances.
After almost 20 years of interacting with investors (and potential investors) on a daily basis, I’ve noticed some common themes that prevent investors from achieving their potential. If you can avoid all three, you are almost guaranteed to achieve financial security.Whilst some of these matters seem relatively simple, you should not let their simplicity fool you into thinking that they are anything less than critical.Why do we tend to overcomplicate matters?I believe that investing is simple. If you adopt a rules and evidence-based approach towards making investment decisions, it is virtually impossible to make a mistake. Successful investing is rooted in sound logic and basic math. There is nothing overly complex about it that cannot be explained in simple terms. That is why I wrote Investopoly – to outline 8 time-tested rules that if followed, would guarantee investors avoid making costly mistakes. I apologise if that sounds like a sales spiel. And I appreciate it sounds like a big promise. But I stand by it.If investing is simple, why do people over-complicate it? Of course, the reason depends on the individual. However, I think there are probably two reasons.Firstly, there is a lot at stake i.e. my family’s financial security, our dreams and goals. Given what’s at stake, people can have the tendency to over-think it due to fear of making a mistake.Secondly, to many people, investing seems complex. Humans tend to think that complex problems require complex solutions. The truth is, simple solutions tend to be very effective, exhibit lower risk, lower cost, easy to implement and easy to understand.Most mistakes are made by over-complicating financial decisions than over-simplifying them.Investment mistake # 1: try to work it all out themselvesAs a rule, I don’t perform my own dental work. I go to a dentist. When buying a property, I don’t do the conveyancing myself. I engage a professional and experienced lawyer. I don’t service my car… you get the point.I rely on various professionals when (1) the consequences of making a mistake are unacceptable and (2) I don’t have enough knowledge and experience to give me a high level of confidence that I will not make any mistakes.It has always puzzled me why someone would invest more than $1 million of borrowed money (e.g. buy an investment property) without getting any professional advice. Firstly, $1 million is a lot of money and the relative performance (e.g. 1% p.a. more) of the asset over 10+ years can make a huge difference in dollar terms (which I previously demonstrated here).Secondly, you are investing money that’s not yours i.e. borrowed money. It’s not yours to lose. And it comes at a cost (interest rate) – and that cost is guaranteed – you must pay it regardless. Therefore, if you are on the hook for the cost of debt, you should take all possible steps to minimise the risk of under-performance. If you are not prepared to do that, then perhaps you shouldn’t be borrowing to invest.Investment mistake # 2: to reduce risk, aim for a quick profitFor almost 20 years I have written ad nauseam that ‘playing the long game’ gives you the greatest chance of successfully building wealth. That is, make investment/financial decisions that are focused solely on maximising outcomes in 10+ years’ time. This allows you to drown out all the (media) noise and focus on sound fundamentals. Fundamentals, not noise (rhetoric), drive investment returns in the long run.However, the main challenge with playing the long game is delayed gratification. Take property as a good example. It is likely that you will need to hang onto a property for 10 to 20 years before you make a decent return in dollar terms (as this chart demonstrates eloquently). That is a long time for you to maintain faith and confidence in your investment decisions.But for many people, this approach feels risky. Generating immediate investment returns gives them the confidence that they are making progress. As such, they start to consider investment methodologies, products and strategies that aim to make quick returns. Examples include picking individual stocks that are predicted to take off, investing in property in an unproven location that is predicted to boom, buying a compromised property just because it has redevelopment potential and so forth.Starbucks founder, Howard Schultz said it best; “short term profit never creates long term value”. Investors must forget about short term investments/returns. Even if you are successful in the short term, you need to find the next investment opportunity and never make any mistakes. Instead, it is much better to invest in assets that provide compounding returns over many decades, as I’ve discussed here.The trick with investing is to have patience. Investors with the most patience are rewarded in the long run.Investment mistake # 3: don’t appreciate the urgencyIn the mid-1700’s English poet, Edward Young wrote that “procrastination is the thief of time”. When it comes to building wealth, procrastination is the thief of wealth.Mathematically, the longer you have to build wealth, the lower the rate of return you need.For example, if you invest $100,000 when you are 25 and receive an average return of 5% p.a., your investment will be worth more than $700,000 by the time you are 65. However, if you don’t invest that $100,000 until you are 55 years of age, you need to generate a return of 22.5% p.a. for your investment to be worth $700,000 by age 65.You do not have to accept much risk to generate a return of 5% p.a. over 40 years. However, you must take unacceptably high risk if you want to achieve a return of over 20% p.a. over a 10-year period.Therefore, the longer you delay investing (procrastinate), you either must take more risk in the future or come to terms with accumulating less wealth. That is simple math.I’m not suggesting that your sense of urgency needs to be at emergency levels. There is never a good reason to rush into an investment. Take your time. Be diligent. Get advice. Invest carefully. But you must avoid procrastinating. Because before you know it, many years will pass by, and the opportunity cost of that wasted time can be significant.Simple mistakes are simple to avoidThese three common mistakes are not ground-breaking and might seem quite innocuous. But the reality is that they are incredibly insidious and can cost people dearly.The good news is that these common mistakes are very easy to avoid. It’s worth investing a few minutes to reflect on your own situation. Have you made any of these mistakes in the past and if so, what steps can you take to avoid repeating them in the future?
With property and share markets trading at all-time highs, it’s reasonable and perhaps prudent to consider whether we are in a (asset price) bubble. Bubbles cannot grow indefinitely and at some point, all bubbles burst.Is the share market about to crash?Share markets around the world have been incredibly resilient throughout the pandemic and almost all markets are trading above pre-pandemic levels. That probably shouldn’t come as a big surprise, as government fiscal support here and abroad has been unprecedented and interest rates couldn’t be much lower.Rivian is a good example of a bubbleThere are some very clear examples of bubble-like share market valuations. The recent listing of shares in Rivian Automotive Inc. in the US (NASDAQ) is a perfect example. It listed on 9 November raising $US12 billion from investors. Rivan is valued at $US110 billion making it the 5th most valuable automotive manufacturer in the world, behind Volkswagen, which sells 2.8 million units (cars) per year. It’s worth almost as much as Australia’s most valuable company, CBA.Perhaps the most noteworthy thing about Rivian is that is hasn’t manufactured one product yet. That’s right! It hasn’t generated $1 of revenue, let alone a profit. It is true that Amazon has agreed to buy 100,000 electric delivery trucks from Rivian, which are to be on the road by 2030, but it effectively hasn’t manufactured one unit. There is no conceivable way on earth that a $US110+ billion valuation could be justified for this company. It’s insane.But not all stocks in the US are overvaluedIt is true that the large US tech companies have contributed substantially to the US stock market’s returns over the past 10 years. The FANMAG stocks now account for almost 24% of the S&P500 index. The total value of these six companies is almost $US8.5 trillion. Japan’s entire stock market is worth $US6 trillion. It is also noteworthy that Tesla’s market capitalisation (value) has added almost $US0.5 trillion to the S&P500 index since joining it in December 2020.But some of these tech companies have been driven by sound fundamentals. Take Apple as an example. It took 38 years to reach a $US1 trillion market valuation in 2018. It only took 2 years to double its valuation to $US2 trillion (by mid-2020). It is currently worth more than $US2.6 trillion. A lot of this growth in value has been driven by underlying earnings (profit). Its trading on a PE ratio of 28 times which is not implausible. In fact, its relatively easy to justify.It’s happening in Australia tooThere are signs of bubbles in different companies in Australia too.Cloud-based accounting software provider, Xero has a market capitalised value of $22 billion. It reported a loss of $6.5 million for the first half of the 2022 financial year. Whilst Xero likes to talk about the lifetime value of a customer, investors are (or should be) more interested in profitability, of which Xero has none.But also, there are large Australian companies that are trading at attractive multiples. BHP, for example, is trading at a forward PE ratio of only 12 times, which is very low. That is mainly because its share price has fallen sharply over recent months in line with the price of iron ore.Australian property price bubble?According to Core Logic, the home value index has risen by 30% in Sydney over the 12 months to October 2021, 26% for Brisbane and almost 20% for Melbourne.Whilst recent property price growth has been unsustainably high, it’s more important to consider medium term growth, especially considering negative returns in 2017-2019. Over the 5 years to June 2021, the median house price in Brisbane, Sydney and Melbourne appreciated by between 4.7% p.a. and 6.9% p.a. (according to REIA), which is below the long-term average.Whilst some commentators have recently predicted that property prices will fall, it is interesting to note that medium term returns (5 year) tend to be a good predictor of price falls. I picked the largest price falls since 1980 in Melbourne, Sydney and Brisbane. Here’s what I found:§ Median house prices in Sydney fell by almost 15% between 2017 and 2019. The 5 years prior to this period prices rose 13% p.a.§ In Melbourne, the median house price fell by 11% over 2011/2012. The 2 years prior to this period house prices rose by 24% p.a.§ Median house prices in Brisbane fell by almost 8% over 1986/1987. The 5 years prior to this period prices rose 11% p.a.The conclusion is that price growth must be above average for an extended period of time (more than 2 years) for there to be a risk of a correction. Property prices in Melbourne, Sydney and Brisbane have merely made up for the poor growth rate since 2017 (i.e. mean revision). If prices don’t grow by another 20+% next year, I doubt values will fall.And of course, there’s bitcoinIt would be remiss of me to not mention crypto in a blog about price bubbles. The total value of Bitcoin is now more than $US1.1 trillion. And the market value of all crypto is circa $US2.6 trillion, which is worth more than Australia’s entire share market! Its worthwhile to remind ourselves that decentralised currencies (crypto) are rarely used for anything other than speculation.Bubbles and micro-bubblesRob Arnott is a US market fundamentalist that I respect greatly. In recent interviews, he has talked about micro-bubbles. Tech company valuations are not universally irrational, like they were in the early 2000’s during the dot com bubble. Instead, certain stocks and assets (e.g. crypto) exhibit bubble-like valuations. This is what Arnott calls a micro-bubble.What created these micro-bubbles?It is hard to say what’s caused these micro bubbles, but I suspect it’s the combination of low interest rates and Covid lockdowns/restrictions.Lower interest rates means that people have more surplus cash than they did pre-Covid, and Covid restrictions mean that people spent less on travel and entertainment. As such, people have been willing to ‘gamble’ some of this money on certain assets with the aim of generating a quick return. According to estimates by JMP Securities, individual investors opened more than 10 million new brokerage accounts in 2020 in the USA.Aren’t valuation fundamentals important anymore?What makes someone buy Tesla stock at more than $US1,100 per share? Using a fundamental approach would require you to make ridiculously implausible assumptions to justify this share price e.g. it would have to grow at more than double the rate that Amazon has over the next 5 years. Amazon has been a once-in-a-generation growth story.What stockholders in these micro-bubble assets are buying is not the fundamentals but the popular narrative/s. Narratives such as Elon Musk is a genius and since all his wealth is tied to Tesla, there’s no better incentive for him to make it work. That the price of Bitcoin will continue to rise. That Xero will achieve scale and generate profit in the future.When will the microbubble burst?When contemplating the answer to this question, there are two important observations to highlight.Firstly, bubbles can last long and go higher than any reasonable person could imagine. As the saying goes, “the market can remain irrational far longer than you can remain solvent”. Therefore, don’t bet against a bubble (i.e. short sell the asset).Secondly, whatever ends a bubble needs to come as a surprise to the market. The market is unsurprised by factors that are already reflected in prices such as higher inflation, higher interest rates, end of Covid lockdowns, central bank tapering and so forth. The catalyst, whatever it is, by definition, is something that is unpredictable today.That said, sometimes gravity is what ends bubbles – prices/valuations get so high that they become unpalatable to everyone – what goes up, must come down. The early 2000’s tech bubble is a good case in point. To date, no one has been able to identify the one thing or things that caused the dot-com bubble to burst. It was merely gravity.Make sure you have a strategyIf you are invested in micro-bubble assets, then you better have an exit strategy. That is, a strategy that will inform you when to sell and take your profit, before the bubble bursts.Alternatively, you should invest in a way (methodologies) that ensures you avoid micro-bubble assets. There are still plenty of excellent investment opportunities in all markets. Don’t assume everything is overvalued.
A financial advisor’s job is to develop a plan and help you implement that plan over many years, so that you achieve your financial and lifestyle goals. This includes navigating the inevitable changes in your circumstances, markets, investments and so forth – knowing when to stick to the plan and when to alter it.Achieving your financial and lifestyle goals is an incredibly valuable outcome. Therefore, it is very likely that financial advisory fees will be a small fraction of that value.Just like in any profession, the best people are typically in high demand. Of course, when selecting an advisor, you definitely want the best that you can afford.Shrinking pool of financial advisorsAccording to research house, Rainmaker, approximately 30% (9,000) of financial advisors have left the industry since 2018. There are now less than 20,000 financial advisors in Australia.There have been lots of legislative changes over this time that have prompted financial advisors to change careers or retire, including the banning of commissions, mandatory tertiary education standards(all financial advisors must pass a mandatory exam before 1 January 2022), increasing insurance costs and ever-increasing compliance obligations and so on.The changes that have been implemented over the past few years have contributed towards lifting the bar (professionalism) for financial advisors. Of course, this is a good thing for the industry and its clients. But the result is that there is a growing shortage of financial advisors in Australia.It’s the person, not that business that mattersA financial advisor and their client have a very personal relationship. This relationship is based on a high level of trust. Therefore, it is critical that clients find an advisor they feel comfortable with. Of course, there’s a personal/emotional element to this.Second to trust is experience. Whilst it is possible to systemise some facets of the advice formulation process, what cannot be systemised or automated is experience. Experience is one of the most important and valuable benefits a financial advisor must share with you. Knowledge tells you what to do and experience tells you when and how to execute. The challenge is that experience isn’t scalable. There are no shortcuts to accumulating experience either.An advisor that has been practising for 20 years is almost always going to be more valuable than an advisor with 2 years of experience.Good advisors are rarer than good clientsThere’s a limit to the number of clients that any one financial advisor can look after. Usually, that limit is in the range of 100 to 200 clients. But, of course, it depends on the complexity of each client.It is very important for an advisor to choose their clients carefully. Of course there are some obvious commercial reasons for this, but I feel the most important consideration relates to the allocation of the scarcest resource; time. There’s a limited amount of time to share with a limited amount of clients, so it’s important that we share our time with clients that could benefit the most.The only reason I come to work each day is the personal satisfaction I receive from helping my clients. Therefore, if I work with clients that truly need my help, I maximise this satisfaction. It might seem altruistic, but the truth is that it is a selfish pursuit. Thankfully, my client and my interests are perfectly aligned.I don’t think I’m the only financial advisor that thinks this way. In fact, I’m sure most in-demand advisors think this way. The advantage of having an almost abundant supply of potential clients is that you can be selective. It allows you to pick the clients that you can add the most value to.Scope to add valueHow much scope there is for a financial advisor to add value depends mostly on your financial circumstances. Factors such as the quantum of investable cash flow, value and type of existing investments and complexity are often the most important considerations.In addition to adding value, an advisor needs to consider whether they will enjoy working with the client over many years. This can include things such as:§ Willingness to follow advice – what is the point of paying for advice if you aren’t going to follow it. That’s just a waste of your money and the advisor’s time.§ Clients are enjoyable to work with when they are modest and appreciate your time, care and advice.§ Clients recognise that you are the expert. They delegate the task of building wealth to their advisor and trust in the process.Don’t underestimate the cost of adviceBen Graham taught Warren Buffett that; price is what you pay; value is what you get.You cannot judge a product or service on price alone, as its only one half of the equation. It’s not difficult to conceive that financial advice can be incredibly valuable i.e. quality financial advice can create several millions of dollars of value over long periods of time. It is sensible to consider that when weighing up an advisor’s fees.Firstly, you must consider the amount of experience an advisor has. An advisor that has many decades of experience is going to value their time at more than a couple of hundred dollars per hour.Secondly, you must appreciate that advice costs money to deliver. That includes all the compliance obligations, cost of education and keeping up to date, taking on the liability for providing advice and so forth.It is worth noting that paying high fees does not guarantee good results either. In fact, paying high fees for a poor outcome is a double whammy. Avoid percentage-based arrangements. Go for a fixed fee arrangement that is based on the time and complexity involved.Great financial advisors are rareUnfortunately, great financial advisors are rare. Lots of people have left the industry over recent years. And it’s not like you can increase the supply of experienced advisors overnight. This means that it makes it harder for people to find a good advisor. My tips for finding a great advisor include:§ Get a referral from someone that has worked with an advisor to build wealth.§ Every advisor should be able to articulate their investment philosophy and approach. And of course it will sound convincing. But you must see evidence that it works (including benchmarking of returns). I can’t understand why anyone wouldn’t use an evidence-based approach.§ Ensure the adviser has extensive experience across all asset classes, especially property and shares. They should be investors themselves i.e. eat their own cooking.§ Realise that you might need to wait. Busy financial advisors typically have client waiting lists.
It is becoming increasingly difficult to buy an investment-grade house for under $1 million in Brisbane, Melbourne and Sydney. This begs the question; if your investment property budget is less than $1 million, where and how do you invest it?Brisbane is becoming more difficultIn early August 2021, I presented an investment case for buying an investment-grade home in Brisbane. My wife and I subsequently followed this advice (I put my money where my mouth is) and we purchased an investment-grade house in the Brisbane suburb of Indooroopilly, which settled last month.Whilst I am still very bullish about the Brisbane market, it is becoming more challenging to buy an investment-grade house for less than $1 million. Whilst it is still possible, it may not remain that way for long.House budgets must be substantially more than $1 million in Melbourne and SydneyIt will not come as a surprise that you need a budget of substantially more than $1 million to buy an investment-grade house in Melbourne and Sydney.In Melbourne, you need more than $1.3 million and approaching $2 million and above in Sydney.Of course, it is possible to find houses in these capital cities for less than $1 million, but these tend to be in non-investment-grade locations and/or have unacceptable compromises. That is, they are not deemed investment-grade assets.Remember, there’s never a good reason to invest in a sub-standard quality asset. Your long-term investment returns will be directly related to the quality of your investment assets. You cannot expect good investment returns from an average (or below) quality asset.A villa unit could be good optionVilla units are typically small houses that share the same block of land e.g. there might be 3 to 4 on the same block. They are often single-level homes that were constructed in the 1960’s or later. Typically, owners share some amenities, such as driveways, but mostly the owner has a direct interest in, and control of, their parcel of land.Villa units are often prevalent in impaired locations such as busy main roads or secondary suburbs. However, it is possible to find some investment-grade villa units in blue-chip suburbs, but you must select judiciously. Villa units are scarce assets, particularly in blue-chip suburbs – property developers don’t build any more as they are not economical (higher density apartments are more economical).It may be possible to buy an investment-grade villa unit in Melbourne for close to $1 million, but it is becoming more challenging. Villa units are not that common in Brisbane in established suburbs.Investment-grade apartments in MelbourneArguably, the sub-$1-million property investment option that represents that best value is investment-grade apartments in Melbourne.In October 2020, I wrote this report investigating the performance of investment grade apartments, particularly in Melbourne. I have taken the opportunity to update this report. This update can be found in Section 1 as an addendum. You can download a copy by clicking below.<< Download report here >>There are three predominate reasons I believe investment-grade apartments in Melbourne represent excellent future growth prospects which I summarise below:1. Apartments have never been cheaper compared to housesThe chart below compares median house price relative to median apartment price in Melbourne since 1980.Chart hereBetween 1980 and 2005, the median house price was on average 1.3 times higher than the median apartment price. The relative value of houses dropped to an average of 1.2 times during 2005 and 2013, mainly driven by the relative strength in apartment prices. The median house price is now 1.45 times the median apartment price in Melbourne, the highest point on record since 1980. This has been mainly driven by the relative strength of houses prices and at the same time, weakness in apartment prices over the past decade.Is relative value a good predictor of future returns?In early 1989, the median house price was almost 1.38 times the median apartment price, which was the highest point until this year. Median apartment prices only grew by 3% p.a. over the subsequent 5 years (1989-1994), which is well below average growth (houses grew by 2.3% p.a. over the same period). But this period included the“recession we had to have” in the early 1990’s, so is not a useful indicator.In early 1998, the ratio peaked again at 1.35 times. In the subsequent 5 years (1998-2003), the median apartment price appreciated by 14.9% p.a. This suggests that relative value could be a useful indicator of future returns.It stands to reason that relative value is a reliable indicator as the prices of houses rise, fewer people can afford them. As such, potential buyers will be forced to either (1) purchase an apartment or (2) move to a suburb further away from the CBD to be able to afford a house. Higher house prices will force a great proportion of buyers towards apartments.2. Mean reversion will do all the heavy liftingOver the past 10 years, the median apartment price in Brisbane has hardly changed. In Melbourne, apartments have generated a growth rate of 3.7% p.a. for the 10 years ended June 2021 and Sydney 5.8% p.a.In Melbourne and Brisbane, the last 10 years could be described as “the missing decade” in that returns have been well below their long-term average (of 9.0% p.a. and 7.7% p.a., respectively).It is an irrefutable fact that all established investment markets experience the reoccurring trend of mean reversion. That is, returns will eventually revert to their mean (average) over long periods of time. That means a period of below-average growth is typically followed by a period of above-average growth. A typical property cycle lasts 7 to 10 years. We have already experienced 10 years of very low growth. Therefore, as each year passes, the probability that the Melbourne apartment market will begin its next growth cycle becomes substantially higher.The best time to invest in an asset class is after an extended period of below average returns. But, of course, this isn’t necessarily easy to do because its contrary to general market sentiment.3. Demand will exceed supplyThe chart below sets out the number of apartments approved in each state since 2000.Chart hereYou will note that there was a significant increase in the volume of new apartments in Melbourne between 2014 and 2018. This surge in supply contributed to the lack of price growth as discussed in the above report (refer Section 4.1).Approvals for new apartments in Melbourne have fallen significantly since mid-2020. In fact, apartment approvals in 2021 so far have averaged 8,700 p.a. (annualised) which is a level not seen since 2010. It is noteworthy that Melbourne’s population has increased by over 1,000,000 people since 2010. Therefore, on a per capita basis, apartment approvals are almost at a record lows. This will no doubt create a supply shortage over the coming years and as such lead to price appreciation.More information in the reportIf you own an investment-grade apartment or are considering buying one, I strongly recommend that you read the aforementioned updated report.Indicative budgetsIf your investment budget is in the range of $500,000 and $700,000 then I would typically recommend buying an investment-grade one-bedroom apartment. If your budget is in the range of $700,000 and $900,000, then you can target a two-bedroom apartment. And if you can stretch to the $900,000 to $1 million range, consider a villa unit.As I have written about many times previously, selecting the right property is key to your success. Therefore, if you want to invest in an investment-grade apartment, or any other property asset, consider engaging the services of a professional and trustworthy buyers’ agent.
The topic of rising inflation and its potential impact on interest rates has been dominating the financial press over the past few weeks. The bond markets expect that higher inflation readings will force central banks to raise interest rates.It’s my opinion that higher inflation is likely to be temporary. And it’s also useful to remember that “markets” (and popular opinion) are not always right. Bond markets priced in higher inflation in February 2021 but eventually normalised after a few months.A quick economics lesson: why does inflation lead to higher interest rates?Inflation is a measure of rising costs. Inflation is measures by the ABS using a basket of goods and services. High inflation is bad for an economy because it erodes purchasing power, increases uncertainty and can have a negative impact the value of a country’s currency.A key role of the RBA is to manage inflation so that it remains inside its targeted 2% to 3% band. It does that by changing the cash interest rate (currently 0.10%). Increasing interest rates, reduces spending (because the business and private sector must direct more money towards interest costs) and therefore reduces demand for goods and services which cools price increases.Therefore, if markets expect that high inflation will persist, they price in that interest rates will increase, which negatively impacts the value of existing bonds, particularly if the coupon (interest rate) is fixed. This has been happening since August 2021 i.e. bond value have been falling.What’s causing higher inflation?As announced by the ABS last week, Australia’s inflation is 3% for the year ended September 2021, which is at the top end of the RBA’s target band. It was slightly less than expected (3.1%) and lower than last quarters annualised reading of 3.8%.This time last year, inflation was less than 1%, so what has happened since then? The chart below sets out how prices have changes over the past year. Five categories have risen by more than 2% over the past year being transport, furnishings, health, alcohol and tobacco and recreation.See chart here. 1. Transport – driven mainly by the rebound in the oil price. This time last year, oil was trading at around $40 per barrel, mainly because most of the world was in lockdown. Oil has since recovered and is currently trading at over $80 per barrel, which is closer to the long-term average price. Its unlikely the oil price will continue to rise, certainly not at the same pace.2. Furnishings – the cost of furnishings have been driven by unusually high demand and supply shortages (supply chain disruptions).3. Alcohol and tobacco – the main contributor were tobacco prices due to increase in government excise and customs duty in 2020.4. Health – these price rises have been mainly driven by health insurance premiums.5. Recreation and culture – price increases were mainly driven by domestic holiday travel and accommodation due to the closure of international borders.It is likely that inflation is transitoryFrom a review of the above, it becomes clear that inflation has been driven by some unique events which are unlikely to persist. The only exception may be health insurance premiums, which seem to increase each year.The Covid pandemic has caused several issues:§ Supply chain disruption: The China Containerised Freight Index demonstrates how the cost of shipping has risen over throughout the pandemic. This has been caused by a number of things including higher demand for durable goods, stevedoring strikes, container shortages and trucking shortages.§ Unusual demand for durable goods: Australians have spent a lot of money on durable goods throughout lockdown including second-hand cars, furniture, household goods and so forth. Spending is not only likely to normalise once life returns to pre-Covid normal, but it’s entirely likely that demand for these goods will be below normal levels for a few years.§ Savings: One of the consequences of being in lockdown is that Australians have been spending less and saving more. Bank deposits have increased by over $140 billion since March 2020, which is more than double the normal rate. The redeployment of these savings into the Australian economy could temporarily fuel inflation over the next 1 to 2 years.It is rare to have persistently higher inflation without income growthGenerally, higher inflation requires higher incomes, because how can you afford to pay more for goods if you are not earning more income? This is the main reason I think inflation in transitory, not permanent.The RBA’s wage growth index is well below 2% p.a. Therefore, how can the prices of goods continue to rise if Australians do not have more money to pay for them? At some point, spending and supply chains will normalise, and inflation will subside.Prediction that higher rates will lead to falling house pricesI was most surprised to read in the Australian Financial Review a prediction by bond trader, Chris Joye that forecast a 1% increase in interest rates could lead to a 15% to 25% fall in property prices.I have followed Chris for many years and have found his commentary always insightful and very accurate. However, on this occasion, I couldn’t be less agreeable. Coincidentally, I did write in this blog last week that each year a high-profile commentator predicts a property market crash, so maybe its Chris’ turn.The chart below illustrates household debts and related interest cost. The dotted lines represent the interest cost after a 1% and 2% interest rate rise. It is evidence that a 1% rise is quite affordable. However, it is conceivable that a 2% rise will probably put pressure on household budgets.Therefore, if mortgages are still affordable after a 1% interest rate hike, why would property prices fall?We shouldn’t forget that lenders test borrowers’ affordability at circa 5.5% p.a. when you apply for a loan.In addition, most property buyers throughout the pandemic have been owner-occupiers, not investors. Owner-occupiers typically will not sell their homes unless it is their last resort. If interest rates rise, they will reduce discretionary expenditure first before they even contemplate selling their home.Finally, anyone that has applying for a loan over the last 5 years knows that it’s a very thorough (understatement) process. That is, banks do not lend money to a borrower if they believe that a 1% rate hike would lead them to experience financial stress.See chart hereProperty prices are not unsustainably highIt’s been well documents that property prices have increased a lot of the past 12 months. However, we must put recent rises into perspective. Over the past 5 years, the median house price in Melbourne has increase by 6.9% p.a., Sydney by 6.6% p.a. and Brisbane by 4.7% p.a. These growth rates are all below the long-term average.And growth rates over the past 10 years have also been below the long-term average. What has occurred over the past year is simply mean reversion.Therefore, whilst recent property price appreciation appears unsustainable over the past year (and it is), in longer term context, it’s not alarming or unusual.What will happen to interest rates?Raising interest rates probably will not cool inflation since factors other than consumer demand that have caused it. However, it’s true that interest rates cannot remain at currently expansionary settings forever.The million-dollar question is what the neutral interest rate is i.e. a level where interest rates are neither expansionary nor contractionary. I suspect that level is in the range of 4% and 5% p.a., particularly as household debt has risen. The RBA should return the interest rate settings to neutral as soon as its confident the economy has recovered from the impact of the pandemic.In terms of the timing and speed of rate increases, there are also two important observations. Firstly, given the rise in federal and state government debt, any increase in interest rates will have a big impact on government budgets (deficits). As such, I’m sure politicians will be keen to keep a lid on rates for as long as possible.Secondly, it’s been well documented that lower income earners have been adversely impacted by Covid whereas most higher income earners have not experienced any negative financial implications. Therefore, raising rates will adversely affect the people that can least afford it i.e. lower income earners.I suspect that interest rates will not begin to rise before late 2023. And I suspect that when interest rates do rise that they will do so slowly. That said, it is wise to use low-interest rate periods to reduce debt (i.e. accumulating cash in offset), because low rates won’t last forever.
Will the property market ever crash?I started ProSolution almost 20 years ago and if there’s been one common theme over that time, it is how “expensive” property is. This theme can be expressed in many ways such as predictions of property market crashes, housing affordability “crisis”, comparison of Australian property prices to other parts of the world and so forth. This noise is often unhelpful for property buyers.The reality is that property has always seemed relatively expensive. And it’s probably never going to change. You must get used to it and learn to make prudent decisions despite the prevailing property price rhetoric.I felt ill after almost ever property I’ve boughtIn December 2006, I engaged Richard Wakelin to select and purchase an investment-grade property. He ended up buying a single-fronted Victorian cottage on a small block (146 sqm) in Prahran, Melbourne for $723,000. It was a record price for that street (the street is lined with similar Victorian cottages) and probably suburb. Paying a record price didn’t feel satisfying. In fact, it gave me indigestion. J But I trusted that buying an investment-grade asset that possessed sound fundamentals will work out well in the long run.This property last sold in August 2019 for $1.362 million[1] (unfortunately, I had to dispose of it as part of my marriage separation in 2012). That makes the price in 2006 seems relatively cheap today.Government policy supports property prices, and probably always willThe government’s policies have always supported property values. Of course, we can argue about the merits of this. And I think there’s a strong case to argue that the government shouldn’t interfere with the property market. But the reality is, they always have, and probably always will.There are several examples of this including taxation incentives like negative gearing, Rudd governments doubling of the First Home Owners Boost in 2008 in the middle of the GFC, federal government asking the banks to provide loan repayment pauses last year and so forth. As soon as the property market has some challenges, the government always steps in.There are two realities to acknowledge. Firstly, falling home values are bad for the whole economy. They impair consumer confidence and therefore consumer spending, and that deteriorates the whole economy.Secondly, the big four banks have a vested interest in a healthy property market, and it is not difficult to imagine that they have substantial lobbying power in Canberra.Again, I’m not suggesting that these vested interests are healthy, just merely pointing out that they exist, and history is evidence of that. Their existence means that the government is likely to intervene to avoid a property price crash.Could property prices ever crash?For property prices to crash, there needs to be widespread selling i.e. more sellers than buyers. Practically, this can only happen if the property market is in oversupply i.e. there are more houses than people to occupy them. This is what happened in the US in 2008. In some locations in the US, the housing market was in over-supply (i.e. there were empty houses) which led to large price falls. Therefore, if the Australian market remains in a supply/demand equilibrium, a property market crash remains very unlikely, because we all need somewhere to live.The chart below illustrates the median house price in Sydney, Melbourne and Brisbane since 1980. It shows that negative returns should be expected every 5 years in Sydney, approximately every 7 years in Melbourne and less than every 10 years in Brisbane. It should be noted that this data represents that change in the median house value, and I would argue that investment-grade property is even less volatile.See chart here. The reality is that there isn’t one, homogeneous property market but in fact hundreds of different sub-markets that can behave differently. Therefore, it’s possible that property in some locations can become so overvalued that they could crash. Mining towns are a perfect example of this – prices in some locations fell by 70% in 2016.In short, a crash in an investment-grade market is possible, but highly unlikely.Doomsayers are perennially wrongThere will always be property sceptics. That is, people that believe that property is overvalued and as such is a bad investment. These predictions are made regularly. I estimate that there’s been at least one major “crash” prediction made each year since I’ve started ProSolution in 2002. I don’t think it will ever change. But at some point, you must stop listening to attention-grabbing headlines and follow an evidence-based approach.Today’s property prices will seem cheap in 2031Mentally, it’s difficult to get your head around how powerful compounding growth can be. The table below illustrates this. If you invest $1 million for 10 years and receive a return of 9% p.a., your investment will be worth 2.4 time more (the red number) i.e. $2.4 million. If you retain that investment for 40 years, your investment will be worth 31.4 times more (the blue number) i.e. $31.4 million.See table here. The best way to reduce your risk of entering a seemingly “expensive” property market is to buy a property that has the highest likelihood of generating the highest possible capital growth rate. As the above table demonstrates, you can double your return if your property can generate 9% p.a. versus 7% p.a. over 40 years. A relatively small increase in growth rates can have an unexpectedly large impact over many decades.Buy the ‘right’ property and play the long gameThe best response to any concerns about property prices is to level up on a property’s quality and focus firmly on long term outcomes. As a staunch proponent of evidence-based investing, you must apply a rules-based approach to selecting an investment-grade asset (there are three attributes for a property to be considered investment-grade, as explained here). But also, since property is part-art, part-science, it’s critical that you get advice from a local area expert.[1] This equates to a compounding annual growth rate of 5.1% p.a., which isn’t spectacular. However, the longer-term growth rate for this property (since 1990) is 7.9% p.a.
I wrote a blog in February 2020 highlighting the first phase of government mandated changes to income protection insurance products. The second phase of changes were implemented at the beginning of this month, and they are very significant. This blog discusses these important changes and how they may affect you.BackgroundIn December 2019, the insurance industry’s regulator (APRA), released a report outlining a number of compulsory changes that it mandated for income protection insurance products. Income protection insurance pays you a benefit if you cannot work due to accident or illness (it does not protect you from involuntary unemployment).These changes were deemed necessary because insurance companies were losing literally billions of dollars on these products i.e. cost of paying benefits far exceeded premium revenue. However, no insurer wanted to make the first move to stem the losses. Fearing that insurance companies may eventually exit the Australian market (if no action was taken), the regulator stepped in and mandated changes to make products more sustainable.There were two main issues that caused these products to be so unprofitable:1. An inability for insurance companies to change terms to accommodate new risks. Mental health is a good example. Mental health claims were immaterial when policy terms were written 20 years ago. However, today, claims due to mental health are more substantial.2. Long term benefits are very costly. If a 30-year-old claims on a policy and is never able to return to work, the insurer could be paying a benefit for the next 35 years. That is very costly. Therefore, it is important that policies only provide for genuine claims. Unfortunately, for the insurers, some policy terms are so generous that they sometimes act as a disincentive to cease being on-claim. This exacerbates losses.Summary of the changes made this monthAll insurers launched new product suites at the beginning of this month (existing products are no longer available). These new products reflected four important changes:1. The amount of income that can be insured has reduced from 75% to 70% of your gross income. Replacing less of your pre-disability income gives you a greater incentive to return to employment as soon as possible.2. The total benefit paid within the first 6 months of claim cannot exceed 90% of your pre-disability income. Many pre-October 2021 products offered ancillary benefits such as lump sum payments for specified conditions and rehabilitation benefits.3. Pre-disability income is based on your actual personal exertion income received the 12 months prior to becoming incapacitated. Many older products used to allow you to select the highest 12-month period over the past 2 to 3 years (prior to incapacity).4. Typically, you may be able to claim an income protection benefit if you are unable to perform the duties required in your ‘own occupation’ i.e. the occupation/role in which you are employed. However, the new products typically loosen the definition for any claims that last more than 2 years. In this case, the occupational definition is reduced to ‘any suited occupation’. The insurer will determine what is a suited occupation based on your skills, training, qualifications and experience. Some policies will pay a reduced benefit amount after 2 years if the insurer person is not “seriously disabled”.An additional change expectedAt the moment, many insurance contracts are non-cancellable which means as long as you keep paying the insurance premium, the insurance provider is locked into providing coverage and it cannot alter the terms (depth and quality of coverage).However, we expect that contract terms will be limited to maximum of 5 years only. That means every 5 years the insurers can alter the terms of your insurance cover, which you can either accept or choose to cancel the policy.(A) Implications if you have existing coverIf you have an income protection policy that went into force prior to 1 October 2021, then you should think very carefully before making any changes, such as reducing the benefit amount or cancelling it. That is because you will never be able to obtain a commensurate replacement policy in the future.The reality is that you may be forced to change, eventuallyThe reason that older policies are no longer available is that they are becoming too expensive for the insurers to maintain. It will be very tempting for insurers to continue to increase the premiums for legacy products to encourage more people to move over to the new, more sustainable products. Premiums have already risen significantly over recent years so it’s quite possible that trend will continue.If the cost of your existing policy comes too expensiveWhilst it is true that the new products provide less comprehensive cover, having some cover in place is better than none. Therefore, one way to manage the cost of cover, is to switch to a new product, even though it provides less comprehensive cover. For some people, a hybrid structure might be more appropriate e.g. retain your existing product but reduce the benefit amount so that half of your total cover is under the old comprehensive cover and that other half via a new product.Of course, whether the option to replace your existing cover is available depends on whether you will pass medical (i.e. your medical history) and financial underwriting. It’s important that you obtain financial advice before cancelling any existing cover to ensure you accurately understand all the pros and cons.A recent analysis for a client highlighted that the cost of the new product was approximately 21% cheaper than the existing older products. It is important to note that premium costs can be unpredictable so savings will vary significantly.(B) Considerations if you plan to get cover in the futureIf you do not have a pre-existing income protection insurance policy and need some cover, it is important that you obtain insurance advice from an experienced financial advisor, as product terms and conditions vary significantly.If contractual terms are eventually limited 5 to years, it will be important that your advisor reviews your policy every 5 years to ensure its still appropriate for your circumstances. This has been less critical when contracts were non-cancellable. That is, it was almost forgivable to ‘set and forget’ your insurances. However, in this new product environment, you (your advisor) must be more proactive.Finally, one way to mitigate some of the risk of new products being less comprehensive is to obtain trauma cover. Trauma cover provides a lump sum benefit on diagnoses of a ‘specified condition’. Typically, trauma policies list 30-35 specified conditions. Statistically, for females it is more likely to be a cancer event and for males a cancer or cardiovascular event. Trauma insurance can be used to fund out-of-pocket medical expenses and voluntary time off work, which may be more common given new income protection policy definitions convert to ‘any suitable occupation’ definition after 2 years.Your ability to earn an income is your most valuable assetFor many people, particularly in their 30’s and 40’s, income protection is the most critical insurance product because:1. Often their financial plans are entirely dependent on their ability to earn an income over the next 10 to 20 years. If they were not able to do that, their financial plan would fail; and2. Their ability to earn an income over the next 20 to 30 years is an incredibility valuable asset (i.e. annual income multiplied by 30). In fact, it is likely to be their most valuable asset. Valuable assets should be insured. You insure your car, and that’s only worth a fraction of what your income is worth. When you compare the cost (premium) to the asset value, it highlights how cost-effective income protection insurance can be.It is even more important if you are the sole or main income earner for your family. Therefore, it makes sense to ensure that you have good value-for-money insurances in place to protect you, your family and your financial plan.
I have noticed that more people are attracted to seeking out work that they have a personal connection with, particularly since the beginning of Covid. That is, for a growing number of people, the emotional rewards (satisfaction) that their work offers is becoming more important than the financial rewards. This might include working in the not-for-profit sector, working for a socially conscious organisation or starting their own business.Of course, not everyone has the flexibility to immediately resign from a high paying job. But of course, you can put a plan in place that allows you more freedom and flexibility in the future. I wanted to discuss the common considerations we tackle when working with clients in this regard.Three phases of wealth accumulationIt is important to recognise that there are typically three phases associated with becoming financially free as illustrated below.ChartPhase one: Accumulation – this phase involves accumulating the required quantum of assets needed to fund retirement. That could include acquiring investment property(s), making additional contributions into super, investing surplus cash flow into shares and so on. This phase typically requires you to contribute as much cash flow as possible i.e. to maximise your earnings and minimise your expenses.Phase two: Income flexibility – the main aim of this phase is to give your investment assets enough time to benefit from the power of compounding capital growth. This phase requires you to earn enough income to pay for living expenses and maintain your investment portfolio. That is, you may have flexibility to earn less during this phase either through changing roles or not working full-time.Phase three: Retirement – it probably goes without saying that this phase doesn’t require you to generate any personal exertion income. All living expenses are funded from your investment/asset pool.Therefore, if you would like to get yourself into a position where you have more choices regarding the type of work you do (i.e. less pressure to maximise your income), what you must do is focus on accelerating phase one.This is a less aggressive version of FIREFIRE is an acronym that stands for a movement called Financial Independence, Retire Early. The idea behind FIRE is that you must minimise your expenses as much as possible to allow you to save and invest more, so that you can retire a lot earlier than a traditional approach allows.The approach I have discussed above can probably be best described as a less aggressive version of FIRE. That is, my approach requires you to maximise your income and minimise expenses for a finite period (could be anywhere from 5 to 15 years). This allows you to reduce your personal exertion income for the next period (could be another 5 to 15 years) as long as it’s enough to cover your living expenses. By doing so, you delay the need to ‘eat into’, your financial resources. It allows your investments to benefit from compounding growth until you can start to draw on your superannuation (from age 60).Maybe you don’t need to earn as much as you thinkOne of the advantages of formulating a plan is that it quantifies what income you need to generate and for how long in order to reach your goals. If you already have a reasonable asset base, it is possible that you may already have the flexibility to reduce your personal exertion income.Specific financial planning considerationsI have listed below some common considerations we encounter when we formulate a financial plan for a client that wants to have more income flexibility in the future. Of course, every clients’ situation and goals are unique, so the matters below are generalisations.You must begin as soon as possibleIt is important to begin your investment journey as soon as possible because a key ingredient for building wealth is time. There are no shortcuts to substitute for the financial impact that compounding returns produce – it just takes time. Warren Buffet put it succinctly when he said “No matter how great the talent or efforts, some things just take time. You can't produce a baby in one month by getting nine women pregnant.”.Consider being more aggressive e.g. maximising surplus and borrowing moreIn phase one you must be as aggressive as possible, but not too aggressive. An aggressive approach to investing can include tactics such as borrowing more money to invest, investing in riskier asset classes (such as emerging markets and private equity/small cap fund, etc.) and so on.If your goal is to accumulate a certain amount of assets as quickly as possible, it is likely you must consider adopting an approach that is more aggressive than what a traditional retirement strategy requires. But that is not to say that you should take unacceptable risk. The risk must be appropriate. You can mitigate risk by doing certain things such as adopting evidence-based approaches, formulating debt exit strategies, not putting all your eggs in one basket and so on.Need to focus on non-super investments (to access prior to age 60)If your goal is to retire before age 60, then you must ensure you have sufficient assets (investments) outside of super to allow this. These assets should either produce a high level of income after all expenses (including interest) or be liquid to allow you to progressively sell down. Residential property, for example, rarely meets with these requirements. However, shares are often the perfect asset class.There’s less room for errorIf you are in your 30’s and are happy to work until at least 60, then you have 30 years to build wealth. Also, since you plan to retire after you can access super, it is likely that super will play a big role in funding your retirement. As such, even if you make a few investment mistakes in your 30’s and 40’s, you probably have enough time to make up for them.However, if you are in your 30’s and would like to have the flexibility to reduce your income (work fewer hours or do different work) by the time you reach late 40’s or early 50’s, then you have less tolerance for mistakes/errors. Therefore, there’s a greater need for you to obtain professional and independent advice to avoid making mistakes.Family home downsizingIf you expect to have substantial equity in your home in the future, then it may be possible to develop a strategy that allows you to have more income flexibility in the future by putting this equity to work.Of course, that will require you to sell the family home and either downsize or relocate i.e. spend less money on a replacement home and invest the difference. Sometimes doing this perfectly aligns with a clients’ lifestyle goals anyway e.g. when they seek a tree or sea change i.e. sell the family home in the city and relocate to the country.Remember, the role of financial planning is to help you achieve your lifestyle goalsA traditional approach to retirement planning included working in your currently role/job until you could access super (age 60). However, the whole point of financial planning is to design a plan that meets your goals, not the other way around. If you no longer enjoy climbing the corporate ladder (or whatever your job entails), it might be time to start planning.
Federal Treasurer, Josh Frydenberg has asked the Council of Financial Regulators to investigate the fact that credit growth is materially outpacing growth in household income and to advise on any policy responses.In lay terms, the Treasurer is worried that people are borrowing too much money compared to their incomes and that could be risky for the economy.Increase in home lending is pronouncedIt has been well documented that house prices in Australia have been rising at a fast pace over the past year. But this isn’t unique to Australia. This is also a global phenomenon, as illustrated in Knight Frank’s Global House Price Index report released last week. This report ranks the house price growth in 56 countries and Australia ranks 18th.It is higher loan volumes that have caused higher property prices. The ABS chart below shows that most of the increase in lending has been driven by owner-occupiers (being the dark blue line), not investors.CHART ON WEBSITEThe monthly volume of home loans has been rising significantly since mid-2020. The average volume of lending between December 2020 and August 2021 was $21.7 billion per month. The average for the 10-year period prior to June-2020, was only $11.6 billion per month.Approximately 60% of the increase in lending over the past 9 months has been driven by an increase in the number of borrowers. And 40% has been driven by an increase in the average loan size i.e. people borrowing more. This makes sense as higher income earners have largely been (economically) unaffected by the Covid lockdowns.Level of household debt is a worryThe chart below illustrates how the level of household debt (blue line) has increased over the past three decades. The green line depicts the interest cost of this debt. The interest cost has remained relatively contained for the past decade, thanks to falling interest rates.CHART ON WEBSITEHousehold budgets will clearly be more sensitive to future interest rate increases because they have more debt. This means that any future increases in the RBA Cash Rate will be more effective in containing inflation (by cooling consumer spending). As such, it is entirely possible, even likely that interest rates may never return to pre-GFC levels. That is, it’s possible that interest rates will permanently remain below 6% p.a.The upshot of this is the government is rightly concerned about households’ higher indebtedness. This may be acceptable whilst interest rates are unusually low, but it could cause problems for some borrowers when interest rates inevitably rise.Likely intervention: income to debt capThe banking regulator considers a high debt-to-income ratio as anything above 6 i.e. borrowings greater than 6 times your family’s gross annual income. Therefore, if your family’s income is $200k p.a. and you have borrowings more than $1.2 million, the regulator considers you to be a riskier borrower.The chart below (froman APRA report) highlights that high debt-to-income lending (dark blue) has increased since last year. In fact, it grew by 2.8% in the June 2021 quarter which is the highest increase on record.CHART ON WEBSITEIt is this cohort of borrowers that I expect the regulator to target. It can do so by instructing the banks to reduce lending to borrowers that have high debt-to-income ratios i.e. greater than 6 times, which I think is prudent.Asset-rich, income poor are locked out of the borrowing marketAsset-rich, income-poor borrowers will further be disadvantaged. As I wrote several months ago, banks only lend against income, not assets. That means if you have $20 million of cash in the bank and no job, most mainstream banks will not lend you a cent! Inflexible lending rules do not allow a bank to consider your asset base as a source to fund loan repayments (only income). Of course, this is nonsensical.Consider an example where a borrower owns their home worth $1 million, an investment property worth $1.2 million, a share portfolio worth over $2 million, $500k in cash savings and has zero debt. For lifestyle reasons, the borrower only works casually and earns $20k p.a., but has the capacity to work full-time, if required. In this situation, this borrower has almost no borrowing capacity. Practically, this investor could borrow safely.The point I’m attempting to make is that implementing restrictions such as a debt-to-income caps is often necessary and prudent. However, lenders must have the flexibility to work outside of these parameters where appropriate. Unfortunately, they almost never have this flexibility or are unwilling to exercise it.High income borrowers are in the box seatMost people with a family income of $1 million, for example, probably wouldn’t want or need to borrow materially more than $6 million, so the implementation of a debt-to-income cap will not have any impact on their plans.However, borrowing capacities for lower income earners will be adversely impacted. A restriction on borrowing capacity will retard their ability to afford a house in their desired location and/or their ability to invest in property.Whilst this isn’t an unacceptable outcome in isolation (as borrowing say 10 times income, for example is rarely a good idea), it will unfortunately exacerbate wealth inequality.What does this mean for the property market?It is my view that any change to debt-to-income ratios will probably not have any measurable impact on blue-chip, investment-grade locations. There are enough borrowers with strong financial positions to underpin demand for investment-grade property.However, expected tightening in lending rules will likely impact locations that are populated with a higher proportion of lower income earners.
Personal insurance is becoming more difficult to obtain and increasingly costly to maintain. This blog outlines the approach we take when formulating how much insurance our clients need and strategies to manage its cost.What is personal insurance?This blog refers to personal insurance only. That typically includes up to four products:§ Income protection insurance – which pays a monthly benefit if you are unable to work due to illness or injury;§ Life – pays a lump sum benefit if you die;§ TPD – stands for Total and Permanent Disability which pays a lump sum benefit if you are unable to ever return to work in the future, due to illness or injury; and§ Trauma – pays a lump sum benefit if you are diagnosed with a ‘specified condition’ which, statistically, includes cancer and cardiovascular events. Even if your ability to be able to work is not impaired, you can still claim a benefit. Benefits are paid according to diagnoses, not symptoms.Other common insurance products such as health, house and contents and car insurances are defined as ‘general insurance’ products. These are the domain of general insurance brokers, not financial advisors.What determines how much insurance you need?In most situations, the two key factors which dictate how much insurance you need are:1. Financial commitments and obligations including mortgages, living expenses, children’s education, dependents and so on. The higher the levels of commitments, the more insurance cover you need. I view the cost of insurance as a necessary consequence of borrowing money. That is, if you aren’t prepared to obtain insurance to reduce your risk, then perhaps you should reconsider borrowing.2. Your financial strength or net worth. The stronger your asset base is, the less insurance you need, as you have sufficient financial resources to maintain living expenses and meet goals for the rest of your life in the event you cannot work. Of course, if you do not have sufficient assets, you need some level of insurance cover.Your requirements often depend on your stage of lifeIn the below video I walk you through the four common life cycle phases and how they relate to your insurance requirements.[Embed video https://vimeo.com/615661071]SingleWhilst young adults typically have very small asset bases, they also tend to have very few (or no) financial commitments or dependants. As such, they tend to need very small levels of insurance cover, or possibly none.Young familyWhen you buy a home and start a family, your insurance requirements are probably at their lifetime peak. That’s because your financial obligations tend to be most significant (e.g. large mortgage, cost of raising children for the next 18+ years, etc.) at the same time as your asset base being relatively low. It is convenient that insurance is relatively cost-effective in your 30’s, so having an adequate level protection is often affordable.As your kids get older and your asset base grows, arguably you can begin to reduce your level of cover, particularly as it becomes more costly.Empty nestersAs your children approach financial independence and you have concentrated on repaying your home loan, it may be appropriate to begin reducing your insurance cover, particularly as it becomes a lot more costly in your 50’s.Income protection becomes less valuable the older you are because it usually only pays a benefit until you are age 65. If you are 30 years of age, you are essentially insuring the next 35 years’ worth of income, which is a very valuable asset. However, if you are 58, you are only insuring 7 years of income, which is far less valuable, especially since it is so costly in your late 50’s.RetirementAssuming you have sufficient assets, it is safe and appropriate to cancel all insurance cover when you are 2-3 years away from retirement.How much do you need?You need sufficient cover so that you will still be able to achieve your goals even if you are unable to work. That can include covering things such as:§ Replacement of living expenses. If a surviving spouse will continue to earn an income, you may only need to replace a portion of living expenses;§ Repayment of debt. This would typically include the full repayment of any home loan and partial or full repayment of investment debt (at least to the extent that investments become neutrally geared);§ Compensate for investment asset deficiency i.e. if the client is not expected to have sufficient assets by retirement age; and/or§ Funding of specific goals such as children’s education.The tension between insurance premiums and building wealthReducing the cost of insurance frees up more cash flow to invest. The more you invest, the more wealth you will accumulate, and the less insurance you need. It is a “chicken or the egg” type situation.It is my view that you must find an acceptable balance by being willing to accept some risk, but not an unacceptable amount of risk. Optimising your insurance cover involves obtaining the appropriate levels of cover, with the highest quality policies (i.e. terms of cover) at the lowest cost. To use a common vernacular, you must get the best bang for your buck.But if I can’t work, I can sell investmentsSometimes people think selling assets is an adequate response if they are unable to work. This may help you repay/reduce debt, but it creates another problem. That’s because the role of investments was to help you fund retirement. Therefore, selling assets tends to be a short-term solution that creates a long-term problem.Important warning about new income protection insurance productsIf you have an existing income protection insurance policy with a retail insurer, you should think carefully about cancelling or reducing your cover. That’s because new insurance products provide substantially less cover, particularly if you are incapacitated for the long term.Insurance providers have not yet released all information and pricing, but we are aware of some big changes including reducing the contract term to 5 years (used to be non-cancellable), reducing benefits for claims that last longer than 2 years, relaxed disability definitions (i.e. less comprehensive cover) and so on. I’ll write a detailed blog about this when all details become available.Your investment strategy must inform your insurance needsConstructing a well-thought-out long-term financial plan makes it a lot easier to develop an insurance strategy because these two matters are closely interrelated. If you have a low asset base, then it’s likely you need more insurance. At the same time, you need to develop a plan to help you improve your financial position, which will eventually allow you to reduce your insurance cover. A holistic approach to insurance advice yields the best outcomes.
How to value stocks – an introduction to valuation conceptsTwo years ago I wrote a popular blog that explained some simple share market concepts and jargon (see here). Building on this introductory information, I thought it was timely to discuss basic share market valuation principles to help investors assess whether a stock is over or under valued.To be clear, I’m not advocating investing in direct stocks. In fact, there is an overwhelming amount of evidence that demonstrates direct share investing (i.e. picking stocks) fails to produce above market returns over the long run. However, it is still useful to understand basic share market valuation principles.The ‘Efficient-Market Hypothesis’The Efficient-Market Hypothesis (EMH) was popularised by Nobel laureate, Professor Eugene Fama. The hypothesis suggests that share prices always accurately reflect all available information. The idea is that the market is made up of thousands (and in some cases, perhaps millions of people) that analyse all available information in relation to a particular company. Many of them are professional investment managers with a lot of education and experience working 40-80 hours per week. This information informs their trades i.e. at what price they are happy to buy and sell. And it is this process of “price discovery” that determines the value of a stock.My personal view is that the EMH might be true over long periods of time. However, in the short run, it is possible (in fact, likely) that markets can be inefficient. Behavioural economics explains that sometimes investors can act irrationally, driven by overconfidence, overreaction, overexuberance, greed, fear and so on. The “meme stock” behaviour earlier this year is a perfect example of how markets can be inefficient and stock prices can be wrong.This is why it’s useful to understand basic valuation principals.The value of a business is equal to the present value of its future cash flowsThe value of any business is equal to the present value of its future cash flows. To calculate that, you need to forecast the business’ free cash flows and then apply a discount rate to express the value in today’s dollars. The discount rate must reflect the risk associated with the cash flows e.g. the higher the risk, the higher the discount rate. This is called Discounted Cash Flows analysis.The table below provides a simple example. This business has a 5-year government contract and is expected to generate $100 per year of free cash flow (i.e. income less all expenses including taxation). After 5 years, the business is not expected to continue. Because the business’ revenue is contractually guaranteed and therefore low risk, a lower discount rate of 8% has been used. The discount rate reflects the return an investor would require to be compensated for the risk. Each year is discounted in today’s dollars using the discount rate. For example, refer to year three. The present value of $100 is $79.38. That means if I have $79.38 today and earn 8% p.a., I’ll have $100 in 3 years from now.The aggregate value of the present value of future free cash flows is the business’ value, which is $399.See hereShortcut method: valuation multiplesCompleting a DCF analysis is time consuming and there’s probably not enough publicly available information. A shortcut valuation method is to use a valuation multiple. I have listed the common valuation multiples below.§ Price/Earnings – the PE ratio is probably the most common valuation ratio. It measures the value of a company compared to its earnings per share (EPS). The higher the PE, the higher the valuation and the riskier it is. The average PE ratio over the past 20 years is circa 26 for the US market (S&P500) and 18 for the Australian market. The US market’s PE is currently trading at around 34 times and the Australian at 29 times, which is probably due to two factors. Firstly, temporarily lower earnings due to Covid. Secondly, elevated valuation multiples.§ Price/Sales – the price/sales multiple is used as a check/secondary measure or for businesses that are not yet profitable (and are expected to benefit from huge scale, such as tech companies, and be profitable in the future). The shortcoming of the price/sales multiple is that it doesn’t consider a company’s profitability which is ultimately a very important factor.§ Price/Book Value – the price/book ratio compares the value of a company to its net asset value on its balance sheet. Price/book multiples typically range between 1 and 3 times. This valuation metric is less meaningful in some industries, particularly ones that have valuable intangible assets, as these are rarely included on balance sheets.Two factors that impact valuation multiplesGenerally, there are two factors that will influence valuation multiples:§ Risk – how likely is it that the business will deliver its expected results? Does it have a well-established business? Does it have a strong track record of profitability and paying dividends? Does it have a strong financial position with little debt? These are some examples of things you must consider in order to ascertain a business’s risk. Riskier businesses attract lower multiples/valuations.§ Growth – does the company have profitable growth prospects? All things being equal, higher growth businesses attract higher valuation multiples. By comparison, businesses that are mature and have limited growth prospects attract lower multiples.The relationship between risk and growth are illustrated below.See hereFactors I consider when assessing a stock’s relative valueBelow is a list of factors that I consider when assessing the relative value of a stock.§ PE multiple – relative to its historical levels, peer companies and the market in general.§ Profitability and dividends – I review historic cash flow, revenue, profitability and dividends to consider volatility and growth.§ Financial strength including cash holdings and debt exposure.These three measures usually provide a good, high-level indication of a stocks relative value.Using Woolworths as an exampleLet’s apply these considerations to Woolworths (WOW) as an example:§ Its PE is trading at 32 times which is very high for a relative mature, low growth, low risk business. Its peer company, Coles is trading on a PE of 22.5 and Metcash (which operated IGA supermarkets) on a PE of 16 times.§ Woolworths’ sales, cash flow, earnings and dividends have been quite stable over the past 4 years.§ It has a very strong balance sheet with low and reducing external debt levels.Overall, I assess Woolworths as a low risk, low growth business and would expect a PE ratio of 18-24 times to be fair value. Based on forward earnings, it suggests its shares are probably valued towards high $20’s. Since its currently trading at over $39, it appears to be overvalued in my opinion.Examples of irrationalismApplying this fundamental analysis to some other stocks results in mindboggling outcomes. Here are a few irrational examples from Australia and overseas:§ Accounting software provider Xero is trading on a PE ratio of over 1,000 times!§ REA Group (operates realestate.com.au) is trading on a PE of over 60 times§ Afterpay is valued at $37 billion and lost almost $160 million last year (and has never made a profit).§ Uber is worth over $100 billion and lost over $9 billion last year!§ Tesla is worth over $1 trillion and is trading on a PE of around 400 times.High growth companies can be rewarding to invest in. However, there’s no point in paying too high of a price for the stock, as all you are doing is pre-paying for whatever growthmight occur in the future. And if the growth doesn’t occur, it will be your loss.Clearly some stocks are trading at unsustainable levels and should be avoided.Stock valuations are inherently uncertainStock analysts spend their whole working life analysing companies to identify investment opportunities. But most of them fail to beat the market. A superior share investment strategy is to adopt a rules-based approach, as these tend to offer a lot of diversification and very low fees. You can incorporate factor-based methodologies that allow you to avoid investing in overvalued sectors and companies.
Over the past 20 years, the US share market has risen 5-fold, the Australian share market 5.4-fold and Australian property 4.2-fold. That means if you invested half a million dollars 20 years ago, in either shares or property, it should be worth between $2 and $2.5 million today. You’d have even more money if you added some gearing.This observation raises an interesting question. That is, why aren’t more people independently wealthy? I suspect the answer lies in their actions, or more correctly their inaction.We make emotional decisions not logical onesIt is a widely accepted fact that we make decisions based on our emotions (how we feel) and then rationalise these decisions with logic. Often, we do this unconsciously.We’d like to believe that we are logical and rational animals. But the truth is that we are not. Our decisions, particularly about money, are shaped by our beliefs, upbringing, our peer group, past experiences and culture. We tell ourselves stories about money. And then we use confirmation bias to validate those stories.Self-awareness and reflection are probably the greatest gifts as they help you recognise how you think, so you can stop allowing emotions influence your financial decisions.Building wealth requires a logical, pragmatic and rational approach. Emotions are not only unhelpful but can be dangerous.Common fear # 1: Paying attention will be painfulSometimes it feels easier to stick our head in the sand and ignore a (potential) problem. For example, most people know that it’s not financially prudent to spend all income on lifestyle expenses. They probably realise that they should be investing/saving some of their income. But to do that, they will have to admit to themselves (and maybe others) that they have been doing the wrong thing in the past. It feels less painful to ignore the issue and “get to it one day”.The problem with ignoring financial misbehaviours is that they magically don’t disappear. They compound. Just like good financial decisions compound, so do bad ones. The longer you ignore it, the worse the consequences will be. And those consequences will be forced upon you at some point in life. For example, you will have to stop working at some point in your life and it’s that point that you will rely on your savings/investments or lack thereof.Often, people in this situation will not do anything until the perceived pain (consequences) from not changing becomes greater than the pain of changing. This often occurs when they are 5-10 years from retirement. They start to think that they’d better start investing before it becomes too late.The solution is to educate yourself about the cost of procrastination. Spending all your income for a couple of years is not a big deal. But doing it for 20-30 years may cost you dearly.Common fear # 2: Investing is too risky. I could lose my moneyWe work hard to accumulate savings. We make sacrifices. And having savings in the bank helps us feel financially secure. Of course, we don’t want to lose that money.When you invest, you do so with the intention of generating future returns. Of course, investment returns are not certain. Investment returns can vary from initial expectations. This is called investment risk - i.e. the risk that you don’t achieve your targeted investment returns.This perceived risk can paralyse some investors into doing nothing.The reality is that risk is black or white. In fact, it is very easy to increase or decrease investment risk within a portfolio through asset allocation. Therefore, the consideration should be how much risk can you tolerate?Most importantly, I think the best way to reduce risk is by adopting evidence-based strategies. That is, employ rules-based approaches that are supported by an overwhelming amount of empirical evidence that demonstrate they work.Common fear # 3: If I try, I may failNo one likes to feel foolish (although, maybe Carlton supporters are the only exception to this rule). Sometimes it feels less risky to not try something and let failure or success remain uncertain. This fear is like # 2, but its less about losing capital and more about successfully achieving goals. Or maybe it’s more about ego?My response to this fear is to highlight that doing nothing is perhaps the riskiest thing of all. It is highly likely that you will fail to achieve your goals if you do not invest.Of course, it is risky to invest if you don’t know what you are doing. But if that’s the case, ask for help. Leveraging the knowledge and experience of people that have achieved what you are looking to achieve gives you the highest probability of being successful. In this situation, it’s a who question, not a what question (which is discussed here).Common Fear # 4: People like me never get aheadAs I mentioned at the start of this blog, often our thoughts about money are shaped by our childhood, experiences and the people we spend time with. People tell us stories about money and these stories echo in our own mind. These can give rise to limiting beliefs.You must first acknowledge these limiting beliefs exists to be able to break this cycle. The above article recommends you identify, reframe and move forward.Common fear # 5: Life’s too shortNo one knows how long we have left on the planet. So, we should always make the most of today. For some people, this extends to how they manage money i.e. spend for today and save nothing for tomorrow.Building wealth is a journey, often a long one. So, we must enjoy the journey in case we aren’t lucky enough to live a long and healthy life. In practical terms, this means spending some money today whilst at the same time, saving (investing) some for the future. Investing doesn’t necessarily require you to curtail all enjoyable activities. In fact, the sooner you begin the investment journey, the fewer compromises you will have to make (my recent blog is evidence of that).Combatting these fears?You can’t address something if you don’t know it exists. Therefore, the first step is to consciously reflect on your decision making and the stories you tell yourself about money. Once you do that, you may become more open to considering evidence that refutes some of your beliefs. The good thing about investing is that it is rooted in simple logic and math, unlike emotions, so it’s easy to verify.Of course, engaging an independent financial advisor allows you to outsource decision making to someone that not only has substantially more experience than you, but also has no emotional baggage about your money.
Borrowing to invest in property is a popular and highly effective wealth accumulation strategy if it’s implemented correctly. However, loan structuring can often be an afterthought. The reality is that loan structuring and maximising your borrowing capacity is almost just as important as buying the right property. This blog sets out how to structure your loans to build a property portfolio.A step-by-step exampleThe video below takes you through an example of how to structure your loans.See video here. Step one: access equity (deposit loan)You will need to pay a deposit (usually 10%) when you purchase a property. Therefore, you need to arrange access to these borrowed funds. Even if you have access to cash savings, I still recommend that you establish a new loan. This blog explains why this is important.I recommend arranging a loan sufficient to fund 20% of the property’s value plus all costs in addition to a buffer. This loan will be secured by an existing property e.g. your home.Step two: arrange an 80% loanYou will be able to fund 20% plus all costs from the deposit loan. Therefore, you need to arrange a second investment loan to fund the remaining 80%. This loan will be secured by the investment property only. This loan should be pre-approved before you purchase.Step three: consolidate loansWhen your investment property’s value has risen by 35% to 40% above the purchase price, which could take 5 to 7 years, you should be able to consolidate the deposit loan with the 80% loan so that all the debt is in one loan solely secured by the investment property. In this case, your home is no longer required as security.This structure avoids cross-securitisation which is important as explained in this blog.Additional investment propertiesIf you plan to invest in multiple properties, you can repeat the steps above. For simplicity, it is acceptable to maintain one deposit loan to fund deposits for multiple properties. If you do so, you must maintain good record keeping. Personally, I maintain a spreadsheet that includes a list of all purchasing costs, as that helps me verify loan amounts and calculates the investment property’s cost base for CGT purposes.Current considerationsThe table below sets out how we generally structure interest rates and repayments in the current environment. Of course, if you are reading this blog after 2021, these recommendations may no longer be appropriate.See table here. Successful investors don’t care about interest ratesBorrowing costs (interest rates and fees) are important, of course. However, maximising your borrowing capacity in a safe and prudent manner is far more important… about 8.5 times more important to be specific!There are two important benefits resulting from having a higher borrowing capacity. Firstly, you will be able to afford to invest in a higher-quality asset. Higher quality assets generally exhibit higher long-term capital growth rates and lower investment risks. Secondly, it may help you invest in more assets i.e. buy another investment property.I would rather pay a higher interest rate if it allowed me to invest in a better-quality asset. For example, paying 0.50% p.a. in additional interest on $1 million loan will cost you less than $53,000 after tax over the next 20 years in today’s dollars. But a 1% higher capital growth rate will make your approximately $450,000 more in equity after tax (CGT). That equates to an 8.5 times return on your investment! That is why maximining your borrowing capacity is far more important than minimising your interest rate. Of course, it is a great outcome if you can optimise both, but never, ever compromise on borrowing capacity.You should expect to refinance every 2 to 5 yearsRefinancing loans is an administrative pain. Anyone that has set up a new loan over the past few years can attest to that. The amount of information you need to provide to the banks (often multiple times) and the number of forms that need to be completed is staggering. But the reality is that lenders (banks) change lending appetite and credit policies almost as often as the wind changes. Therefore, whilst your existing lender/s might be suitable for you today, there is no guarantee they will be in 3 years from now, for example. In fact, there’s a good chance they won’t be. Successful investors know that finance is a game and you’ve got to be willing to play that game. That includes switching to a new lender when necessary. Avoiding a refinance is easier. But sometimes the easiest path is not the most effective.An experienced mortgage broker is vitalAn experience mortgage broker will be able to help you structure your loans to ensure you maximise any tax benefits as well as your borrowing capacity. The benefits that an experienced mortgage broker can/should provide you, in addition to loan structuring, include:§ Knowledge and experience. The lending industry is a very dynamic marketplace. Things are changing all the time; credit policy, interest rates, laws, regulations, credit appetite and the list goes on. You need an experienced broker to help you navigate these risks and opportunities. Someone that goes into bat for you. That represents your best interest.§ Whilst loan applications are neither enjoyable or instantaneous, a professional mortgage broker will save you a lot of time through completing forms, answering inevitable (and often banal) questions from the lender, following up matters to avoid delays, liaising with other providers such as your accountant and lawyers and so on.§ Proactively re-pricing loans. This chart from the RBA clearly shows that existing borrowers are paying higher interest rates than new borrowers. That’s because higher discounts are typically offered by the banks to attract new business. Therefore, it is important to periodically re-price loans to ensure you are receiving the highest interest rate discount possible. My firm is currently implementing a technology tool that uses an algorithm to trawl over our client’s loans and automatically apply for higher discounts when they become available. It automates the whole process, so our clients don’t need to do anything.Building wealth is a game of finance, not propertyInvestor and educator, Michael Yardney says “property investment is a game of finance with some houses thrown in the middle”, and I couldn’t agree more. To master any game, you must learn the rules. And if you would like to do that, I suggest you grab a copy of my book, Rules of the Lending Game. For a limited time, you can buy a copy of this book for only $20 (free postage) if you use the code BLOG. Books are mailed by Australia Post so please allow 1 – 2 weeks for delivery.
Investing in the share market is a relatively easy, simple and a low-cost investment strategy to implement, if you know the right way to do it, of course. However, if you don’t know what you’re doing, it’s easy to mess it up. In this blog, I set out how to implement a highly successful (over the long run) share market investment strategy using a low-cost, evidence-based approach.Of course, the information in this blog (and in fact, in all my blogs) is general in nature. It’s not written or tailored for you, as I do not know your personal circumstances, goals, risk appetite and so on. Therefore, be careful. If you have any doubt, always seek independent financial advice.There are three steps to implementing a share market investment strategy.Step one: chose your investment methodologyWhen investing in the share market, you have three broad options:1. Invest in direct shares i.e. pick the stocks that you would like to buy;2. Employ the services of professionals to pick the stocks on your behalf e.g. use a stockbroker or actively managed fund; and/or3. Invest in low-cost index funds (this could be described as a rules-based approach to picking which stocks to invest in).Regular readers of this blog will know that I strongly believe in only employing evidence-based investment approaches. And there’s an overwhelming amount of evidence that demonstrates that index investing has the greatest probability of generating the highest returns over the long run. If you’d like to learn more, I present this evidence in this blog and also in my book, Investopoly.Some people are attracted to investing in shares for fun (i.e. a bit of excitement). A perfect example of this is what happened to US stock, GameStop and other meme stocks. The core purpose of investing is to build wealth, not to have fun! In fact, if done correctly investing should be boring. Although the process might be boring, the outcome is exciting!Step two: pick the productNow that you have decided to adopt an indexing methodology (if not, return to step # 1!), it is time to pick the product you will use.I strongly recommend you use a diversified product. A diversified product invests in a variety of sub-asset classes such as Australian shares, international shares, emerging markets, bonds and smaller companies. The asset allocation is professionally managed which means there’s less room for error. Currently, two Australian ETF providers offer these products:§ Vanguard – VDGR has a very broad asset allocation with 70% invested in shares and 30% in bonds. VDHG has a more aggressive asset allocation with 90% invested in shares.§ BetaShares – DHHF is 100% invested in shares i.e. no bonds.§ Ethical investments – BetaShares also has some ethical options including DGGF (70% in shares) and DZZF (90% in shares). These funds screen out companies that are large carbon dioxide emitters i.e. fossil fuels.Whilst bond returns are currently low, bonds still play a very important role in a portfolio because they have a negative correlation with shares. How important this is to you depends on your situation and risk profile.BetaShares products are relatively new (established in Dec 2020). However, the Vanguard funds have a much longer track record (established in 2002), albeit in managed fund form (and only recently offered in an ETF form). You can view long term returns here and here. Both have returned over 10% p.a. over the past 10 years.In terms of how to invest in these ETFs, you can do that using an online share trading account. If you invest in Vanguard’s ETFs, you can use its new Personal Investor service which allows you to buy one of its listed ETFs for only $9 per trade. If you want to invest in a BetaShares ETF, you need a retail share trading account such as CommSec.Step three: implementationBecause the share market can be highly volatile, the best way to invest is incrementally in small tranches over a long period of time e.g. monthly or quarterly. This helps spread your timing risk. Timing risk is the risk that you lose money because you picked the wrong time to invest a lot of money in the share market i.e. just prior to a crash. This chart is a good reminder of how volatile the share market can be. Therefore, you need to decide how much you are comfortable investing each month or quarter. One of the advantages of a share strategy is that you can increase or decrease this amount if your circumstances change. It is very flexible.Some additional considerations include:OwnershipYou will need to think how to own these investments. Typically, your options include sole name (you or your spouse, if you have one), joint names (if you have a spouse) or a family trust (click here for a presentation about family trusts). It may be worth speaking to your holistic accountant about this.GearingDepending on your goals, circumstances and risk profile, you may consider boosting your regular investment amount with some borrowings. For example, if you had $3,000 per month of surplus cash flow, you could set up an investment loan (mortgage) secured by your home and draw $3,000 per month from that loan. This would allow you to invest $6,000 per month funded 50% from cash and 50% from borrowings.What results can you expect?The chart below sets out the results an investor could have achieved if they started investing $3,000 per month 20 years ago. The investor’s investment portfolio would be worth $1,828,000 today consisting of $720,000 of capital contributions plus $1.1 million of growth. And if they continue investing, the investor’s portfolio could be worth $4.6 million by 2031 i.e. in 10 years from now (consisting of $780,000 of capital plus $3.8m of growth). Pretty extraordinary, right?See chart here. The thing I like the most about this chart is that is demonstrates that sometimes you can do everything right for many years but not enjoy any results. For example, if you started investing in 2001, by 2008 you would have earned zero return (thanks to the GFC). This can happen despite employing a sound, evidence-based approach. But investor’s that have the discipline and fortitude to stick with it, play the long game, have faith in evidence-based strategies, are always well-rewarded in the long run.Financially model your own scenarioClick here to download my regular share investing financial model (Excel spreadsheet). It allows you to alter the monthly investment amount to model various scenarios.When do you need independent financial advice?As described above, this is a simple strategy to implement. However, the more you invest, the greater the scope there is for a financial advisor to add value. They might be able to deliver value in several ways:1. The diversified options mentioned above tend to distribute too much income. For example, the Vanguard Growth fund generated a return of 9.30% in the 5 years ended July 2021. This consisted of 7.07% p.a. of income plus 2.22% of growth (the High Growth fund generated 7.63% income plus 3.48% growth). Obviously, income is taxed each year. But growth isn’t taxed until you sell the investment. For many investors, it’s more tax effective to have more growth and less income. The tax implications become more material with the more money you have invested. Also, there may be other ways to structure a portfolio to minimise tax.2. All diversified investments use traditional market cap indexing only. I have written about the limitations with this methodology in the past – click here. The more money you have invested, the more important it becomes to use a variety of rules-based indexing methodologies, particularly in this market. By way of an update, last financial year (2020/21), fundamental indexing outperformed by 4.5% and Dimensional by 4%. Of course, longer-term returns mentioned in this blog are more reliable.3. An advisor can construct an investment portfolio that is tailored to your specific needs and risk profile. For some investors, capital preservation is more important than investment returns, so investing in safer assets other than bonds becomes important. Other investors are willing to take higher risk and skew their portfolio towards the sub-asset classes and geographical markets that are positioned to provide the best returns over the medium to long term.Whilst it is difficult to formulate a perfect rule of thumb, my view is that if you are investing more than say $3,000 to $5,000 per month, and/or your existing portfolio exceeds circa $400,000 in value, then it is likely that you would benefit from engaging an independent financial advisor to manage your portfolio on an ongoing basis. Notwithstanding that, there might be other things they can help you with.Keep it simple and do it regularlyAs the chart above demonstrates, monthly investing over long periods of time generates substantial wealth. The strategy is flexible and lower risk than borrowing to invest. And there has never been a time when this strategy has been easier and more cost-effective to implement. It is certainly worthy of consideration.
Approximately half of Australia’s population is currently in a lockdown, and this may continue for another few months until vaccine target levels are reached. I wanted to discuss what impact this may have on the property market and the broader economy.Of course, there are wide ranging impactsThe impact of Covid lockdowns can be wide-ranging. Dealing with the challenges of home schooling, not seeing family, not enjoying your normal pastimes, business failures, job losses, mental health challenges and so on. Of course, we all have a tremendous amount of empathy for the various ways that lockdowns are negatively impacting people’s lives. That said, the aim of this blog is to focus purely on economic impacts only.What we learnt from previous lockdownsThe lockdowns in Australia during 2020 and around the world taught us some valuable lessons, as there were some common themes, namely:§ Low-income earners tend to be impacted to a much greater extent. In fact, it is not uncommon for higher income earners to avoid any negative financial impacts from being in lockdown, because as they can work from home, they retain their employment and income.§ Because people cannot undertake their normal (non-lockdown) activities, we observe two economic trends. Firstly, people save more money (i.e. the savings rate spikes), which improves their financial position. Secondly, people tend to spend more on durable goods – although this trend will probably diminish at some point – how many new appliances do we really need!§ Whilst an increase in business failures hasn’t yet been reflected in insolvency statistics, it stands to reason that each successive lockdown (Melbourne’s onto its 6th) puts an increasing amount of pressure on some businesses, as their financial resources deplete. Anecdotally, unfortunately I have observed a greater number of business closures in the Melbourne CBD over the past couple of months.§ Overall economic demand does tend to bounce back strongly and quickly. At a macro level, demand for spending by higher income earners tends to more than compensate for lower levels of demand by income earners.But we don’t have JobKeeper anymore?The federal government’s Covid-19 Disaster Payment provides an income of $750 per week to those that have lost 20 hours or more of work during a lockdown. The highest JobKeeper payment during 2020 was $1,500 per fortnight, so this is on par.However, according to Deloitte Access Economics, only about 2 million Australian’s were accessing this Disaster Payment in August 2021, compared to 6 million that accessed JobKeeper in March 2020. That means less money from government assistance is being pumped into the Australian economy. That said, the JobKeeper program was widely criticised for its untargeted nature e.g. some large businesses claimed JobKeeper and subsequently declared record profits and dividends (e.g. Harvey Norman). As such, perhaps this Disaster Payment package is more efficient and still just as effective. Regardless, the Australian federal government will rack up more than $1 trillion of debt from supporting the economy through Covid, so it isn’t going to stop now. I expect the federal government will provide more support should it be needed.Apartment rental incomes will be under pressureRenting an apartment tends to be more affordable than renting a house. As such, apartments are tenanted by a higher proportion of lower income earners. Whilst the federal government’s Disaster Payment package will hopefully avoid or minimise financial hardship, it is possible that some residential tenants will seek rent relief (in the form of a waiver of deferral) from landlords.Because Covid has adversely impacted lower income earners to a much greater extent, it is likely that apartment rental income growth will be relatively stagnant over the next one to two years.Vendors are likely to remain cautious about sellingAccording to the REA Group, property listings dropped by over 10% nationally in July, with Melbourne and Sydney experiencing much larger falls. One-on-one property inspections can still be conducted in Sydney, but not in Melbourne. Live auctions have been banned in both cities. As such, almost half of the auctions that were scheduled to occur over the past week in Melbourne were withdrawn.The fact is that vendor confidence is weak. Of course, most people are reluctant to begin a sales campaign in the middle of a lockdown, as sales activities are severly restricted. However, even when we emerge out of these lockdowns, most vendors worry about their sales campaign being interrupted by yet another lockdown.As such, I don’t expect the property market (particularly supply of property listings) to normalise until the risk of lockdowns evaporates, which might not be until next year.Central banks and commodity pricesOne of the challenges with controlling the federal budget deficit will be the impact of the falling price of iron ore. Between the start of December 2020 and mid-May 2021, the price of iron ore rose by 80% from $US125 to $US215 per tonne. This boosted government revenue through mining royalties and company income tax receipts. However, iron ore prices have been falling since the start of August. It is now trading at $US160 per tonne. If this trend persists, it is not good news for the government budget.At the start of this month, the RBA announced that it would reduce its bond buying program from $5 billion per week to $4 billion in September, as it tappers off its quantitative easing (EQ). However, given the huge cost of lockdowns to states and the federal government, most commentators expect it will delay any tapering. Similarly, commentators expect the US Federal Reserve to postpone any planned tapering of its QE program due to rising delta cases in the US. It seems more central bank support might be needed.Interstate migration away from Melbourne and Sydney will almost certainly riseI shared this interstate migration chart a few weeks ago. It is noteworthy that interstate migration has been negative in NSW for quite some time. And Victorian interstate migration is trending downwards to the point that it is now negative (a net loss of 4,900 people in the March 2021 quarter compared to a net gain of 490 people in the March 2020 quarter).I think this trend will continue in that an increasing amount of people will migrate away from Melbourne and Sydney and move to Queensland. Perhaps Melbourne will fare the worst because its lockdowns have been more draconian and therefore likely to have had a more severe social and economic impact.It is important to note that negative interstate migration may reduce demand for property in Melbourne and Sydney at a macro level. However, it is unlikely to have a material impact in investment-grade locations. The reason why is that these locations tend to benefit from multifaceted demand. Therefore, even if one demand factor temporality subsides, it is very likely that overall demand will still exceed supply, thereby resulting in price appreciation.My conclusionI predict that the investment-grade property market will be largely unaffected by the prolonged lockdowns in Melbourne and Sydney. Of course, the practicalities of selling means that transaction numbers will continue to be below trend, whilst restrictions are in place. But once restrictions are lifted and the risk of further lockdowns disappears, I believe demand for property will quickly return to normal. Supply (i.e. properties for sale) is not likely to recover until 2022.However, non-investment-grade locations that are predominantly occupied by lower income earners may not fair as well.Regarding the economic recovery, at a macroeconomic level, I think the economy will bounce back relatively quickly, like it did in 2020. However, unfortunately, some sectors will now take a lot longer to recover (i.e. years, not months) such as hospitality, retail (particularly in the CBD) and tourism.
Land tax is levied on the value of an investor’s landholdings on 31 December each year. It is an insidious tax as any land tax is relatively small when you initially purchase an investment property but typically increases each year. As such, the problem is that it can become quite costly by the time you reach retirement – a time when it’s preferrable to pay less tax, not more.There may be several opportunities to minimise land tax which are discussed in this blog.Land value is a vital attribute of an investment-grade propertyThe value of a property comprises of the value of the underlying land plus the dwelling’s value (i.e. improvements that are permanently located on the land). Typically, land appreciates in value over time whereas buildings depreciate. Therefore, to maximise your property’s rate of capital growth, you must invest in property’s that have a high land value i.e. more than 50% of the property’s value should be in the land.There are a couple of consequences of investing in high land value properties:1. High land value properties tend to produce low rental yields. That’s because renters don’t really care about the value of the underlying land. Renters are more impressed by the size and quality of the accommodation; and2. High land value properties attract higher land tax liabilities.Remember, the power of compounding capital growth more than compensates investors for these disadvantages.In the past, it hasn’t been wise to own property in a company but…One of the major disadvantages of owning investments in a company is that a company is not entitled to the 50% capital gains tax discount.If you realise a capital gain in your personal name of $100, you can discount that gross gain by 50% if you have held the investment for 12 months or longer. As such, the investor will be taxed on a net gain of $50 at their marginal tax rate. If they earn over $180,000 p.a., their rate of tax is 47%, so they will pay $23.50 in tax. In short, the maximum rate of tax in respect of CGT in their personal name is 23.5%.If a company makes a capital gain of $100, it will pay tax on the whole gain as the 50% discount is not available. As the corporate tax rate is 30%, it will pay $30 of tax.In this situation, the investor that uses a company pays a high tax rate by 6.5% (i.e. 28% more in tax). As such, companies used to be an unattractive ownership structure (also because negative gearing losses are trapped).But the company tax rate has reduced in some situationsCompanies that meet the eligibility of ‘base rate entities’ will be taxed at the flat rate of 25% from this financial year onwards. A company is a base rate entity if its turnover is less than $50 million and 80% or less of its income is passive income (which includes rental income).This could create a good opportunity for self-employed taxpayers if they are able to distribute business income into a corporate beneficiary, so that the non-trading investment company meets the ‘base rate entity’ definition. In this case, the rate of CGT would be 25% versus 23.5% in a personal name. This is a far more palatable outcome, especially if a company ownership structure helps reduce land tax liabilities, as discussed below.State based tax regimeLand tax is a state government tax, and each state has different rules. Principal places of residence do not attract land tax. But any properties in addition to your principal place of residence, such as holiday homes and investment properties, typically do attract land tax.Land tax in VictoriaIn Victoria, investors incur a land tax liability if the value of landholdings exceeds $250,000. It has a marginal tax rate system which means the more land you own, the higher rate of tax you pay.It is noteworthy that the land tax free threshold of $250,000 hasn’t change since 2009, despite the median house price almost doubling since then!Joint owners share one land tax free threshold. Therefore, if you own two investment properties, purely from a land tax liability perspective, you are better off for each spouse to own one property each, rather than jointly.Family trusts (click here for the benefit they offer) attract higher rates of land tax, and their land tax free threshold is only $25,000. As such, it if often worthwhile to establish a separate family trust to hold each property, rather than having multiple properties in one trust.Companies are taxed at the same rate as individuals. Therefore, if you are self-employed and can distribute business income into a corporate beneficiary, a company could be a good ownership structure.I have prepared some financial projections which compares various ownership structures depending on whether you own one, two or three investment properties. Click on the image below to view this analysis.https://www.prosolution.com.au/wp-content/uploads/2021/08/Vic-land-tax-charts.pdfLand tax in NSWNSW provides a land tax-free threshold of $755,000. This threshold is increased each year, which is a fairer system than Victoria. The value of land that exceeds the threshold is taxed at a flat rate of 1.6%.The land tax-free threshold is available to individuals, companies and self managed super funds, but not family trusts. That means a property investor that uses a trust to hold property in NSW will always pay $12,080 more in land tax each year, if the value of its land holdings exceeds $755,000 (being 1.6% of $755,000). As such, where possible, it is better to own property in personal name/s or, if you are self-employed, a company (subject to the discussion above).NSW has announced that it will seek to reform property taxes by replacing stamp duty with an annual tax. Whether this will have an impact on land tax is unknown.Queensland land taxQueensland’s land tax regime is like Victoria’s, in that it has a land tax-free threshold (of $600,000) and levies a marginal rate of tax.Trusts, companies and self managed super funds attract a lower tax-free threshold of $350,000 and higher rates of tax. Depending on your situation, it might be wise to spread property ownership across multiple trusts, as discussed above for Victoria. Just like I did for Victoria, I have prepared some financial projections which compares various ownership structures depending on whether you own one, two or three investment properties. Click on the image below to view this analysis.https://www.prosolution.com.au/wp-content/uploads/2021/08/QLD-land-tax-charts.pdfGeographical diversification can help minimise land taxBecause land tax is a state-based tax, it may be possible to benefit from the tax-free threshold in each state. As such, owning three properties in three different states will result in a materially lower annual tax liability than owning three properties in one state.Other factors to considerWhen contemplating investment property ownership options, it is important to recognise that land tax is only one of many considerations. There are many financial and non-financial considerations to weigh up including:§ Capital gain tax and income tax e.g. negative gearing benefits;§ Asset protection;§ Estate planning i.e. transfer of wealth;§ Compliance costs e.g. accounting fees, set-up costs and ASIC fees; and§ Ability to borrow (e.g. maximise borrowing capacity, if applicable).Some of these factors can be just as important, or more important than land tax outcomes.Also, it is very important to acknowledge that tax rules can change at any time. In fact, if you plan to own the property for a few decades, then it is very likely that tax rules will change over this period. That is why it’s important to not be too tax focused. An ownership structure should provide many advantages including the ability to minimise taxes.It’s too late to change nowChanging the ownership of a property that you currently own is often cost-prohibitive as it can give rise to capital gains tax and/or stamp duty liabilities. Therefore, it is important to seek independent financial and taxation advice well in advance of acquiring an investment property to avoid any costly mistakes.As I wrote at the beginning, land tax is insidious – it will sneak up on you. Therefore, you must consider ways to minimise it and you can only do that if you have a well-defined plan.
As a completely independent advisor, I have no vested interest in how my clients invest. Whether they invest in property, shares or any other asset class makes no difference to my life. Of course, I want them to invest in (1) assets that are most appropriate for them and (2) assets that provide the highest returns without taking unacceptably high risk. I know that if I help my clients invest successfully, they will continue to remain clients and therein lies my firm’s success. Often investors contemplate (and compare) investing in either property or shares.The property versus shares debate is meaninglessIt is often debated which asset class is better, property or shares. I view this debate like arguing which golf club is best. Each club has its unique purpose, and the reality is that golfers need many clubs in their bag to play well. Investing is no different. Investing in a mixture of asset classes allows you to balance out the pros and cons of each asset class at a portfolio level. Ignoring any one asset class in totality gives rise to higher investment risk as you are putting too many eggs in one basket.In summary, I think shares and property are equally good asset classes. I believe that most investors should invest in both. I believe that if you employ an evidence-based approach, in the long run, the investment returns produced by property and shares should be materially similar.The big difference is an investors’ appetite for gearingMost people feel more comfortable borrowing to invest in property but less so with shares. There is good reason for that. The chart below is from my book, Investopoly. It sets out the long term returns and corresponding volatility of each asset class.See chart here. The average volatility rate (or standard deviation) for shares is 20.9% and the average long-term return is 11.6% p.a. To put this in non-mathematical terms, two-thirds of the time, you can expect that your annual return from shares to be in the range of -9.3% and 32.5% (being plus or minus one standard deviation from the average). And 95% of the time your return will between -30% and 53% (plus or minus two standard deviations). That is a very wide range, right? And that is why shares are seen as volatile, as return can vary significantly from year to year.However, residential property is a lot less volatile. Two-thirds of the time your return will range between 0% and 20%. And 95% of the time, between -10% and 30%. Whilst this is still a wide range, it’s a lot tighter than shares. That is why people feel more comfortable borrowing to invest in property, because the likelihood of experiencing a loss year (just after you have borrowed to invest) is relatively low (i.e. there were only 6 loss years between 1980 and 2016).How to borrow to invest in sharesI would almost never recommend someone borrow a large lump sum of money and invest it in shares in one tranche, for the reasons described above i.e. volatility. Instead, I would usually recommend investing in a series of regular and relatively small tranches over (hopefully) many years. Doing so helps you spread your market timing risk.This can be a very effective strategy as explained in this video by Vanguard (watch from 1:30min). This example shows that if you invested $500 per month in an Australian index fund beginning in 1990, that by June 2020 your investment would be worth $760,000. This balance comprises of $177,000 of your contributions plus $583,000 of investment earnings. It shows that the strategy of making regular investments over long periods of time (30 years in this case) creates significant value. All you need is the discipline to stick with it and patience.Therefore, I would typically advise an investor wanting to borrow to invest in shares to do so on a regular basis, not in one lump sum.Shares versus property: a practical comparisonI would like to compare two scenarios:1. Establish a loan against the equity in your home and draw $5,500 per month to invest in shares for 15 years i.e. $1 million invested; versus2. Borrowing $1 million today to invest in property.Shares scenarioI have assumed a total investment return of 9.8% p.a., comprising of 3.7% of growth and 6.1% of income (this is based on the past 10 year performance of Vanguard’s growth index fund). Other assumptions include a mortgage interest rate of 6.5% p.a., a marginal tax rate of 39% and that the investor makes a cash contribution into shares equal to the investment property’s holding costs (i.e. the next scenario below).Property scenarioThe investor purchases a house in Brisbane for $940,000 and borrows $1 million to pay for stamp duty and buyers’ agent fees. The property generates an initial rental yield of 3.2% and this rental income increases at a rate of 5% p.a. The assumed long-term capital growth rate is 6.6% p.a. (so that the total return is 9.8% p.a. – same as shares). The interest rate and tax assumptions are identical to the shares scenario.And the winner is…The chart below compares the value of equity for both scenarios. It is obvious that property is the clear winner. That is not because property is “better” per se, but simply because the $1 million of borrowed funds were invested in full from day one (compared to $1 million invested gradually over the first 15 years).See chart here. What is the property capital growth breakeven rate?The mathematical power of gearing can compensate for (or mask) poor investment returns. The property strategy analysed above will be superior as long as the property’s average capital growth rate exceeds 5.85% p.a. This means that it is possible that investing in a property that is sub investment-grade could still work out to be a superior strategy.Of course, I would never endorse investing in a property that is not investment-grade. My point is to not underestimate the power of gearing.The comparison is not fair, but its realisticAs I have stated, the above comparisons have very different gearing levels, so of course the scenario with a higher level of gearing produces superior results. But we must not ignore the fact that gearing increases your investment risks as you have a larger interest rate exposure. That is, you have an obligation to meet a property’s holding costs (from your salary or other resources), whereas the share strategy is self-funding (investment income pays for the interest costs).It is not always appropriate for people to gear to the high level that is necessary to invest in property. This risk factor must be considered.Property can be better, but only because of gearingThe analysis above indicates that gearing into property may allow you to accumulate 25% more equity over 30 years.The property scenario above resulted in an equity value of $2.4 million in today’s dollars ($5.06m in future value) versus $1.8 million for shares (future value of $3.81m). Whilst the differential is material at $600,000 in today’s dollars, considering that the shares strategy is self-funding, I’d argue that both strategies produce relatively good outcomes.It’s probably more of a question of which strategy suits your circumstances and goals best, rather than which is the better asset class.
I hosted a seminar in August 2018 where I presented an investment case for (investment-grade) houses in Brisbane in the $800,000 to $1m price range. It was my thesis that they represented excellent value and had a high probability of delivering above-average returns in the medium term. An investment grade house that sold for circa $800,000 in late 2018 would be worth well over $1 million today.Depending on your financial position, existing assets and investment strategy, an investment-grade property in Brisbane might still be an excellent investment. I set out some pros and cons to consider in this blog (in no particular order).Pro: Overseas and interstate migrationThe chart below sets out interstate migration for NSW, Victoria and Queensland. Sydney’s interstate migration has been negative for many years (as a Melbournian, I’ll resist the temptation to disparage Sydney). The clear trend over the past 5 years is that a growing number of people are moving from Victoria and NSW to Queensland. However, historically, almost all interstate migrants move to the Sunshine and Gold Coast, not Brisbane. However, I suspect that Covid might change that trend.See chart here. This next chart sets out net overseas migration since 2004. Overseas migration declined significantly between 2008 and 2015. It was starting to recover but of course Covid has interrupted that. Unlike interstate migration, almost all overseas migrants move to Brisbane.See chart here.Interestingly, New Zealanders tend to represent around half of the total permanent migrants. But fewer New Zealanders have been moving to Queensland in recent (pre-covid) years. The number of New Zealand migrants between 2017 and 2019 ranged between 1,500 and 3,000. By comparison, in 2008 over 16,000 New Zealanders moved to Queensland. A rebound in New Zealand migration could have positive consequences for Brisbane and its property market.I suspect that Covid has highlighted how attractive Australia is as a designation for overseas migrants. And, for some of the reasons highlighted below, Brisbane is well positioned to attract a large share of these immigrants.Pro: Large infrastructure spendingBrisbane is in the midst of a$20 billion infrastructure spend including major projects such as Cross River Rail, Queen’s Wharf Precinct, Showgrounds Masterplan, Brisbane Live entrainment precinct and so on.Last year, the Queensland government completed construction of a second runway at Brisbane airport at a cost of $1.4 billion. It is projected to generate $5 billion of economic benefit over the next 10 years.And of course, Brisbane will host the 2032 Olympic games. KPMG projects that it will deliver $4.6 billion in economic benefits.These infrastructure projects contribute positively to Brisbane’s ability to attract a growing number of overseas and interstate migrants.Con: Smaller city (population)Brisbane’s population is almost half the size of Melbourne and Sydney, which means there are fewer high net worth persons that are willing and able to drive blue-chip property prices higher. As I have written before, property prices will continue to rise in blue-chip locations as long as the demand from a cohort of wealthy individuals outstrips supply. The larger a city’s population is, the more likely that demand will persistently outstrip supply.See table here.Pro: Better affordabilityBuying a family home in a blue-chip suburb (i.e. located 5-12 kms from the city in a good school zone) is still relatively affordable in Brisbane compared to Melbourne and Sydney. A property of this calibre can typically cost in the range of $1 million to $1.5 million. However, in Melbourne and Sydney you need to spend more than double that amount.I think this is a big attraction for overseas migrants, particularly New Zealanders.Con: Job opportunitiesOne of the Brisbane’s downsides is that it doesn’t have a lot of corporate head offices and therefore, attract fewer high-paying executive roles. From a list of 265 notable large Australian business (many of them listed), only 27 of them have head offices in Brisbane (compared to 94 in Sydney and 84 in Melbourne). A city really needs to be large enough to attract a large number of employers that earn substantial salaries.The ‘work from home’ movement might go some way to alleviate this. Depending on the industry and occupational role, it may not be necessary for key employees to live in the same state as the company’s head office.Pro: Lower stamp duty than in VictoriaInvesting in property in Brisbane attracts lower levels of stamp duty than in Victoria. The table below compares the upfront stamp duty cost and ongoing land tax for a property worth $1 million.See table here.It is noteworthy that NSW charges the lowest amount of Stamp duty. However, of course, you are not going to find an investment grade property for $1 million in Sydney, so the comparison is theoretical only. The reality is that purchasing in investment grade property is either Melbourne or Sydney will give rise to a much higher stamp duty bill.Pro: Higher rental yieldInvestment-grade house rental yields in Brisbane range between 2.5% and 3.5%, with the typical yield being close to the midpoint i.e. 3%. This yield is much higher than in Melbourne and Sydney where investment-grade houses are lucky to generate a rental yield of 2%.Based on current fixed interest rates, the annual after-tax holding costs for a $1.5 million property is likely to be less than $10,000.Think long termCurrently you can buy an investment-grade property in Brisbane in a blue-chip suburb such as Toowong, Ashgrove, Paddington for between $1 and $1.5 million. The house will be located on a 400-500 sqm block of land (land value will represent 60-70% of the property’s total value). You will receive a 3% rental yield.I ask myself, what will this property be worth in 20 years? It is certainly not inconceivable that a $1.5m property today will be worth over $4 million in 20 years’ time (which is only a growth rate of 5% p.a.). If so, I have accumulated $2.5m in equity and it won’t have cost me very much money to pay for its holding costs.Conclusion: Could be a good addition to your portfolioFor the reasons discussed above, investing in Brisbane property does have a lot of merit. Of course, whether it suits your circumstances is something I cannot comment on. However, it is important to consider the benefits of geographical diversification. Therefore, if you already have investment exposure to the Melbourne and/or Sydney property markets, then investing in Brisbane could be a good addition to your portfolio.Of course, it is paramount to buy the right property i.e. one that is investment-grade.
It is not unrealistic to expect your super returns to be over 20% for the financial year ended June 2021. Of course, this is a great outcome in what has been a tumultuous year. However, I would like to highlight some important observations and considerations.And the 2021 winner is…The table below sets out investment returns for the largest 8 industry funds based on a Balanced investment option (data from Lonsec). The table is sorted by 1-year returns, highest to lowest for the financial year ended June 2021. Hostplus achieved the highest return. However, AustralianSuper is the best performing fund over 3, 5, 7 and 10 years as highlighted.See table here.I have selected the relevant pre-mixed investment option that has between 60% and 76% of assets invested in growth assets e.g. shares. This is defined as a Balanced asset allocation. You will note however that some super funds don’t use the Balanced description – some call it Growth or Core and so on. This highlights that it is important to not rely solely on an investment option’s name. Instead it is important to examine the actual asset allocation of the option you are considering.This list of top 10 super funds includes all industry and retail funds (my list above only compared the 8 largest industry funds).Click here to view a similar comparison for a Growth investment option.Often, it’s impossible to understand how your money is investedOf course, it is basic common sense to make sure that you always understand how your money is invested. However, that can be challenging with some industry funds. Most people assume their money is invested in share and bond markets. However, some industry super funds invest a large amount of your balance in “alternative” investments.Alternative investments can include almost any type of investment that cannot be classified as shares, bonds, property or cash. Alternative investments include things such as infrastructure, construction and private credit, hedge funds, private equity, currency, commodities and so on. Industry super funds do not have to disclose any detail regarding these investments. In fact, any information is often value vague so it’s impossible to assess the underlying risk.The chart below (data from Lonsec) highlights that the amount each industry funds allocates to alternative assets. This ranges from 5% (UniSuper) to 33% (Hostplus).See chart here. Risks with alternative assetsThe advantage of listed assets, such as shares, is that price discovery occurs on a daily basis. That is, market participants (investors) often buy and sell stocks. As such, the current price of an investment reflects all publicly available information and the market’s views. It is a very transparent process. This gives investors comfort about what their investments are worth and consequently, how they are performing.However, many alternative assets are not listed assets e.g. shares in an unlisted company (i.e. private equity) or a large infrastructure project. As such industry super funds must periodically engage valuers to revalue these assets.Prior to starting ProSolution, I used to work for a Big 4 accounting firm preparing business valuations. I know all too well that valuations can be highly subjective. The fact is that you never really know what an asset is truly worth until you attempt to sell it. Some commentators have accused industry super funds of using the subjectivity of unlisted asset valuations to their advantage to manipulate investment returns.I note that the government is seeking to improve unlisted asset disclosure requirements but of course the industry funds are opposing the proposed obligations.My other concern with unlisted investments is the lack of transparency and accountability. Investment risk hides in the dark. This is why listed companies have clearly defined reporting obligations – to help investors make informed decisions. However, industry super funds have no such disclosure obligations.Why do super funds invest in unlisted assets?The problem that large super funds face is that they have too much money to invest. For example, in the 2019/20 financial year, AustralianSuper received over $15.5 billion of new money to invest. Super funds therefore must look for alternative investment options.However, this is a super funds problem, not yours. You have substantially less money to invest so it is entirely possible for you to invest it in a ways that is completely transparent and evidence-based.The best industry funds are…Taking into account past investment returns, fee levels and the desire to minimise exposure to alternative assets, it is my view that UniSuper and AustralianSuper are the two most attractive industry super funds.AustralianSuper is Australia’s largest super fund. Its allocation to alternative investments, which consist of only infrastructure and direct property, is not unacceptable at 17.5%. Its investment fee for the Balanced investment option is 0.63% and it’s the best-performing fund over long period of time.UniSuper was only available to people employed by Australian universities. However, from 1 July, it is now open to the public. It only invests 5% in alternative assets which consists of infrastructure and private equity. Its investment fee for the Balanced investment option is very low at 0.46% and its long-term investment performance has been excellent.Of course, this information is general in nature, and you must not switch to one of these funds solely based on this blog. In fact, depending on your situation, there might be better alternatives. For example, my super has been invested using a wrap platform for almost 20 years and I use this for most of my clients also.Avoid indexed optionsIf you have been reading this blog for a while, you will know that I’m a huge fan of low-cost, evidence-based and rules-based share investment methodologies (such as indexing). Therefore, it is probably reasonable for you to assume that I would prefer industry super fund index investment option. However, I don’t.The table below sets out the performance of the longest running index investment options provided by Hostplus and AustralianSuper.See table here. You will note that these index options have underperformed over various periods of time (remember, these returns are after investment fees).American novelist, Upton Sinclair wrote that “It is difficult to get a man to understand something, when his salary depends on his not understanding it”. If the index investment options were hugely successful, industry funds would not need anywhere near the number of investment staff.Firstly, it is therefore not in the investment team’s interest to promote or improve the performance of the index option. Secondly, industry super funds have close ties with unions, and they are typically not in favour of redundancies. As such, it is my view that non-index options will probably continue to outperform.What is the best investment option?Many super funds provide members with two options. The first option is a pre-mixed investment option such as Balanced or Growth. The second option allows you to formulate your own asset allocation by determining how much you would like to invest in Australian shares, international shares, property, bonds and so on.It is my view that you should outsource this important asset allocation decision to investment professionals. Not only do they have the requisite skill and experience to make better-informed decisions, but they will review it regularly and make changes, as necessary.The right super fund will make a massive differenceIt cannot be underestimated how important it is to ensure your super is invested astutely as well as ensuring you minimise investment and administration fees. The compounding impact of optimising this over many years (and decades) is substantial.
One of the challenges that many investors face is deciding what to invest in, how much and when. There are three methodologies that you can employ to help make this decision, but only two are supported by evidence.What is mean reversion?Mean reversion is a financial theory that suggests a period of above average returns is often followed by a period of below average returns, such that the average return over both periods is close to an asset class’ long term mean (or average) return.Many academics have studied mean reversion and concluded it is an observable and repeatable trend in financial markets.Mean reversion makes sense. It is unlikely that an asset class can generated above average returns for an unlimited period of time. For example, the S&P500 index (US market) has returned over 15% p.a. over the past 12 years. Its long term mean return is close to 10% p.a. Therefore, the probability of it delivering that return again over the next 10 years (thereby generating a return over 15% p.a. over a 20-year period) is very low. In fact, modelling suggests the probability of that occurring is less than 1%.Examples of how perspective & mean reversion helps with investment decisionsI recall that towards the end of 2011, the AUD/USD exchange rate was close to parity (i.e. $AUD1 = $USD1). This meant that it was a good time to invest in the US market (because Australian dollars was more valuable). However, in the 10 years ended December 2011, the S&P500 index had delivered a return of close to zero. As such, an investor would have been excused for discounting such an investment opportunity, because why would you invest in a market that had delivered a zero return over the past 10 years!? Sure, the exchange rate was favourable, but that alone doesn’t validate the investment.Since the end of 2011, the index has delivered a return over circa 14% p.a. and the Australian currency has fallen 30% (relative to the US), resulting in a total return of circa 18% p.a. Mean reversion together with a low-cost index fund have done most of the heavy lifting.Perhaps the most obvious market at the moment that is likely to benefit from mean reversion is the investment-grade apartment market. As I wrote in this blog last year, investment-grade apartments (in Melbourne in particular) have delivered very little capital growth over the past 10 years. If the trend of mean reversion repeats itself, and it will, it is very likely that we are approaching an 8-10 year period double-digit capital growth. No one knows when the growth period will begin. But 4 to 5 decades of evidence tells us it will begin eventually.Of course, it’s difficult to invest when recent returns have been poorWe are all wiser with hindsight. Looking back at my 2011 US share market investment example above, it seems like a no brainer today. However, at the time, it wasn’t. Its counter-intuitive to invest in markets that haven’t performed in recent years. It often feels less risky to invest opportunities that are currently most popular i.e. follow the herd. But it’s not. Astute investing requires discipline and courage.It’s much easier to pick medium-term (or longer) trendsI wrote last week that it’s very tempting to focus on investing opportunities that promise quick returns. However, as the illustration below highlights, it is a highly speculative approach. A far superior approach is to invest primarily using a very long-term lens. This invites you to focus almost entirely on (1) only adopting evidenced-based methodologies and (2) focusing on investing in the highest quality assets. It helps you drown out unhelpful noise.See hereHowever, if your risk appetite permits, you might like to use a combination of medium and longer term approaches. For example, if a client’s investment strategy includes investing in both property and shares, we might adopt the following approach:1. When investing in property, we’ll use a pure long-term approach. Because property is a lump asset i.e. you must invest a large amount, it’s important to take the lowest-risk approach; and2. When progressively invest in shares, we might first invest in the geographical markets and/or sub-asset classes that exhibit the best opportunities for delivering above-average returns in the medium term. That is, relying on the trend of mean reversion.Have cash but don’t know when to invest it?Low interest rates can create a sense of urgency for some investors. That’s because leaving your money in cash rewards you with very little interest (term deposit rates are less than 1% p.a. and mortgage offsets save you maybe 3% p.a.). Consequently, some investors feel compelled to invest their money elsewhere.Alternatively, some investors are concerned that property and share markets are trading close to all-time highs, and don’t feel confident investing in case the market crashes.However, whether to invest or not is rarely an all-or-nothing decision. That is, it’s unlikely the right response is to invest nothing at all and leave your money in cash. But, by the same token, it’s probably foolish to invest all your money tomorrow. Instead, often the most prudent response lies somewhere in between.If all else fails, go long termAs I have written ad nauseam, the lowest risk approach is to focus on the long term. Invest in a way that will maximise your wealth 20 years from now, close your eyes and have faith. As long as you’ve made a fundamentally sound investment, this is sure to be the lowest stress approach to investing.
There are a number of factors that I consider when contemplating an investment on behalf of my clients or for me, personally.I think it’s very important to consider a vast array of investment opportunities (or appoint an advisor to do it on your behalf). But it is even more important to discount most of them. Being diligent, setting a high bar and having the discipline to stick to sound fundamentals is critical for success.This blog sets out the important factors that I always consider.Will it materially improve your financial position 10 years from now?It is often tempting to invest in ideas or opportunities that may promise to provide quick investment returns. Doing so appeals to our desire for instant gratification (reward). One of my favourite quotes is from Howard Schultz (billionaire and founder of Starbucks); “short term profit rarely creates long term value”. It’s very true.A quick profit is nice, but it’s not the solution to building long-term wealth, unless you can consistently pick the next short term opportunity. But that is impossible to do. The problem is these ‘quick profit’ opportunities tend to be inherently risky (so many don’t work out well) and provide a one-time return only.Instead, you are much better off to invest in assets that provide predictable returns over very long periods of time. Investing in an asset that provides an average return of 7% p.a. over the next 30 years will magnify its value by 7.6 times.Asking yourself whether the investment you are considering will materially improve your financial position in 10 years’ time, forces you to think long-term. It helps you avoid the shiny objects (i.e. opportunities that trick you into believing they’ll deliver quick profits).Ironically, the older we become, the easier we find it to make long-term decisions. Or maybe we just get more comfortable with delayed gratification. Either way, it requires discipline and patience.Do you understand what’s driving the expected returns?Don’t invest in anything you don’t understand.You need to understand how the investment will work. How will the returns be generated? It must make sense.For example, if you are investing in a property in a blue-chip and highly sort after location, it is easy to understand how that property will be worth a lot more in 30 years from now. How much more is uncertain, of course. But it stands to reason that its likely to outperform the “average” property.However, for example, this is my problem with Bitcoin. I understand what it “could” be used for. I understand the advantages of a decentralised currency that offers privacy (anonymity). But the reality is that the vast majority of people currently buying Bitcoin are doing so for pure speculative purposes. Therefore, the only way I can make a return is if it attracts an increasing number of speculators. And that feels very risky to me. I invest. I do not speculate.All fundamentally sound investments can be explained in simple terms using basic logic. It’s important that you understand this logic. If you are not able to do that, don’t invest.Where is the evidence?There is no need to throw darts at a dartboard. There are plenty of investment opportunities (asset classes and investment methodologies) that offer good long-term returns of 8-10% p.a., which are supported by an overwhelming body of evidence.Therefore, when contemplating an investment, ask yourself where is the evidence that this is going to work. The fact is that such evidence doesn’t exist for poor quality investments. Therefore, following this rule will help you avoid investing in something that won’t work.Of course, only using evidenced-based strategies doesn’t eliminate all risk. It is possible that past returns are not a reliable indicator of future returns, which is why you must take into account the other factors listed in this blog.Who’s making money and how much?Virtually no one promotes investments for free. Often, there’s a commercial incentive to do so. It is very important that you understand what incentives exist, who benefits and by how much. The reason is because you, the investor, ultimately ends up paying for them (through lower returns or lost value).For example, some property developers pay massive commissions (often tens of thousands of dollars) to people that sell/recommend off-the-plan properties to their clients. When the developer sets the property’s sale price, they include the cost of paying commissions. But you (the owner) don’t receive any value for paying them. Ultimately, you’re the one that is out of pocket.Commercial interests aren’t bad per se. People should be fairly rewarded for their time and expertise. And you must fully understand who gets paid what, so that you can make this assessment of whether its reasonable or not and what value it’s going to create for you.What could go wrong?I find most investors focus on possible returns but fail to consider risks. Instead, I prefer to initially identify all the things that could go wrong and think about ways I can reduce or eliminate these risks. I do that before I consider what returns are achievable.As Warren Buffett advises, the first rule of investing is to never lose money. Therefore, by thinking about your downsides first, and mitigating them as much as possible, you might be able to achieve good investment returns whilst taking very little risk. This is the real genius to investing well because normally you have to accept higher risk if you want to achieve higher returns. But that is not always true. Focusing on your downside first goes a long way to reducing your risk, thereby helping you to never lose money.It takes real discipline to do nothingGlobal fund manager, Fidelity undertook a study of the performance of client accounts between 2003 and 2013 and found that the best performing accounts were ones that were deemed ‘inactive’ (e.g. people had lost log in details or forgot the account existed). This demonstrates the value of patience (and the fact that our intervention rarely adds value).You need to have the patience to find the right investment opportunities. And then you need to have the patience to hold onto the right investments for the long run. Do that, and you will accumulate a lot of wealth – albeit it may take a couple of decades.If you can’t find the right investment, do nothing. Don’t compromise. Just keep looking.
Last week a prospective client asked me a very good question. They asked whether I have data that shows what investment returns my clients have generated. Whilst this sounds like a logical question, my response was that not only did I not have this data[1], but it also wouldn’t necessarily be that useful. The reason is that investment returns are highly dependent on a client’s stage of life, their risk profile, the quantum of their investable income, their starting financial position and so on. Unless all those factors are identical to this prospective client, the returns are not relevant.But the question got me thinking; how important are investment returns anyway?Short term investment returns don’t give you the full storyIf I told you that my clients enjoyed a 100% return over the past 12 months, would you be impressed? Of course, no one’s going to be upset with that return but it tells me nothing about:1. The risk that I took to achieve that return. High returns are almost impossible to achieve without taking high risk; and2. Whether that return is sustainable. The laws of compounding growth tell us that it’s more powerful to consistently generate a sustainable return (e.g. 8% p.a.) over many decades. That should be your goal.Returns become more important over long periods of timeIt is very possible that when I start working with a client, in the short-run, they might be financially worse off. I have two examples to demonstrate this.The first example is when I advise them to invest in property. In that first year they pay for a lot of large expenses such as stamp duty and buyers’ agents fees. This diminishes their net asset position.The second example occurred last year when we had actively reduced exposure to the seemingly overvalued US tech sector prior to Covid. As we know, the tech sector was the greatest beneficiary of Covid during 2020. Consequently, our portfolios under-performed over the year to December 2020. However, based on initial investigations, it appears our portfolios have more than made up for that under-performance over the year ended June 2021 (being underweight tech has served us very well to date in calendar year 2021).The lesson these two examples demonstrate is that sometimes short term returns suffer in the pursuit of maximising long-term returns. This is acceptable, unavoidable and necessary.I can’t control markets or returnsI can’t control investment returns, especially in the short-term. No one can. In the short term, markets can be irrational, unpredictable and highly volatile. No one in the world has developed a model to reliably predict short-term returns with any meaningful consistency.The factors that I can control (on behalf of my clients) include investment fees, the methodology we employ (i.e. whether its robust, tested and evidenced-based), the investment strategy/plan that we formulate, asset allocation and the quality of the investment. In the long run, all these factors will be responsible for delivering investment returns.To use an analogy, a personal trainer doesn’t have any control over the weight her client loses in the short term. All she can control is how much her client exercises, the meal plan that her client follows and other environmental factors. The weight her client loses is merely a consequence of her client’s behaviours. But if her client follows her advice consistently over many months and years, the results become more predictable.In fact, the value of advice has little to do with investment returnsThis 2021 study by global fund manager Russell Investments suggests that quality financial advice contributes 4.83% towards your investment returns each year. That is the value of financial advice.Interestingly, it estimated that the investment aspect of what a financial advisor does only contributes a relatively small amount of value. This includes two aspects:1. Asset allocation (which is referred to as ‘product alignment’ in the report). This is the decision of where to invest your monies; and2. Active rebalancing which is the decision of how to change where your money is invested over time.The report estimates this only contributes 0.79% towards your investment returns (which is less than 16% of the total value of advice).The majority of value is from…According to this study, the majority of the value from financial advice is derived from three activities:1. 2.02% comes from behavioural coaching. I describe this as stopping my clients from making costly mistakes. A ‘mistake’ can include not following fundamentally sound financial advice. This can be incredibly valuable.2. 1.20% comes from saving tax i.e. structuring investments tax-effectively. This can include using different ownership structures, different investment products, distribution and franking strategies, super strategies and so on.3. 0.82% come from having a strategic plan. A strategic plan provides context for making decisions. That is, you will be able to assess whether doing X or Y contribute towards, or detract from, the success of your plan. Without this context, you are flying blind.Whilst this report sets out how the authors have calculated these value estimates, we must remind ourselves that it’s a generalisation, and actual value will be different for everyone. Also, the report was prepared by an investment manager to help its clients (which are financial advisors) articulate their value. But, putting aside this lack of independence, I agree with the general premise of the report in that an advisor’s role is to help their clients optimise factors that they can control. This includes making quality decisions, reducing taxes, sticking to a long-term strategic plan and so on.My goal is to help you achieve yoursChoosing an advisor can be a difficult task because it can be challenging to assess what value you may receive. It is hard to assess the value of advice if the advice has not yet been formulated.Focusing on factors such as independence, experience, creditability and philosophy go a long way. And perhaps the other factor is the longevity of the advisor’s client relationships. Typically, clients will only remain with an advisor if they (1) feel like they get more value than they pay and (2) they are happily advancing towards their goals. Therefore, if the advisor doesn’t lose many/any clients, that’s strong evidence that their clients are satisfied.[1] Whilst this would be easy to prepare for investments on a wrap platform, it would be inherently difficult to include the performance of all direct property investments (unless every client’s property is independently revalued every year) any investments not held on a platform.
Some buyers’ agents promote investing in more affordable locations. I can understand why some investors might be attracted to follow their advice. But it’s not until you delve into the theory and evidence that it becomes blatantly obvious that such investments have a high probability of under-performing.Here’s an example I saw on social mediaI noticed a buyers’ agent advertise that he bought this "north Brisbane" property for a client for $530,000. He estimated that the rental income would be $480 per week. The land size is large. It’s on 1006 sqm, which apparently has subdivision upside. Sounds good?Firstly, a bit of research revealed that this property is located 17kms north of Toowoomba, not Brisbane. In fact, it’s over 140 kms from the Brisbane CBD.Secondly, it’s not going to work as an investment for the following reasons:§ Toowoomba has a population of only just over 120,000 people. It’s a very small city with plenty of vacant land surrounding it. The property is located in a new estate surrounded by literally an endless supply of vacant land.§ The land was purchased for $90,500 in March 2007 and a 5-bedroom home was constructed on it. Whilst the land may have appreciated in value since 2007, the value of the dwelling has (and continues to) depreciated. This is evidenced by the past growth rate. The completed property first sold in September 2013 for $445,000. Therefore, over the past 7 years the overall value of the property has appreciated by a mere 2.5% p.a. (inflation was 1.7% p.a. over that period).§ Apparently, the property will rent for $480 per week. That equates to a gross yield of 4.7% p.a., which is high by capital city standards. But it’s indicative of the fact that the property is mostly building value, not land value. Most importantly, a 14-year-old, 5-bedroom house will start to require an increasing amount of ongoing maintenance, which will diminish the property’s net income.At first glance this asset might appear to be a good investment because of its affordability i.e. low price compared to capital cities and high rental income. However, it is very clear that it doesn’t have the attributes to drive any meaningful capital growth. The rental income will diminish over time unless capital improvements are made. This is not an “investment”.But there are lots of similar examplesI picked the above example randomly (in fact when I picked it, I thought it was in Brisbane, not Toowoomba). But I come across many similar examples.For example, for almost 20 years I have heard various buyers’ agents suggest that Melbourne’s suburb, Frankston is the next growth suburb. Of course, whilst some properties in Frankston may have performed well (as there’s always exceptions that prove the rule), investors have been better rewarded by investing in blue-chip suburbs over the last 20 years.Attractions of investing in outer-suburb locationsI’d imagine that the price point is the big attraction for some investors. That is, houses are substantially cheaper. That means that people can spread their eggs across multiple baskets i.e. invest in multiple properties. It also means that people that cannot afford a house in a capital city, can still “invest” in property.Secondly, because properties in outer locations tend to have a lower land value component (land is cheaper than the building), rental yields are higher. This makes property more affordable to hold, particularly while interest rates are so low. Quite often, in today’s market, the property’s rental income will cover all expenses and loan interest.Investment weaknesses of outer-suburban locationsThe first thing to recognise is that the supply and demand fundamentals are significantly different compared to blue-chip locations. Supply of vacant land in the surrounding locality is typically infinite. Whereas the demand for property reduces the further you move away from blue-chip suburbs.The second consideration is the tenant profile. Tenants in these locations are more likely to be lower-income earners. That can include young families, often with pets that create a lot of wear and tear on your property. Compare that to a professional couple renting in a blue-chip suburb that have almost zero risk of unemployment and probably spend most of their time away from the property.Lastly, it is incredibly important to recognise the impact that increasing borrowing capacities has had on house prices over the past 3-4 decades, even in outer suburbs. The average Australian’s borrowing capacity has increased by 2 to 3 times since the early 1980’s. It is my view that borrowing capacities have peaked. They will only rise in line with incomes. That means the buying power of low to middle income earners will not increase by the same rate as it has over the past 30+ years. This means the rate of historic growth will not be repeated.Why blue-chip suburbs exhibit lower risk and will provide better returnsWe know that price appreciation occurs when demand persistently exceeds supply.Putting aside affordability considerations, most people desire to live near the CBD (not in it but surrounding it). These locations tend to offer a greater array of employment opportunities and better amenities such as entertainment, schooling, medical and pastime activities. The supply of houses in these locations are finite and fixed. There’s little to no vacant land available. As such, it’s not difficult to visualise that demand always exceed supply.The richest 20% of Australian’s own 64% of all household wealth. And between 2003 and 2017 this top 20% grew their wealth by 68% (compared to 6% for the least wealthy 20%). It is this cohort of Australians that can afford to (and will) drive blue-chip property prices perpetually higher.Remember, the aim is to invest in a location that has the highest probability of having an excessive level of demand. You might own the property for 30+ years, so pick a location that will maintain its popularity over that long period of time.The quality of your investment will be responsible for the investment returnsYou cannot expect average returns from a below average quality investment asset.Above average quality assets are lower risk because they have a very high probability of delivering reasonable investment returns. For example, a pink diamond will probably always appreciate in value at a faster rate than a white diamond. The same principal applies to investing in property – you must aim to only invest in the pink diamond.Investment principles must never be compromisedIt is probably tempting for some buyers’ agents to buy property at any price-point. Because, of course, not everyone can afford to spend over $500k on an investment property. However, the only way you can do that is if you compromise sound investment principles. And that is a slippery slope and is a sure-fire way to make costly mistakes.If you want to invest in property, do it properly and never compromise on quality (even if you have to put all your eggs in one basket), or don’t do it at all and invest in alternative asset classes.
Twenty-three-year-old, Ashleigh Petrie nominated her mother as the sole beneficiary of her super. However, Ashleigh’s 63-year-old fiancé was successful in claiming her full super balance after she died in a car accident. Ashleigh was in a relationship with her fiancé, Rodney Higgins for only 7 months (living together for four of them). This story highlights the pitfalls and limitations to super fund death benefit nominations.Superannuation doesn’t form part of your willA super fund is a type of trust. That means that no one has entitlement to any super funds until the trustee makes an election to distribute monies i.e. pay a super benefit. As such, superannuation does not (initially) form part of your estate and therefore is not covered by your Will.The trustee of your super fund must decide who is entitled to your super balance including any life insurance benefits (if the policy is held inside super).Different types of nominationsThere are two types of death benefit nominations:Binding nominationsAs the name suggests, trustees are bound to follow the superannuant’s instructions as long as they comply with the super laws (SIS Act). Binding nominations can either be ‘lapsing’ or ‘non-lapsing’. Lapsing nominations are valid for up to three years but can be changed at any time. However, a lapsing nomination cannot be updated if the superannuant loses capacity (although their attorney may be able to update it).Non-lapsing nominations do not need to be updated each year and therefor can offer a greater level of certainty for succession planning.Non-binding nominationsNon-binding nominations provide guidance to the trustee as to how to pay a death benefit. However, ultimately, the trustee still has discretion as to who to pay a benefit to.Reversionary nominationsIf a person’s super is in pension phase, some super funds allow reversionary nominations. A reversionary nomination instructs the fund to continue paying a super pension to their nominated beneficiary such as their surviving spouse. Reversionary nominations offer few financial planning advantages.Who can you nominate?According to the super laws (SIS Act), super must be paid to your dependent/s. If you do not have any dependents, your super must then be paid to your Personal Legal Representative which is the executor (or administrator if you don’t have a will) of your estate. That is, super will then form part of the assets of your estate and will be dealt with according to your Will.The super laws define a dependent to include (1) spouse including de facto relationships and same-sexual partners, (2) children of any age including step and/or adopted children or anyone deemed to be a child of the member under family law and/or (3) a person that was in an interdependent relationship with the member (which involves cohabitating with the member and one or both persons provide financial and domestic support).If the superannuant doesn’t have any dependents, the super benefit must be paid into the deceased’s estate (Personal Legal Representative) and they will be distributed according to their Will. If they don’t have a will, then benefits will be distributed according to the succession laws in that jurisdiction.Who should you nominate?A super benefit paid to a financial dependent will be received completely tax-free. It is important to note that a financial dependant must meet the Income Tax Act definition to avoid any tax. This differs from the super law definition.According to tax law, a dependent is defined as a current or former spouse, a child under 18 years, anyone in an interdependent relationships or any person that was financially dependent on the deceased prior to death.Therefore, to avoid a super benefit payment being taxed, generally, we advise our clients to nominate a financial beneficiary. Most people nominate their spouse.How are benefit payments taxed otherwise?If super is paid to a non-beneficiary, any tax liability is deducted by the estate before the payment is made to the beneficiary. The amount of tax depends on the benefits components:§ Tax free. This is usually the portion that has accumulated because of non-concessional contributions made after 30 June 2007. This component does not attract any tax.§ Taxable – taxed element. This element is usually accumulated because of making concessional contributions including employer contributions. This balance is taxed at a flat rate of 15%.§ Taxable – untaxed element. This element includes income or earnings which the super fund has not paid any tax on. This element is taxed at a flat rate of 30%.When can things go wrong…Returning to Ashleigh Petrie’s example which I cited at the beginning of this blog, it might now be obvious why her super fund paid the benefit to her fiancé. The reason was that her mother did not meet the definition of a dependent whereas her fiancé did. What she should have done is nominated her Personal Legal Representative i.e. her estate. Her (valid) Will could have nominated her mother as the sole beneficiary and her wishes would have been carried out.Care should be taken when completing super benefit nominations. You should make sure they are completed correctly, up-to-date and adequately witnessed (usually by two adults that are not beneficiaries).SMSF’s offer some advantages hereSelf Managed Super Fund death benefit nominations offer some advantages.Firstly, they do not lapse after three years.Secondly, they do not have to comply with the super dependency laws, as long as the SMSF Deed doesn’t specifically require it. This means that a SMSF member may complete a binding death benefit nomination, nominate a non-dependent and the trustee is obligated to follow those instructions.Check your super benefit nominations this weekUnfortunately, non-existent or inadequate super death benefit nominations are not uncommon. Once you know what you are doing, they are usually easy to check and update if necessary. I suggest you check that your nominations are current and accurate this week. Most super funds allow you to do that online but you’ll need to complete a paper form if you need to complete a new nomination.
It is true that buying a property in any market will generate a lot of wealth as long as you (1) buy the right property and (2) hold it for a few decades. But it is also true that you do not need to rush into the market at the risk of substantially overpaying.My wife and I planned to buy an investment property this year so we have been monitoring the property market a bit closer than usual this year. Of course, we expect to pay fair market value for a high-quality asset (quality assets rarely sell for less). But we have no interest in overpaying. We are happy to wait on the sidelines until we are able to buy an investment-grade property for a fair price.What we have noticed this year is that overpaying is almost the only way to successfully purchase a property – sometimes by more than 10%! I wanted to discuss (speculate) why this might be happening and counsel property buyers to be patient and diligent.Is demand greater than supply?It was my initial hypothesis that a lack of supply was responsible for driving property prices higher. That is, that the volume of property buyers exceeds the volume of properties available for sale.The graphic below include property listing charts for a selection of locations from the beginning of 2010 to date. You will note that property listings in some locations are well below trend, particularly coastal regions. This supports my theory that tight supply is pushing prices higher. However, as you will observe, there are some locations where listing volumes appear to be normal.Chart: https://www.prosolution.com.au/wp-content/uploads/2021/06/Property-listings-summary.jpg Of course, we must remind ourselves that listing volumes (supply) is only one half of the equation. Demand is the other half. It could be that whilst supply is normal, demand could be above average.Demand is very highProbably the best indicator for demand is the volume of new mortgages, as depicted in the chart below from the ABS.Chart: https://www.prosolution.com.au/wp-content/uploads/2021/06/New-loan-commitments-total-housing-seasonally-adjusted-values-Australia.jpegThe average monthly volume of home loans between 2015 and 2020 was $13.4 billion. This year, the average monthly volume has increased by a whopping 66% to $22.2 billion. By comparison, investor loans have increased by just over 9%. I think we can conclude that demand for property is substantially above average.As such, whilst supply (listings) is normal in some locations, there’s not enough property for sale to satisfy the strong level of demand and as a result, prices are rising.Why is demand so high?Many Australians, particularly higher income earners, are spending less and saving more due to the impact of Covid. This is reflected in the household savings ratio which is at the highest level since the data series began in 1973! This relative improvement in household financial strength might be encouraging more homeowners to spend more money on their home e.g. upgrade or renovate.Historically low interest rates have almost certainly also contributed to demand. With home loan fixed rates under 2% p.a., money is very cheap!But why would people be paying so much for property now?We must remind ourselves that property buyers are motivated by different things. The ‘price versus value’ deliberation is not always the most important consideration.Someone might be prepared to “overpay” for a property for several reasons, including:§ Their assessment of a property’s fair market value is different to yours. Property valuations can be highly subjective. So, it’s possible that you have undervalued a property.§ The property might have a special value. For example, the purchaser might already own the property next door, they might be buying it so that their family can live in close proximity, they might need to buy a property prior to a particular date and so on.§ They might be very wealthy and take a very long term approach. For example, they might think that overpaying by a few hundred thousand dollars is largely inconsequential if they plan to hold the property for 30+ years, particularly whilst money is so cheap.§ They might be driven by FOMO and worry that if they don’t buy now, they’ll have to pay a lot more later.There might be lots of reasons that someone is prepared to overpay for a property. But that doesn’t mean you have to join them.Why buying now might be the wrong thing to doThe irrefutable laws of economics dictate that higher property prices will eventually lead to more listings (supply).And an increase in the volume of listings will satisfy demand and create a more balanced market. Buyers will have more choice and as such there’s less pressure to overpay.Having witnessed a number of over-exuberant property markets over the past couple of decades, I know too well that it is entirely possible that a higher volume of listings could lead to a small correction. That is, prices for comparable properties can easily come back by 5% to 10%.In my view, the balance of probabilities is that waiting a few months for a higher level of supply means you will either have to pay the same price as today, or possibly less. But I consider it to be unlikely that you will have to pay more.What am I going to do (and what I’m advising my clients to do)?My wife and I continue to monitor the property market and look for a quality investment opportunity. We are prepared to buy an investment-grade property and pay a fair market value whenever it arises. But we suspect this may not happen this year. We are not in any rush.I am advising my clients to do the same. That is, to employ a reputable buyers’ agent to diligently scour the market for quality investment-grade properties without a particular deadline. Do not expect to get a high-quality asset for a bargain price. But, by the same token, it is unnecessary to overpay or compromise on asset quality.Be careful out there.
The Corporations Act makes a distinction between wholesale and retail clients. It is assumed that wholesale clients have a sufficient level of financial literacy to self-assess the appropriateness and risks of various investment products and to protect this own interests. As such, there are fewer disclosure obligations (and lower compliance costs) for financial services businesses working with wholesale clients.It is my contention that similar provisions should be available to banks and mortgage brokers. Often, the way you assess an application for a borrower with a net worth of $2,000 compared to a borrower with $20 million will vary. Making this distinction allow lenders to apply a more common sense approach. However, unfortunately, no such distinction exists. All borrowers are subject to the same rules, irrespective of their financial position and financial literacy.Retail versus wholesale investor rulesThe Corporations Act makes a distinction between wholesale and retail clients (or “sophisticated investors” if being offered bonds or direct shares). A wholesale client is someone that meets either of the below two tests:1. Asset test – having a net worth of over $2.5 million; or2. Income test – having a pre-tax income of at least $250,000 in each of the past two years.The Act also includes other exemptions in addition to the above including professional investor test, product value test and small business test.These asset and income hurdles were struck back in 1991 and are now vastly outdated. Adjusting for the impact of inflation, the income threshold should now be over $490,000 and asset value over $4.9 million.Wholesale clients are assumed to be financially savvy enough to make informed decisions and are able to protect their own interests. In short, they can decide whether an investment is appropriate so there’s less onus on the provider or advisor. Also, there are fewer obligations (on financial advisors and product issuers) when dealing with wholesale clients such as there is no need to provide a Financial Services Guide, Statement of Advice, Product Disclosure Statements, etc.Wholesale clients are often required to confirm their status by providing a certificate from a qualified accountant.Responsible lending rules may not be changed as plannedIn September last year, the government announced that it would seek to wind back some of the responsible lending rules which I discussed here. The main proposed change was to relax the obligation for the bank to verify how much you spend (and on what items) when applying for a loan.The Bill passed the House of Representatives in March 2021 and is currently before the Senate. It is being opposed by the Australian Labor Party, the Australian Greens and some consumer groups. However, the government has reaffirmed its intention to push this legislation through. I understand that the Bill is scheduled for a second reading next week (16 June 2021). If this Bill doesn’t succeed, there’s an even greater need for sophisticated borrowers to be recognised.Problems with a one-size-fits-all approachA one-size-fits-all approach to assessing loans creates some perverse and frustrating outcomes. I share two common examples that we have experienced recently.Asset rich but income poorWe have recently been helping a client borrow $650,000 to purchase an investment property for $1.25 million (i.e. borrowing only 50% of its value). This client has approximately $20 million of assets in cash, shares and superannuation. It is the banks policy to ignore historical dividend and interest income and instead use a deeming rate of only 0.25%. As such, when calculating the client’s income for lending purposes, the bank assumes our clients will receive only $50,000 in investment income (from $20 million of assets), which is barely enough to cover living expenses.This credit policy may be appropriate for ‘mum and dad’ borrowers that might have a small parcel of shares. But there wouldn’t be many people that would disagree that applying the same approach to a high net worth individual (like our client) doesn’t make a lot of sense. They have significant financial resources to draw upon to meet loan repayments. If you’re not going to lend to them, who will you lend to?Large offset balancesIt is common for our clients, particularly ones that are approaching retirement, to have large borrowings that are fully or mostly offset. When it comes to assessing borrowing capacity, the banks ignore money in offsets on the assumption that you could spend it, and if you did, you would incur interest in respect to the mortgage.However, common sense suggests that someone with $2 million in an offset account has demonstrated a long history of making prudent financial decisions. As such, it is unlikely that they will spend all this money frivolously tomorrow. In fact, one could successfully argue that the mere fact that they have $2 million in their offset is the strongest evidence that they are prudent money managers and can afford to service additional debt.It is time to introduce a new category of borrowers: sophisticated borrowersThe government began to tighten credit rules back in 2009 after the GFC. By the time the banking Royal Commission started in 2017, most of the regulatory holes had already been plugged. Of course, prior to 2009 the laws were too loose and they didn’t protect consumers adequately. It makes absolute sense that banks and mortgage brokers have an obligation to ensure clients can afford a loan.But it also makes sense that different people should be treated differently. The Hawke government, which drafted the wholesale client rules that apply for investments, realised that higher net worth people have the capacity, knowledge and experience to make prudent decisions and protect themselves. As such, they don’t need the same levels of protection.It is my view that credit laws must make the same distinctions. Higher income earners and high net worth persons are usually able to assess whether it is prudent for them to take out a new loan. Also, the approach to assess a loan for a high net worth individual should allow a bank to rely on financial resources, not income, to demonstrate the capacity to service a loan.Perhaps the definition of a sophisticated borrower could be someone that has an income over $400,000 p.a. or net worth over $3.5 million or aggregate borrowings over $3 million. The exact hurdles are obviously open for debate, but this is merely an example.The current system is brokenThe fact that someone with several millions of dollars in the bank is subject to the same assessment as someone with very little financial resources highlights that the current regulations are inadequate. Banks must be given a robust framework but enough discretion to operate within that framework to achieve acceptable outcomes. Distinguishing between retail and sophisticated borrowers seems to be a logical step in the right direction.
One of the Australian Labor Party’s (ALP) big election promises in the 2019 federal election was to abolish negative gearing. It would be logical to think that the ALP’s shock election loss in 2019 will serve as a warning for policy makers. That is, banning negative gearing is an unpopular policy. However, I would caution investors against assuming that negative gearing is here to stay.What is negative gearing?Negative gearing allows investors to offset property investment losses against other taxable income (such as employment income) to reduce their tax liabilities.For example, Colin is employed as a lawyer and earns $200,000 pre-tax. Colin’s employer correctly deducts $64,700 of tax. If Colin borrows $1 million to purchase an investment property, he expects to receive approximately $14,000 of rental income after all expenses (management fees, insurance, maintenance, etc.). The bank will charge him approximately $35,000 p.a. in interest. Therefore, the property will lose approximately $21,000 p.a. ($14k less $35k).Colin will be able to offset that loss against his employment income to reduce his total taxable income to $179,000 ($200k less $21k). This will reduce his annual tax liability to $54,900, which is a saving of $9,800 p.a. As such, the after-tax cost of the property is $11,200 p.a. ($21k less tax saving of $9.8k). This is called a negative gearing benefit.Why do people negatively gear?The only reason that you would negatively gear is that you anticipate that the property’s capital growth will eventually dwarf its income losses.Continuing with Colin’s example above, let’s consider the projected outcome after 20 years. Let’s assume the property continues to lose $11,200 per year which equates to $224,000 in total over 20 years. This assumes the rental income and interest rate do not change for 20 years, which of course is highly unlikely, but for the sake of simplicity, lets continue. If Colin’s investment property appreciated in value by 7% p.a. on average, it will be worth over $3.8 million in 20 years. After capital gains tax, Colin would have accumulated almost $2.2 million of equity in return for losing $224,000 of income. Most would agree that this is a good financial outcome for Colin.In short, investors use negative gearing on the expectation that the capital returns generated by an investment (often property), will substantially offset any after-tax income losses over time.Why is negative gearing at risk?There are three main reasons that I believe that tax benefits (savings) resulting from borrowing to invest in property will not be as substantial as they have been in the past. As such, I would counsel investors to not rely on negative gearing tax benefits when making investment decisions.Reason 1: Government will probably limit negative gearingThe expansion of federal government debt to over $1 trillion dollars means the government must generate more revenue to service and eventually repay this debt. One way to do that is to grow the economy (GDP) which will generate more tax revenue, even if tax rates don’t change. Another way is to raise taxes or limit deductions.Just over 11% of Australians invest in property (2.2 million people out of 19.8 million adults). However, only about 3.3% of Australians own 2 or more investment properties. Therefore, if the government limited negative gearing to say one property, fewer election votes would be at risk.I think the more likely outcome would be to introduce a dollar value limit. For example, maybe negative gearing deductions could be limited to $20,000 per year. Any negative gearing losses that exceed $20,000 could be carried forward to reduce the investment’s cost base (i.e. reduce CGT liability). This policy would still allow low and middle income earners to benefit from negative gearing but limit the benefit to higher income earners. I think this is an attractive proposition for any government.Reason 2: Persistently low interest rates reduce tax savingsGross property residential rental yields typically range between 2% and 3.5%. After allowing for expenses (such as management fees, maintenance, insurances and so on), net rental yields typically range between 1% and 2.5%. With interest-only investment rates starting at 2.5% p.a. (fixed rates), a property’s pre-tax income loss can range from nil to 1.5% of a property’s value (being net yield less interest rate). This means if your property is worth $1 million, your pre-tax loss probably won’t exceed $15,000 p.a. Consequently, your tax benefit (savings) won’t be more than $,7,050 (being 47% of the loss).Prior to 2012, variable interest rates exceeded 6% p.a. which meant a property’s pre-tax loss would typically be in the range of 2.5% and 5% of a property’s value. So a $1 million property’s pre-tax loss would therefore range between $25,000 and $50,000 which would save its owner between $12,000 and $23,000 in tax. That’s substantially more than today.A low interest rate environment greatly reduces negative tax benefits in dollar terms. And if interest rates remain low for an extended period of time, property investors tax savings will be greatly diminished, but then so is their pre-tax cash flow loss.Reason 3: Stage 3 tax cuts will reduce tax savingsIt was reported last week that the ALP will likely support the government’s stage 3 tax cuts which are set to become effective in the 2024/25 financial year. This means that there will only be two tiers for taxpayers that earn in excess of $41,000 p.a.:§ $41,001 to $200,000 = 34.5% tax rate including Medicare; and§ Over $200,001 = 47% tax rate including Medicare.Currently, the tax rate for earnings between $120,001 and $180,000 attracts a 39% rate of tax. The stage 3 tax cuts benefit taxpayers earning over $120,000, which would include many property investors.Using Colin’s example at the beginning of this blog, the annual tax savings from investing in property would reduce by almost 40% from $11,200 to $6,900 (because after 2024/25, tax on $200,000 would be $60,000 versus $53,100 on $180,000 of taxable income).Don’t invest in property (or anything) to save taxSaving tax alone will never make you independently wealthy. Tax is an unavoidable consequence of building wealth.Of course, any tax benefits ease the cash flow burden of investing in property. But it is very important that your investment strategy works with or without tax benefits.To do that you must only invest in investment-grade property/s that has the best capital growth prospects.
Active fund managers use their skill and experience to pick which stocks to invest in. An alternative to active investing is to invest in low-cost index funds. One criticism of index funds is that they blindly invest in a broad index which might not always make sense. Index funds participate in the highs and lows. This led me to consider how well actively managed funds did last year.Last year’s share market opportunitiesBetween 1 January 2020 and mid-March, the international share index (MSCI World ex-Australia hedged to AUD) fell by approximately 20%. By the end of the 2020 calendar year, the international share index bounced back by around 40% (between mid-March and Dec 2020) to finish the full calendar year up by around 11%.The Australian market didn’t fare as well, but its volatility was still high. The Australian share index (ASX300) fell by approximately 27% to mid-March and then bounced back by almost 33% between mid-March and the end of 2020 calendar year. It finished the 2020 calendar year in a minor loss position (down about 3%).But this is only part of the story. The market’s reaction to Covid created some obvious long term investing opportunities for active investors as some sectors were punished a lot more than others. These include oil and gas, airlines, travel and tourism, real estate and banking.Active fund managers and investors should outperform in a bear marketIn a bull market, almost all stocks are rising so investing in a broad index should capture most of these returns. Logic would have us believe that a bear market probably creates opportunities for active investors. For example, at the heights of covid lockdowns last year, technology stocks were the best performers. But as the vaccines immerged, the sectors that were more severely punished began to recover strongly. As such, and admittedly, with the benefit of hindsight, an active manager could have been overweight tech for half of 2020 and then switched to the recovering sectors for the remaining half of the year. This approach would have outperformed the index.Certainly, we are all wiser in hindsight, and perhaps it’s a little bit unfair to undertake this analysis. However, the point I am attempting to make is that if you pay an active manager higher fees, isn’t it reasonable to expect that they will outperform in such a volatile market?How did active managers do last year?US based index firm, S&P Dow Jones Indices prepares the Standard Poor's Index Versus Active (SPIVA) report every 6 months. It compares the investment performance generated by all active managers to the index, to calculate the proportion of active managers that failed to beat their relevant index. The table below summaries the results for the 2020 calendar year.CountryProportion of active managers that failed to beat the index in 2020USA60%Australia56%Japan54%Europe37%Source: SPIVA reportApart from Europe, more than half of active fund managers failed to beat the index in a year that presented a lot of opportunity to do so.Longer term performance however is more compelling. Generally, over any 5 year period, approximately 75% to 80% of active fund managers fail to beat the index. And of the 20% to 25% of active managers that do beat the index, it’s not the same managers each year. In fact, data shows that less than 10% of outperforming managers can outperform for more than 2 years in a row. Outperformance is usually short-lived.A lot of active fund managers are index huggersMany active managers are scared to under-perform the index, because it’s not good for their business (less people want to invest with them). As such, they tend to construct their portfolios to closely replicate the index, to minimise the risk of under-performing it. This is called index hugging. But why would you want to pay an active manager between two and ten times more in investment fees just to replicate an index? Of course, you wouldn’t (and you shouldn’t!).Similarly, actively managed funds rarely go to cash because if they are not fully invested in the market when it takes off, they will miss all the returns. But perhaps, if you are paying high fees for an active manager, maybe you want them to reduce their investment exposure in some markets.A recap on the benefits of active versus rules-based investingRules-based investing includes traditional index funds and factor-based investing. It differs from actively managed funds in that they don’t pay portfolio managers a lot of money to make subjective decisions. Instead, they use rules-based, quantitative methodologies. There are four main advantages to this:1. Better investment returns – as noted above, index funds tend to outperform the vast majority of actively managed funds. And it eliminates the ‘risk’ of picking which active manager to use.2. Lower fees – active managers tend to charge fees in the range of 1.0% to 1.5% p.a. However, index fund fees tend to be in the range of 0.2% and 0.4% p.a. – some are as low as 0.04% p.a.3. Lower tax – index funds tend to be more tax-efficient because their turnover of stocks is lower (less buying and selling) and therefore less realised gains. Maximising your capital growth in return for minimising income means you pay less tax each year.4. Very diversified – index funds tend to be very diversified and the level of diversification (or lack of concentration risk) is the common thread in methodologies that tend to produce better returns. For example, Vanguard’s international index fund holds over 1,500 individual stocks. Almost all active funds hold less than 100, often fewer.If the ‘experts’ can’t do it, what chance do you have?There is a huge body of evidence that demonstrates that adopting a rules-based approach when investing in the share market is likely to generate better returns net of fees and taxes. That is not to say that it will beat every active manager, every year. Of course, there are always exceptions to every rule. But if you want the highest probability of generating good returns (and therefore accept lower investment risk), rules-based investing is the way to go.In addition, what 2020 has proved (yet again) is that if you invest in share markets, you must be prepared for volatility. Typically, there’s a big volatility event every decade and smaller events every two to three years. The best thing to do when this happens is to close your eyes (and ears) and focus on long term outcomes. If you can’t do that, then maybe share market investing isn’t suited to you.
Many lenders are taking a number of weeks (sometimes months) to approve loans at the moment. These delays have been caused mainly by significantly higher mortgage application volumes and the operational disruption from onshoring back-office services due to Covid lockdowns in the Philippines and India.As such, banks are prioritising applications for borrowers that have already purchased property and have a definitive settlement date to meet. Consequently, pre-approval applications are low priority and can take a long time to arrange. This blog discusses the pros and cons associated with buying a property without a loan pre-approval.What is a mortgage pre-approval?A pre-approval is a conditional loan approval. Typically, the main condition is that the borrower is able to offer a suitable property as security for the proposed loan. For example, a bank may approve a loan for $800,000 subject to the borrower buying an acceptable property that is valued by the bank at an amount of at least $1,000,000 (to keep the loan to value ratio at 80%). The only other condition might be that the borrower’s financial circumstances do not change. This is called an approval-in-principle (AIP) or pre-approval.Arranging a written pre-approval with a bank (via a mortgage broker), gives borrowers a higher level of certainty that, if they go ahead and purchase a property, that the bank will ultimately unconditionally approve a loan to fund that property.Pre-approvals do not attract any fees (they are free) and you are not obligated to use that lender or borrow the pre-approved amount.What could go wrong even if you have a pre-approval?Things can still go wrong even if you have a pre-approval.Typically, the only material risk is that the bank values your new property below the purchase price. The bank will lend against the contract price or valuation, whichever is lower. If the property valuation is lower than purchase price, it will mean you won’t be able to borrow as much and you must contribute more cash (or additional property as security).For example, if you buy a property for $1,000,000 and need to borrow 80% (or $800,000), and the property valuation comes back at $950,000, the bank will reduce your loan amount to 80% of that value, being $760,000. That means you must contribute another $40,000 of cash to be able to settle on the property.The other risk is a change in circumstances (such as losing your job) occurring between when the pre-approval was issued and when the loan is ultimately formally approved. Of course, if your circumstances change before you have purchased a property, you should go back and speak to your bank or broker. If your circumstances change after you have purchased but prior to a loan being fully approved, that could be problematic, although this is very, very rare.Are low valuations common?No. By definition, the value of a property is what the market is prepared to pay for it. Therefore, if you have purchased a property in a standard open-market sale, that is usually strong evidence of its current market value.However, if there are not enough sales of comparable properties to support your purchase price, that is when a low-valuation becomes a risk.It is possible to challenge a bank valuation by providing additional evidence, but this usually has a low success rate for a variety of reasons. In our experience, the most expedient solution is to go to another bank. More often than not, alternative banks (which means alternative valuers) will value the property at contract price.However, if you have genuinely overpaid for a property, then obtaining a bank valuation equal to contract price will be challenging.You need to know what you do not already know?Some potential borrowers use logic to determine the likelihood of a bank approving their loan. They may reflect on the fact that the repayments are easily affordable and assume the bank will agree. That is a flawed approach because sometimes (often) bank credit policies often lack logic. Just because you feel you’re a low risk, doesn’t mean the bank will agree.Banks use compressive credit scoring models in order to assess an applicant’s credit worthiness. If your application scores low, it will be declined. There are lots of things that impact a credit score, some of which most laypeople would consider to be inconsequential.The other common ‘unknown’ is what is on your credit file. For example, there might be a bill that you were never aware of that wasn’t paid. Or it could contain errors. These things can cause issues.These risks can be identified and mitigated by arranging a pre-approval.Do all pre-approvals reduce your risk?There are two types of pre-approvals.The first type is where the application goes through the same credit approval process as a full application. That is, a human credit assessor reviews the application and verifies the information.The second type is where the banks system reviews/approves the pre-approval, but no one verifies the data that is put into the system.Of course, the second scenario is highly dependent on the information that is entered into the system. If there is any ambiguity or subjectivity to the data, the second option doesn’t really reveal how the lender will assess that information, and is therefore less valuable.Is it risky buy without a pre-approval?The answer to this question depends on the strength of your financial position and circumstances. Typically, we would consider two main factors:1. How much you need to borrow compared to your maximum borrowing capacity. For example, if we were advising a client and we assessed that they could borrow up to $2 million. However, in this instance, they only need to borrow $500,000, then we might conclude a pre-approval is not critical. However, if we need to borrow close to a client’s maximum, then even a small change in a lender’s assessment could have an adverse impact. As such, we’d recommend the client obtain a pre-approval.2. Our assessment of the likelihood of approval. After almost 20 years of experience, we have a very good sense about whether a bank will approve a loan. Included in this assessment is considering the level of subjectivity in the bank’s credit assessment. If a client’s situation is not clear-cut, it increases the risk that a bank may not agree with our assessment. Of course, we would never advise a client to take unmitigated risks. But if we are almost certain that we can get a loan approved, a pre-approval is not as imperative.In some situations, we might have a high level of certainty that we can get a loan approved by one of the 30+ lenders on our panel, but it’s not as certain that the clients preferred lender would approve it. In this situation, we would invite the client to make friends with the worst case scenario - that is, if their preferred lender declined the loan then we would need to use an alternative lender. Often the differential in interest rates and fees, if any, are not material, as the mortgage market is competitive.How experienced is the banker or mortgage broker advising you?If a mortgage broker or banker advises you to purchase a property without a pre-approval, you must assess their experience and aptitude before relying on their advice. If they have many years or decades of experience and deal with people that are similar to you, it should provide you comfort. However, don’t listen to someone just because they work for a well-known brand. You need to trust the individual, not the brand.How can you minimise bank valuation risk?Banks will not value a property before you sign a contract of sale. However, you could engage a firm (same firm that also works for the banks) to prepare a “valuation for mortgage purposes”. This would give you an indication of fair market value, although it’s possible that valuers may be conservative to manage their business risk. However, in my experience, few purchasers get properties valued before they buy them.Undertaking comparable sales research is probably the best thing you can do to minimise the risk of paying more than the bank’s valuation.Engaging the services of an experienced and trustworthy buyers’ agent is another way to minimise valuation risk. They will have a lot of experience and knowledge which helps determine fair market value and undertake comparable sales research on your behalf.Remember, it’s your riskBuying a property without having a pre-approval is not without risk. Of course, the risk is acceptable in some situations but unacceptable in others. A highly experienced mortgage broker will be able to guide you with this decision, as they will be able to draw upon their experience with multiple lenders. However, ultimately, if you decide to purchase without a pre-approval, it’s your risk.Of course, I do acknowledge that sometimes circumstances do not allow you to obtain a pre-approval, even if you wanted one.This is why investing is more a game of finance, than a game of assets (property or shares). And an experienced team of professionals (buyer’s agent, financial advisor, mortgage broker) can help you win that game.
Treasurer Frydenberg handed down the federal budget last night and to be honest, there’s not a lot in it for individuals and investors. However, there are some real positives for small business, first home buyers and retirees. This blog provides a summary of the initiatives announced on 11 May 2021.First home buyers’ to be able to access more super for a depositThe First Home Super Saver (FHSS) scheme was introduced four years ago to help first home buyers save a deposit. In summary savers can make tax-deductible voluntary contributions into super of up to $15,000 per year. These contributions are usually taxed at a flat rate of 15%, which means it reduces their income tax liabilities. They can then access these savings (plus investment earnings) in the future and contribute the monies towards the purchase of a first home. Previously, the maximum a saver could access from super was capped at $30,000. However, this has been increased to $50,000 in this year’s budget.Savers cannot withdraw compulsory employer contributions i.e. the 9.5% (to increase to 10% after 1 July 2021) their employer contributes on their behalf. These contributions are still preserved inside super, which is good.The benefit of this is it makes it easier to save after-tax dollars. For example, someone earning $135,000 p.a. pre-tax would pay a marginal tax rate of 39% on the last $14,000 of pre-tax income – or $5,460 – allowing them to save only $8,540 after-tax ($14,000 - $5,460). However, if they salary sacrificed that $14,000 into super, their super fund would only pay $2,100 of tax, allowing them to save $11,900 after-tax. In this example, this person has increased their savings by almost 40% due to the tax savings.People earning greater than $120,000 p.a. could enjoy the highest tax savings.Expend 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 mortgage insurance, because the government guarantees part of the loan. Places under this scheme are very limited. However, the government will make available another 10,000 places. Plus a further 10,000 places over the next four years to eligible single parents with dependants.If you earn less than $120,000 – extension of low to middle income tax offsetIf you earn less than $120,000 you may be entitled to a tax offset of up to $1,080 (progressively scaled back if you earn between $90,000 and $120,000) – see here. This offset was introduced 3 years ago but has been extended to apply in the 2021/22 tax year.Increase to the Child Care Subsidy (CCS)From 1 July 2021, the government will move the CCS cap of $10,560 per child. And commencing on 11 July 2022, the government will increase the childcare subsidy for parents with two or more children under the age of five by 30%, up to a maximum CCS rate of 95% for these children.Company tax rate cutThe company tax rate will reduce from 26% for ‘base rate’ entities (revenue less than $50 million p.a.) to 25% after 1 July 2021. As such, if you operate a business in a company, it is advisable to bring forward as many expenses as possible into this financial year.For business: loss carry-back and temporary full expensingThe government will extend the loss carry back and temporary full expensing by an additional year.The loss carry back will allow eligible companies to carry-back tax losses from the 2022/23 tax year (or prior) to offset previously taxed profits as far back as the 2018-19 income year.The temporary full expensing allows businesses to claim a full tax deduction for the purchase of depreciable assets up until 30 June 2023.Simplify tax residency rulesDetermining tax residency can be a challenging task as there are a number of tests to apply and considerations to take into account, which are embedded in case law. This creates a high level of uncertainty and we have often needed to obtain a private ruling from the ATO on behalf of our clients. The government has announced that it will re-write the residency rules to provide more certainty.Removal of the super contribution work test for people aged between 67 and 74Previously, people aged over 67 needed to meet the work test to be able to make contributions into super. The work test requires the super member to have completed 40 hours of paid employment within any 30 day period. The government will remove this work test. This could be advantageous to retirees that have less than $1.7 million in super and investments or cash in their personal name. It could be a great opportunity to move wealth inside super which is a zero tax environment.Downsizer contribution is available from age 60Previously, anyone over the age of 65 who sold their home and met certain other conditions, could contribute up to $300,000 (per individual) into super. This minimum age will be reduced to 60.Is this a good budget?Overall, the initiatives aimed at easing housing affordability for first home buyers will have little to no impact. What’s required is a massive infrastructure spend to reduce travel times to regional centres and ensure they provide attractive employment opportunities and recreational facilities.The incentives to business such as the reduction on the corporate tax rate, loss carry-back and expense write off should provide substantial economic benefit and aid the economic recovery. These are good initiatives in my view.The government should provide more support for childcare expenses as they can be crippling and impair productivity (because the cost prohibits parents returning to work). People often balk at the cost of top-tier private school fees but childcare can cost just as much. It is difficult to afford, even for higher income earners. I think more must be done.And I like the incentive available to older Australians to contribute into super. This cohort wouldn’t have benefited from compulsory super for as long as younger Australians (as it was introduced in 1992).
After 1 July this year, your employer must increase your super contributions from 9.5% to 10% of your salary. This contribution rate will then increase by 0.5% p.a. for the subsequent 4 years until it reaches 12%. This could boost your retirement savings but only if you optimise two things.The government was tempted to delay this increaseIt has been reported that the government was contemplating delaying increasing the Superannuation Guarantee Charge (SGC). The increase in SGC was proposed by the Gillard government back in 2012 but it was subsequently delayed until 1 July 2021. The Morrison government was probably concerned about whether businesses could afford higher employment costs during a pandemic. In addition, some commentators have suggested it would deter higher wage growth because any possibility for wage increases would be thwarted by higher superannuation costs.In my opinion, not delaying the super increase is the right decision. The underlying economy is recovering better than expected. And an increase in wage inflation in the short term is probably unlikely anyway for a variety of reasons. Forcing people to increase the amount they save for their future retirement is a good thing for them personally and the country as a whole.What effect will this have on your future super balance?The table below sets out the projected increase in super balance depending on your income and your super balance today. There are three numbers in each corresponding cell. The first number represents the percentage increase over a 10 year period, the second over 20 years and the third over 30 years. For example, if your super balance is $200k and your income is $150k, then this increased SGC rate over the next 5 years is projected to increase your super balance by 6.1% in 10 years, 9.1% in 20 years and 10.3% in 30 years.See table at https://www.prosolution.com.au/super-increase/As we can see, the increase in SGC really helps people with lower super balances the most.However, if you already have a healthy super balance, the increase in contributions probably isn’t going to have a material impact on your retirement. Instead, fees and returns will have a greater impact on your future balance.It is important to highlight that most people will need to invest in assets in addition to super to be able to enjoy a very comfortable retirement. That is, super alone is rarely sufficient.There are two factors you must optimise:Factor one: Minimise feesFees are guaranteed. Investment returns are not.It is important to minimise investment and administration fees as much as possible. Unlike many things in life, paying higher fees does not generate higher returns. In fact, many studies have shown that there is an inverse relationship between investment fees and investment returns. That is, typically, the lower the fees, the higher the returns. With investments, when you pay more, you receive less.If your super is with an industry super fund, you should aim to pay no more than 0.70% p.a. in investment and admin fees plus a fixed dollar fee of around $100-140 p.a. If your fees are materially more than this, you should review alternative options.Factor two: Maximise returnsThis is an obvious second factor. Of course, you must maximise your investment returns.One of the commonly espoused benefits of industry super funds is that they are non-for-profit, unlike the banks (retail super funds). Of course, all things being equal, that should serve you well. Almost always, retail funds are inferior.However, I would make two important points about industry super funds.Firstly, not aiming to derive a profit is useless, unless you have a fanatical focus on productivity and reducing costs. For example, some charities raise a lot of money for their causes. However, unfortunately, some charities spend more than 40% of that revenue on administration costs. For example, 44% of revenue donated to Make-A-Wish Foundation is spent on administration and advertising. Therefore, being “run only to benefit members” means nothing if there is no accountability to reduce costs. The Productivity Commission in 2019 highlighted that Australian industry super funds have failed to deliver lower fees despite achieving massive scale.Secondly, just because your fund is an industry super fund, doesn’t mean it’s automatically a good option. Industry super fund returns vary greatly. The table below compares the investment returns from the top 8 largest and most well-known industry super funds. I have selected two of the top performers (over 5 and 10 years to March 2021) and compared those to the two bottom performers. As you can see, the returns vary by circa 1% p.a., on average. Over 20 years, that could result in a 13%[1] lower super balance, which is generally going to have a more substantial impact on one’s super balance than the SGC increase. Of course, there are plenty of super funds that have generated even lower returns.See table at https://www.prosolution.com.au/super-increase/The government has proposed to publish returns on an easy-to-understand website to help people compare options. In addition, it will force poor-performing funds to consolidate with larger players. Of course, the success of this lies in its implementation, but any improvement in transparency and accountability is positive.Fees charged by the industry super funds should reduce – but will they?If you operate a super fund, it might cost you say $7 to administer every $1,000 of super you receive (equating to a fee of 0.70% p.a.). When the SGC increases from 9.5% to 12% p.a., instead of receiving $1,000 of contributions, the fund will receive $1,260 of contributions. However, the cost to manage $1,000 or $1,260 should be very similar. Therefore, it should still cost circa $7 or 0.55% p.a.In short, increasing the SGC from 9.5% to 12% should deliver the super industry significant economies of scale. As such, we should expect fees to reduce by 15% to 20% p.a. over the next 5 years. Watch this space.Soon there will be a much better option for Australian’sHistorically, there have been four options available to Australians for their super:1. Retail funds owned by the banks – typically these are characterised by high fees and low returns and are almost always never a good option.2. Wrap accounts which I discuss here. The main disadvantage is that to run it properly, you should engage a financial advisor, which may be economic if you have advice needs beyond super.3. Self Managed Super Funds – because of their high fixed costs, they are typically only worthwhile if you (1) want to invest in direct property and/or (2) have a high balance.4. Industry super funds – which tends to be the best option for those that don’t need a financial advisor and/or don’t have a high balance.However, within the next year a new entrant will appear. It is Vanguard. Vanguard is a US firm founded in 1975 and is the first and largest index fund provider (it manages over $9 trillion globally). It is a mutual organisation meaning it’s not-for-profit, like industry super funds. However, unlike industry super funds, it has a long (almost 5 decades) history of reducing investment fees.Whilst Vanguard has not released any details, I expect this will be a very exciting option for Australians. It’s offering will likely be low-cost, offer absolute transparency (what your money is invested in) which invites more accountability and its investment track record (returns wise) is excellent. When the product arrives, no doubt, I’ll be writing about it here.Vanguard will generate some much needed competition for industry super funds.Good reasons to not switch your superWhilst generally I encourage you to proactively compare your super fund’s fees and returns and switch if they are not suitable, there are some matters to consider before you do that.Firstly, some employer-related funds offer subsidies such as lower fees and free insurance benefits. It’s important to take these into account.Secondly, if you have insurance cover, you should aim to replicate that cover in your new fund, if appropriate. You should do that prior to rolling all your monies over. If the new fund does not agree to providing you with economical insurance cover, you could consider leaving a minimum balance in your old fund just to preserve the insurance.Super may be boring but it’s importantI appreciate that the vast majority of Australian’s are disinterested in super. However, the biggest advantage of super is that it forces us to make long term decisions and enjoy the power of compounding returns. Invest money today and leave it there for 20, 30 or more years. That is powerful.However, it is also incredibly wasteful to not check-in every couple of years to ensure your super fund is still performing well i.e. high returns and low fees. Doing so could dramatically increase your retirement savings.[1] Based on super balance of $350k and income of $200k p.a.
Tax isn’t necessarily a bad thing. If you’re paying tax, it means that you are making money (income or capital gains). But of course, there’s no need to pay any more than you legally have to. I discuss our common-sense approach to saving tax below.Minimising risk is often more important than saving taxIt is not worth it to bend or break the law to save a few hundred dollars in tax. For example, if you get audited and you have some dodgy deductions, it will encourage the ATO to look harder. The last thing you want is to attract the ATO’s attention.My approach has always been to stick within the black letter of the law. Bending the law is rarely worth it. However, if there are entirely legitimate ways to minimise tax liabilities, then it would be silly to not explore them.Remember, when you lodge a tax return, the taxpayer takes all the risk. If you get audited, you will be liable for the interest and penalties, not your accountant.Often, tax can only be delayed, not avoidedOf course, there are few things you can do to minimise tax. However, more aggressive tax minimising measures tend to delay tax rather than permanently reduce it. Often, implementing these strategies create cost (tax advice fees and documentation) and complexity. Even the best plans can be thwarted by the ATO issuing a tax ruling, practice statement or change in law to outlaw your plans. Sometimes, it’s better to keep things simple. Minimise tax as much as possible without creating too much cost and complexity.Minimise tax whilst you’re working (pre-retirement)I list some of the common strategies we use to help clients minimise taxation liabilities whilst they are working i.e. generating personal exertion income.Personal exertion income earners have few avenues to minimise taxIf you are a PAYG employee or earn Personal Services Income, there are not many avenues available to you to minimise your income tax liability. Of course, you can use negative gearing and/or contribute into super (discussed below), but that’s about it. There are some additional tactics available to certain professionals such as barristers and medicos. If there are limited avenues available to you to minimise income tax, then its best to focus on minimising other tax liabilities such as tax on investment returns, land tax and so on – which I discuss below.Contribute into superAfter 1 July 2021, individuals can contribute up to $27,500 per year into super and claim a tax deduction for this expense. The concessional contribution cap of $27,500 also includes any mandated employer contributions I.e. the compulsory 9.5% of your salary your employer contributes.Concessional contributions are taxed in your super fund at a flat rate of 15% if your annual income is less than $250,000 (or 30% for higher income earners).Borrow to invest (negative gearing)Borrowing to invest essentially allows you to use other people’s money (the banks) to build your personal wealth. You can use pre-tax income to pay for the interest expense. This used to be very tax effective. However, now that interest rates are so low, borrowing to invest provides substantially smaller tax benefits. That said, apart from the tax savings, borrowing to invest (to generate capital growth) often makes good sense, especially if you are more than 10 years from retirement.Minimise tax on investment returnsIf there are not many avenues to reduce the amount of tax you pay on your income, then at least make sure you don’t pay too much tax on your investment returns.The first thing to do is to make sure that you invest in assets that generate more capital growth than income. For example, residential property tends to provide most of its return in the form of capital growth. Also, you should avoid share market investments with high turnover (trading) as most of your return will be taxable in the year its generated (this is most common with actively managed investments). This is another advantage of index funds – the turnover tends to be much lower.The second tip is to make sure the investments are owned tax effectively. This could include investments being held in the lowest income earner’s name or in a family trust to provide flexibility. Think carefully about asset ownership. The owner of the asset will dictate which tax options you have in the future.Minimise land taxLand tax is insidious because the annual expense tends to creep higher the longer you own a property. And by the time it becomes a problem, it is too cost prohibitive to take corrective action. Mapping out a plan and following expert advice will help you minimise land tax as much as possible.Consider capital gains taxQuality assets will generate substantial capital gains if you hold them for the long term. Consequently, they also accumulate substantial capital gains tax liabilities too. This is something to consider. It might be appropriate to put some assets in structures that allow you to minimise (or eliminate) CGT such as a SMSF or Family Trust.If you’re self employed, there are a lot more optionsIf you are self-employed and generate business income, there could be lots of avenues to minimise tax, as long as your business is structured correctly. To learn more about this, I recommend you listen to our new podcast: The Holistic Accountant.Your aim should be to pay zero tax in retirementAny assets that are held inside super that are in pension phase (i.e. you are retired) do not attract any tax (no capital gains tax or income tax) as long as your member balance is less than $1.7 million (after 1 July 2021). That means a couple can have up to $3.4 million invested in super, and not pay any tax.An individual can earn up to $22,500 per year and not pay any tax. This means a retired couple can earn up to $45,000 and not pay any tax. Of course, even if they exceed this amount by a small amount - say $10,000 - they will still pay very little tax - only about $2,500 (or 4.5%). Therefore, in retirement if you expect to generate less than $50,000 per year, just make sure its evenly spread between spouses. If you expect to generate a more substantial amount of income, then make sure you have some tax flexibility in retirement – such as a family trust.If you plan well, it is a reasonable expectation to pay little to no tax in retirement.If you can’t save tax, focus on investment returnsSome people can become too focused on saving tax. If you earn money, its likely you will have to pay your fair share of tax. That’s life. It’s important to take whatever steps you can to minimise tax. However, at some stage, you must move on and focus your attention elsewhere, such as maximising investment returns.
It’s stating the obvious to say interest rates are very low at the moment. But what can be easily missed is how powerful low rates can be for investors. And arguably, the next few decades could provide the best opportunities in a lifetime for investors, if they are diligent and invest in high quality assets.When will interest rates rise?That is the million-dollar question. The short answer is that no one really knows. But we should remind ourselves that interest rate expectations can change very quickly, so we must factor that into our investment decision making. That is, make sure you can afford higher loan repayments when rates eventually rise.The RBA has been very firm in regard to its intention. It has said that it will not raise rates until the inflation rate rises above 2% p.a., which it does not expect will occur before 2024. Therefore, it seems variable rates are on hold for at least 2.5 more years.We should consider the level of government indebtedness and the impact rising interest rates will have on the budget. Economies can become reliant on low interested rates – look at Japan as an example. It has been stuck on zero interest rates for more than 20 years.For what it’s worth, my view is that variable rates probably won’t change materially over the next 3 to 5 years. Beyond 5 years, they are likely to rise but probably at a relatively slow pace. It is quite difficult to fathom rates rising above 5-6% p.a. over the next few decades. Low rates could be the “new normal”.Simple math proves its powerInvestors can lock in an interest rate for 5 years at 2.69% p.a. with interest-only repayments. I think we can all agree that is low (especially compared to early 1990’s rates, as shown in this image doing the rounds on social media).Assuming you have a surplus annual cash flow of $25,000 to invest, you have two obvious options:1. Invest it incrementally each year in an investment such as a share market index fund; or2. Borrow a lump sum, buy an investment property and use the cash flow to pay for its net holding costs.If you chose the first option and you received a return of 10% p.a. over the next 20 years (which would be a very good outcome), your investment would be worth almost $1.45 million (equivalent to circa $880k in today’s dollars).If you chose the second option, you could purchase an investment property for $1.2 million. Because fixed interest rates are so low, the cost to hold this investment would be circa $7,000 p.a. after-tax. But you could retain the balance of your surplus cash flow ($25,000 less $7,000 = $18,000) in the loan’s offset account to provide for future interest rate increases. This option would be superior if the value of your investment property appreciated to be worth approximately $2.5 million in 20 years’ time. That equates to a compounding growth rate of only 3.8% p.a.Assuming you buy a high-quality, investment-grade property in a blue-chip location with strong fundamentals, what’s the chance of it appreciating by at least 3.8% p.a.? It’s almost certain, isn’t it?What if property appreciates by 6% p.a.?Continuing with the above example, if the property actually appreciated by 6% p.a., your equity would be worth $2.75 million in 20 years.To achieve the same return using the first option (i.e. no gearing), you would need to generate an average compounding return of at least 15.4% p.a. over 20 years. Historical returns indicate that this target would be considered overly ambitious.In addition, if you select well, it is my view that there is a very high probability of a quality property producing a capital growth rate materially above 6% p.a. For example, the long term average median house growth rate over the past 40 years is circa 7.5%.And what if the growth rate is above 6% p.a.?It is probably not unreasonable to expect a growth rate of close to 8% p.a. over the long term. Remember, this is only marginally above the median rate.If you do achieve a growth rate of 8% p.a. over 20 years you will have over $4.5 million of equity in the property. To generate that using the first option, you would need to generate a return in excess of 19.5% p.a. over a 20 year period. I think you would agree that whilst it’s not impossible, it is very unlikely.Of course, gearing is not for everyoneWhilst mathematically gearing is a very powerful strategy, it is not appropriate for everyone.There are a number of matters you must consider to determine whether gearing is right for you, including proximity to retirement, future income stability and predictability, your equity position, the quantum of existing borrowings and so on.Mortgages are fantastic servants, but terrible masters, so do not over-borrow.The importance of playing the long gameThere are always reasons to delay investing. Over the past 20 years since founding ProSolution, there has never been a perfect time to invest where all the signals were green. There’s always uncertainties with either your personal situations and/or markets.At the moment, investors could be concerned by the impact of money printing by central banks around the world (i.e. quantitative easing), how long it will take the global economy to recover from Covid, high share market valuations (which I discussed last week) and the list goes on.The only solution to this is to change your perspective. Think in terms of decades, not multiple months or years. What can you invest in today that is likely to be worth 3 to 4 times more in 20 years? For example, if you buy a quality property with a strong land value component in a blue-chip suburb, do you think it’s going to be worth substantially more in 20 years from now?Focusing on the long term invites you to drown out all the short term noise and base your decisions on long-term fundamentals.
Growth investors have been well-rewarded over the past decade. For example, the S&P500 index (US market) has delivered an average return of 14.5% p.a. over the past 10 years solely off the back of growth stocks, mainly technology. However, this year to date, value has outperformed growth. If this continues, it could have significant implications for investors.Value versus growthA ‘value’ approach involves investing in companies that appear to be under-valued by the market. Investors use a number of ratios to measure whether a company is under or overvalued including price-earnings (PE) ratio, book to market value and so on. The investment thesis is that there is a large body of evidence that demonstrates your starting valuation is a good indicator of future returns. When valuations are low, subsequent returns are high. Such companies also tend to have strong fundamentals including strong cash flow, profitability, strong balances sheets, etc.A ‘growth’ methodology is less concerned about whether the company is fairly valued by the market. It is all about future potential for growth. Growth investors are encouraged to focus mainly on top line indicators such as user numbers, revenue and growth potential e.g. how big the market could be one day. It seems that profitability is rarely a consideration.Tech has been a big contributor to growthThe large US tech companies have been major contributors to the stock markets growth over the past ten years. The chart below measures how much the FAAMG stocks (being Facebook, Amazon, Apple, Microsoft and Google) have contributed towards the overall performance of the S&P 500 index over the past 1 to 5 years. Over the past 5 years, they are responsible for driving almost half (48.4%) of the index’s return.If we look at the PE ratios that these FAAMG stocks, we can clearly see that valuations seem unsustainable (Facebook = 31, Amazon = 81, Apple = 36, Microsoft = 38 and Google = 37). To put this in context, the average PE for the S&P 500 has historically ranged between 14 and 18.Growth has been the clear winner over the past decadeThe chart below (published by Dimensional) compares the returns from value and growth since 1926. As you can see, for 84 years (between 1926 and 2010), value was the clear winner. But since 2010, growth has out-performed, particularly over the past 3 years.But value has performed better this yearOne thing that is for certain in financial markets is that outperformance never persists forever. Markets move in cycles. Returns eventually revert to their long-term mean. That means that periods of relative out-performance usually are followed by periods of relative under-performance.The chart below produced by S&P Dow Jones below illustrates the returns for the 3 months ended 31 March 2021. ‘Pure value’ was the second highest performing factor returning 21%. That compares very favourably against ‘pure growth’ which returned only 0.8% for the period.In Australia, the performance differential was just as stark. ASX200 Value returned 8.5% for the 3 months ending March 2021 whereas Growth lost 0.09%.What has changed this year?It is natural to question why the market has switched fromgrowth to value this year. The simple answer is the best performing sectors this year (Q1 of 2021) were energy, financials, materials and real estate. The worst performing were consumer staples, technology, utilities and health care.The value index is heavily under-weight in technology and heavily overweight in financials.To my mind this change has probably been precipitated by the aggressive rollout of the Covid vaccine in the UK and US, and to a lesser extent, Europe. The market is now starting to get a more reliable indication about how far away the global economy is from returning to pre-Covid levels.Growth portfolios exhibit more riskReturns are important, but so is risk. A growth portfolio currently exhibits substantially more risk than a value portfolio because growth company valuations are elevated by historical standards. In fact, the US CAPE ratio, which is a reliable indicator of future medium-term returns, is extremely elevated (see here – when the CAPE is above average, future returns will be below average). This makes sense. If you over-pay for a stock, the only way you can make a profit is if the stock value keeps rising. But the higher its price gets, arguably, the lower the likelihood the price will keep rising, especially if it’s not supported by higher earnings.However, most of these lofty valuations are centred in just a few sectors most notably consumer discretionary (thanks to Amazon) and technology, whereas financials are relatively cheap. By adopting a value approach, you avoid the riskiest companies and sectors in the market, particularly if you agree that some of these valuations are unsustainable.Will this trend continue?Will value continue to outperform growth? The short answer is no one knows.The longer answer is that growth has outperformed value by 2.3% p.a. over the past 10 years, and by more than 21% p.a. over the past 3 years. Over the past 2 to 3 years, I have been tilting my client’s portfolio towards value, mainly to reduce risk but also to generate higher returns. I have been doing this because historical evidence demonstrates that growth will not outperform forever. At some point the market will realise that you cannot make money in the long-run if you pay over 1,000 times annual earnings for a company (e.g. Tesla). I don’t know when that will be. But 95 years of data/evidenced demonstrates that tilting towards value will likely yield better returns over the next 5 to 10 years. The key is not to try to pick short term trends. Medium to longer term trends are far easier to identify.Value options are limitedUnfortunately, there are limited value options for retail investors. There are a couple ETF’s which provide global exposure (being VVLU and VLUE). The only ETF that gives you Australian exposure is QOZ which uses fundamental indexing. I’m not recommending these investments of course, just highlighting they exist.In fact, it’s very important to highlight that there are many low-cost, rules based managed funds that use proven value methodologies that will probably never be available in an ETF format. This is why it’s important to receive independent financial advice, to ensure your portfolio is structured correctly to minimise risk whilst maximising future returns.
The internet and newspapers are awash with stories of properties selling for amounts wildly above reserve. Such news can create FOMO and fuel buyer demand. But buyer overexuberance is rarely sustained for long periods of time. My feeling is that price growth will level out this year and I set out the reasons why below.Properties can sell above reserve for many reasonsLast month, a property located in the Eastern suburbs of Sydney (209 Edgecliff Road, Woollahra) sold for $1.5 million more than the reserve. Of course, this is an extreme example, but stories of properties exceeding reserves suggest the market is running away. I’m not suggesting these results aren’t noteworthy. They are. However, we must remind ourselves that multiple factors can contribute towards a property selling for more than its reserve.Firstly, of course, it could be that the demand is so strong for the property that multiple bidders push the price higher. Some of these bidders may be driven by emotion, particularly home buyers. They might fall in love with the property or their ego might kick in because they don’t want to “lose” at the action. Whatever the motivation, “paying more” contributes to high prices.Secondly, the reserve might be too low. Not all vendors are motivated to maximise their sale price – there might be other factors. Also, they might have an unrealistic expectation of current value (too low). Or maybe the selling agent was keen to quote the lowest possible reserve to attract more potential buyers.Finally, interest rates have a big impact on affordability, particularly for higher-value property, as buyers tend to borrow more. Fixed home loan interest rates of less than 2% p.a. make spending “a little more” on a property more affordable than it was 5+ years ago.Remember, prices have been stagnant for 3 yearsMedian house prices in most capital cities haven’t really changed since early 2018. The reason being is it’s been a pretty tumultuous period for the property market.Tightening in credit (borrowing capacity) occurred throughout 2017 and 2018, which reduced the volume of property buyers, particularly investors.In 2018 and 2019, the ALP’s federal election policy of banning of negative gearing and hiking the rate of capital gain tax weighed on property market sentiment.And then in 2020 we had Covid and resultant lockdowns.All these factors have meant that property prices were largely stagnant for the past three years. The long-term average growth rate of property (as depicted in this chart) is around 7.5% p.a. Therefore, arguably, the intrinsic value of property should be approximately 24% higher than 2017/2018 levels (being 3 years of growth). After all, mean reversion is a strong trend that has been present for many decades.A greater number of motivated buyers than sellersIt is possible that someone wanting to buy property over the past few years has been put off by a number of factors including credit tightening, the 2019 federal election and Covid. All of these events resulted in negative predictions for the property market.However, not all buyers can delay their decision forever, particularly if they you need to buy for practical reasons such as changing locations or increasing the size of accommodation (for families). Therefore, as soon as property market sentiment improved (which only occurred over the past 4-6 months), many buyers that have been waiting on the sidelines rushed into the market. Of course, this pent-up demand will eventually normalise.Post-covid ‘normal’ will encourage discretionary vendorsA ‘discretionary vendor’ is someone that would like to sell a property but is not motivated to do so in any particular time frame. Discretionary vendors would have delayed selling over the past 3 years for the same reasons previously mentioned. However, the recent positive sentiment would probably encourage discretionary vendors to consider whether 2021 is a good time to sell. That said, I think most people are cautious about the prospect of another unexpected factor cropping up that will adversely affect property market sentiment, including random snap lockdowns.I also think that people are more focused on enjoying the resumption of post-lockdown activities such as travel and holidaying, particularly Victorians. But, as Australia’s vaccine rollout continues, albeit at a very slow pace, it will provide the property market with more certainty.Spring has always been considered the best time to sell property, although volume variations between winter and spring are less pronounced than they were a few decades ago. I expect that by the time we get to Spring, snap lockdowns will be less likely and people would have become used to post-covid living. This will allow them to focus on making important (long-term) decisions, such as selling their home. As such, I would not be surprised if the supply of property increases in Spring. An increase in the volume of properties for sale will likely temper price increases.We have seen this beforeI recall that property prices jumped sharply between early 2016 and late 2016 to early 2017. They subsequently levelled off. But during this time it was easy (and for some buyers, tempting) to over-pay for property.In a hotly contested market, buying a property for less than it’s worth is near on impossible. You must be prepared to pay a fair market value. At the same time you must avoid overpaying for property. Demand can spike and then normalise only a few months later. People that overpaid in early 2016 would have been in a loss position (on paper) by the end of 2017.I don’t want to overemphasise the importance of paying the right price – because quality is always more important than price. But it is important to remind ourselves that property prices can move in two directions, not just one.Here’s what I think will happen…I admit that short term predictions are meaningless. In the short term, markets are inherently unpredictable. It is far more important to focus on making good long-term decisions.That said, I’m happy to share what I think could happen to property prices this year.§ Blue-chip suburbs – I think these will continue to perform well but, for the reasons described above, I would not be surprised if price growth between now and the end of the year is less than 10% p.a. That is, price growth will level out.§ Outer-ring suburbs – locations that are dominated by lower income earners will probably under-perform compared to blue-chip locations. The reason is the lowest 40% of income earners have been impacted by Covid the most.§ Popular WFH locations – locations that attract ‘work from home’ (WFH) employees looking for a sea or tree change will probably continue to be dominated by low-supply. That is, there are very few properties available for sale in these locations which could drive prices higher. That said, I think demand from WFH buyers will level out at some stage.Of course, expect the unexpectedIt seems like over the past decade (or so) there have been a series of once-in-a-lifetime events. The GFC, Covid, political uncertainly, floods and fires and so on. Therefore, it is probably wise to expect the unexpected. And if one occurs this year, my prediction above will be wrong.
The word ‘holistic’ is defined by Oxford Languages as “characterised by the belief that the parts of something are intimately interconnected and explicable only by reference to the whole.” This definition implies what a holistic accountant is positioned to offer you the most value. But not all accountants are able to adopt a holistic approach.This blog sets out the key considerations to help you assess whether you would benefit from engaging a holistic accountant.Taxation and investing are inextricably intertwinedTaxation is typically your biggest lifetime expense. Therefore, it makes sense that you should take steps to minimise it. This includes ensuring your investments are tax-effective. The less tax you pay, the more investment returns you keep. The more you keep, the less assets you need to fund retirement.Take superannuation as an example. It’s a wonderful investment vehicle because its concessionally taxed at a rate of 15% for income and 10% for capital gains. However, in retirement (pension), all investment income and gains are tax free (if your account balance is less than $1.7 million after 1 July 2021).Therefore, it is natural for your accountant to recommend contributing into super. But if your super is invested poorly and doesn’t generate any returns, the rate of tax is inconsequential. This demonstrates how intertwined tax and investing is. In this situation, you need an accountant that not only recognises the tax benefits of super, but that can also direct you how to maximise your super investment returns. Of course, there are many examples of how tax and investing are inextricably intertwined, and this is only one.You trust your accountantAccording to research, accountants are rated as the most trusted financial professionals. The main reason for this is that they are independent. Typically, they have nothing to sell to you, other than their advice.Although, 15 to 20 years ago some accountants sold “tax-effective” agribusiness products to their clients. Unfortunately, everyone that invested lost thousands. Most accounting bodies have since banned accountants from selling products to their clients.Back to the topic of independence. Being independent means accountants don’t have any conflicts of interest. Their only interest is what is best for you. This situation has resulted in accountants being the most trusted financial professionals.Your accountant knows a lot about you and your financial position. Together with the trust you have in them, it puts them in a great position to help you.What is a holistic accountant?A holistic accountant is someone that helps you maximise your wealth on an after-tax basis. This is more than just saving tax, which is how people have traditionally thought about accountants. It recognises that no amount of tax structuring can compensate for poor quality investment or a bad strategy. The most amount of value is harnessed when the two factors are optimised. That is, when a client has high quality investments that are structured tax-effectively. The value created through optimising both is greater than the sum of the parts.But not all accountants are able to adopt a holistic approachThere are two hurdles that accountants will face when trying to adopt a holistic approach.The first is a lack of skill and experience. Its challenging for one person to keep on top of both tax and investing. They don’t necessarily have to know everything – just enough to identify any issues and opportunities. If they are successful investors themselves, their personal experience will go a long way to making them better accountants. And if they work in a multi-disciplinary team, including financial advisors and mortgage brokers, they will be able to workshop ideas with their colleagues.The second major limitation could be having the appropriate licenses including an Australian Financial Services License (AFSL) to give financial advice and Australian Credit License (ACL) to give mortgage advice. These licenses are not only onerous to apply for and retain, but they are becoming more costly too. ASIC has increased licensing fees by 160% over the past two years.Holistic accountants can work in two waysThe best arrangement that allows an accountant to adopt a holistic approach is to work in a multi-disciplinary team as it allows them to workshop ideas with their colleagues. When one firms looks after your entire financial needs, the right hand knows what the left hand is doing.The alternate solution is for an accountant to establish relationships with professionals outside of their organisation. When their client has a need, they can refer them to the most suitable professional. Whilst this approach should work in theory, in my experience, it doesn’t work well in practice. It’s just too hard to control the process and outcomes. And open collaboration can be challenging too. That is why at ProSolution we have decided to adopt a multi-disciplinary team approach. But experience tells us that working in the same office is not enough. We must work hard (and have the right systems) at ensuring we proactively collaborate on a daily basis.Who can benefit from holistic accountants?Most people would benefit from having a holistic accountant. However, the more complex your circumstances, the more you probably have to gain.Business owners and self-employed persons almost always should use a holistic accountant. The reason for this is that they tend to have more tax minimisation opportunities available to them. This means a holistic accountant can help them minimise income tax whilst allowing them to invest their profits tax effectively using the right investments and strategies.Investors also have a lot to gain from engaging a holistic accountant. Minimising tax on investments increases your after-tax investment returns. Combining a perfect investment approach/plan with a perfect tax minimisation plan creates tremendous value.How do you find a good holistic accountant?I think you can guess what I’m going to say… That is, you have already found an excellent holistic accountant. Us! But if you ask me for a less selfish answer, I suggest the best way to find a good holistic accountant is by referral, as I have previously explained here.If you would like to discuss your tax/accounting needs with us, you are welcome to email Deb Serginson. She will gather some initial information from you and introduce you to the most suitable person at our firm.
Almost everyone is predicting that property prices will surge higher this year. In fact, the newspapers are already full of stories about properties selling well above reserves.Low stock levels are partly responsible for the currently exuberant property market. That exuberance might cool as more stock becomes available. But the RBA and the government do not want prices to rise too quick as it might create a bubble, and all bubbles pop eventually.Predictions of rising property pricesWestpac’s chief economist, Bill Evans predicts that Australian property prices will rise by 20% over the next two years. Most other economists agree with him.Mr Evans cited Australia’s better-than-expected economic recovery, the vaccine rollout and historically low interest rates as the reasons for his optimistic property price prediction.According to ABS lending indicators, the property market is still dominated by owner-occupiers. However, as overall sentiment improves, it is likely that investors will return to the market and that could further fuel price rises. The government could become concerned if it believed growth rates were unsustainable.Imminent loosening of lending rulesLast year the government announced that it would scrap the ‘responsible lending’ rules in order to speed up loan approval times and eliminate the ‘one-size-fits-all’ approach (i.e. give banks more discretion). The practical consequence of this proposal change is that lenders may no longer have to ascertain what you currently spend each month (including discretionary expenses). Instead, they could use a benchmarks. In effect, for many borrowers, it would increase their borrowing capacity.The Senate Committee recently recommended to the government that these proposed changes become law. The Bill will now need to be debated and passed in the Senate and the House of Representatives before it becomes law. If the Bill is ultimately successful, this could further fuel property prices.Why the RBA cannot increase interest ratesThere are two main reasons why the RBA probably will not increase the Cash Rate.Firstly, as highlighted by Governor Lowe in a speech in October 2020, the lowest 40% of income earners have been impacted by Covid the most. Whereas higher income earns have been largely unaffected. In fact, most recent data indicates the top 40% of income earners are earning more than pre-Covid. Therefore, an increase in interest rates will adversely impact lower income earners who can least afford it.Secondly, an increase in interest rates would be very bad news for the federal (and state) budget deficit. The Australian federal government total borrowings are tipped to reach $1 trillion. A 1% p.a. interest in interest rates would cost the government an additional $10 billion. Politically, this is not an attractive prospect. As such, the government has an incentive to maintain low interest rates.How to cool an overheated property marketIf the RBA doesn’t feel it’s appropriate to cool the property market by increasing the Cash Rate, then the next best method is to change prudential lending standards. They could achieve this in one or a combination of ways:1. Increase interest rates for investor mortgages and leave owner-occupier rates unchanged (investor mortgage rates are already between 0.40% and 0.80% higher than owner-occupier rates). The government (APRA) could do this by requiring the banks to hold more capital for non-owner-occupier loans. That would increase the banks’ cost to hold investment loans and no doubt, they would pass that higher cost onto borrowers.2. Limit the maximum loan to value ratio (LVR) for investment loans. At the moment, investors can borrow up to 90% of a property’s value – meaning they only need a 10% deposit plus costs. The government could reduce these LVR limits, like the Reserve Bank of NZ did last month. Most banks in NZ will now only lend up to 60% of a property’s value to investors. It will be interesting to see whether this is enough to cool the heated NZ property market.3. Increase the benchmark interest rates for investors. A benchmark interest rate is used when a lender calculates your borrowing capacity. It provides a buffer, to provide for future interest rate increases. The higher the benchmark interest rate, the lower your borrowing capacity.When will this happen?I think it’s very likely that the government (APRA) will tighten lending rules for investors sometime over the next 6 to 18 months. Of course, this is dependent on property prices. If price rises are considered sustainable, borrowing rules do not need to change.What should you do now to prepare for tighter lending rules?Lock in access to as much equity as possible over the next 6 months. Depending on the type and location of your property/s, I would probably be inclined to wait one to two months before getting your properties revalued. This will allow for some more comparable sales to occur. Then, around April or May, I would ask your mortgage broker to revalue your properties and lock in my borrowing capacity to 80% of those new valuations. The exact timing of this does depend on your circumstances.Notwithstanding the prospect of future lending rule changes (as discussed above), it is always a good idea to maximise your access to borrowings, even if you have no immediate plans.Don’t get sucked in by FOMO. Run your own raceSome people worry about the prospect of future property price rises and feel a sense of urgency to buy property now, before they rise further. Don’t!Of course, you shouldn’t procrastinate. If you are ready to invest, you should certainly do so. But by the same token, if now is not the right time, do not despair for three reasons:1. My analysis proves that the price you pay for a property is largely irrelevant. What is far more important (by a factor of 10) is the quality of the asset you buy;2. Property is a long term investment. You should plan to hold it for many decades. So there’s no point getting anxious over a few months. Its immaterial; and3. Discretionary vendors will be encouraged by recent results. As such, we should expect the supply of properties ‘on the market’ to increase. This may have a cooling effect on prices – or at least temper price rises. We must remind ourselves that prices are able to move in both directions.One thing is almost for sure. Interest rates are likely to remain low for an extended period of time. That creates financial opportunities in itself.
It is alleged that Sydney-based financial advisor, Melissa Caddick stole $25 million from her clients. She has recently gone “missing”, leaving a trail of disaster for her clients and family members.Many con artists are very cunning and go to great lengths to conceal their wrongdoings. But there are a few simple steps you can take which will virtually eliminate any chance of you being ripped off.An advisor must be an independent intermediately, not a fund managerVirtually all fraud committed by financial advisors occurs when the advisor is in control of the investments. That is, they are investing the money on behalf of their clients. This impairs their independence and allows them to manipulate information.That is why you must demand absolute independence from any advisor you deal with. Your advisor’s job is to hire and/or fire fund managers (based on performance), not be a fund manager themselves. This allows the advisor to always represent your best interests. They are an intermediatory between you and the business investing your money, holding them accountable.At ProSolution, we invest in a variety of managed investments and Exchange Traded Funds (ETFs). At any time, our clients can go directly to the fund managers or ETF providers website to check on the investments and performance. It is a very transparent arrangement. Transparency is the enemy to fraudsters.Make sure there’s good internal controlsIt is acceptable to allow your financial advisor to make investments on your behalf. In fact, that’s what you are paying them to do. However, they should not have any ability to withdraw funds.For example, we use an investment platform to invest our clients’ monies. We can invest any monies on the platform, but we cannot withdraw money from that platform. Only our clients are able to do that. This add another layer of protection.A custodian should hold your assetsAll reputable investment platforms and fund managers use a custodian to hold all investment assets. A custodian protects the investor from counterparty risk. For example, if you use Macquarie investment platform and Macquarie goes bankrupt, your money is protected because it’s held on trust with its custodian. A custodian is an independent legal entity that holds assets on trust for its beneficiaries i.e. you.ASIC and Google searchesThe federal government’s Money Smart website allows you to search the financial advisor register. This will tell you a lot about an advisor. Most importantly, it will tell you if they are licensed and who with (i.e. who holds the Australian Financial Services license, “AFSL”). It will also tell what qualifications they hold, their experience, any disciplinary actions, professional memberships and training records.Melissa Caddick never appeared on this register. So, a simple search conducted by any prospective client would have confirmed that she was not a licensed advisor.Advisors must give you their AFSL number. It is wise to search this AFSL to ensure it’s a legitimate business – you can do that here. You might even contact the licensee to confirm that the advisor is in fact licensed by them. In the case of Melissa Caddick, she was quoting someone’s AFSL number without their knowledge or authority.Of course, a simple Google search is valuable to do also.Recommendations speak volumes, but be careful of confirmation biasOf course, a recommendation from someone we trust typically provides us with a lot of comfort. After all, if the person recommending the advisor has had a good experience for many years, then that is good evidence.However, a recommendation does not substitute all the other checks I have listed above. US conman, Bernie Madoff stole over $80 billion from his clients, many of whom were referred to him by existing investors. When we want something to be true, we refuse to see any signs to the contrary i.e. confirmation bias. Therefore, just because someone you trust has invested, does not mean you shouldn’t conduct your own checks.Too good to be trueNo one can control markets. Therefore, it is impossible to promise clients a certain investment return. All we can control is what we invest in (asset allocation) and the methodologies we use.If someone promises to achieve a certain return, and that return is high, be sceptical. It is virtually impossible to achieve a high return without taking a high risk – the two come hand-in-hand.A financial advisor must sit on your side of the tableThere are two types of professionals that can help you invest – and the two must never be confused. The first one is an investment manager which includes stockbrokers, buyers’ agents, fund managers and so on. Because they only earn an income if you invest with them, they have a conflict of interest. That is, they have a commercial interest in you remaining a client of theirs. Whilst these professionals might be able to create a lot of value for their clients, they are not financial advisors.A financial advisor sits on your side of the table[1]. They should not have any vested interest in what you invest in. That way they are completely independent, so they can analyse your investments without any fear or favour.Three simple checks will protect your wealthOf course, all the ideas I have shared above are important. But the top three are (1) searching the Money Smart financial advisor register (2) researching the AFSL holder and (3) ensuring your advisor is completely independent. These three things will ensure you will never be a victim of fraud.[1] A friend, colleague and financial advisor, Matt Ross uses the term “sits on your side of the table” which I have borrowed on this occasion.
Do you realise that $10,000 invested in Bitcoin 5 years ago would be worth over $1.1 million today? Makes you think, right?With lockdowns occurring almost everywhere around the world, no one is travelling and AirBNB’s business has been decimated. Yet, its share price has risen by more than 40% over the past year, and it is currently worth nearly $160 billion. That is $10 billion more than Australia’s most valuable company, CBA. Oh, by the way, AirBNB lost $5.8bn in the 2020 fiscal year. In fact, it’s never reported a profit after tax. By comparison, CBA makes nearly $10 billion profit per year.The big question is; is this the new normal? Is cryptocurrency the next big thing? Is profit and cash flow no longer an important metric when valuing a business?Cryptical cryptocurrencyI am no expert when it comes to cryptocurrency. In fact, I admit that I know very little about it. But, then again, I have never spent much time researching it because it fails a few basic fundamental tests.When contemplating an investment, it is important to form a view about the future demand for the product or asset involved. It’s not enough that its currently popular. You must ensure it will continue to be popular. Therefore, we must ask ourselves; who’s using cryptocurrency today and why? As far as I can see, at the moment, cryptocurrency is held solely for speculative purposes. Very few people are actually using it as a substitute for traditional currencies. The one exception to this may be money launderers.According to the theory of diffusion of innovation, for cryptocurrency to become a sustainable alternative currency, it must be widely adopted. Renowned author, Dr Geoff Moore argues that there is a large chasm between ‘early adopters’ and the ‘early majority’. A product must cross this chasm in order to become self-sustainable.There are two major impediments stopping cryptocurrency from crossing the chasmFirstly, cryptocurrency is extremely volatile. The share market’s volatility rate is approximately 20% p.a. compared to Bitcoin at just shy of 50% p.a. On average, Bitcoin’s daily volatility rate is 3% i.e. the price changes on average by 3%. Therefore, if you agree to buy some goods, when it comes to paying for them in 7 days’ time those, goods could end up costing you nearly 20% more!For cryptocurrency to achieve wide adoption, its volatility rate needs to be around 4-5% p.a. – one tenth of what it currently is!Secondly, one of cryptocurrency’s selling points is its anonymity. You can hold cryptocurrency without revealing anything about your identity. That makes it a perfect exchange for criminals to use. Governments around the world would have a lot to lose if cryptocurrency was widely used. It would be difficult to operate their tax surveillance activities and it would make policing criminal activity more difficult. If this occurred, governments would start regulating cryptocurrencies in the same way they regulate traditional currencies.A market dominated by speculatorsYou must invest in assets that have application other than wealth accumulation. For example, investing in property in a location that is dominated by owner-occupiers is a wise strategy. If the investment market dries up for any reason, demand for property in that location will remain largely intact.The same is true for cryptocurrencies. At the moment, the market is dominated by speculators and maybe money launderers. There are very few actual users. And cryptocurrencies are a long way away from achieving wide acceptance, and probably never will.If you are going to indulge in pure speculation, only do so with money you can afford to lose.Tech valuations aren’t based on profit and cash flowWhen considering a private equity investment opportunity on behalf of my clients almost 10 years ago, an investment banker told me that “you cannot value tech companies the same way you value traditional companies”. He was suggesting profitability didn’t matter. Anyway, I declined the investment opportunity and the business went into liquidation a few years later.Prior to starting ProSolution in 2002, I worked for Deloitte preparing business valuations for listed companies. It is widely accepted that the value of a company is equal to the present value of its future cash flows. If it has no future free cash flows, it arguably has no value. An exception to this is where a company owns an asset it can sell such as patents or software (intellectual property).The popular view is not always rightIn the year 2000, at the height of the dot-com bubble, the universally held view was that US tech company, Cisco Systems Inc. was going to be the first company in the world to reach a $1 trillion valuation and that would happen within the next 10-15 years. At the time, its market capitulation (value) was circa $500 billion. More than two decades later, Cisco is worth less than $200 billion. The market was wrong!Fundamentals never changeTo suggest that the ‘new economy’ requires new valuation methodologies is absolute nonsense. There are certain fundamentals that a business must possess to be considered investment grade including predictable and stable cash flows, strong profitability, a solid balance sheet and a history of wisely reinvesting profit or paying dividends. These metrics apply to all industries. They always have. And they always will.So, why is the share market valuing AirBNB at $160 billion? It’s not the only non-profit-making company with insane valuations – there’s lots of them e.g. Tesla, Afterpay… the list is long.There could be many reasons for this. Firstly, the influx of novice share investors around the world has been cited for creating some unusual behaviour. With casinos closed, people are turning to the share market. Secondly, low interest rates entice investors to mis-price risk. Thirdly, the work-from-home trend imposed due to lockdowns makes technology a popular investment.Irrespective of the cause, if you are going to invest in a stock that has no fundamentals, you must time your investment perfectly. Popularity is fleeting. It can change overnight. So, your investment returns are dependent on you selling before any change in popularity.Alternatively, if that feels too risky, stop speculating and start investing.There’s always going to be something more popularInvestment fads come and go. They always have. There’s always an asset that promises better than average returns – read: get rich quick. However, the true rewards go to the investors that can ignore the shiny objects and stick with fundamentally sound investment for the long run. Popularity is a wonderful driver of value in the short term, but unfortunately it never lasts, only fundamentals do.Fundamentals will be popular again one day soon.
Choosing the right accountant can make a world of difference. A proactive accountant will share tax-saving and wealth-building ideas, be available to answer questions during the year and ensure you never end up in the ATO’s ‘bad-books’.Common complaintsThere are two common complaints about accountants.Firstly, that they don’t provide proactive advice, including wealth building ideas. They are so involved in their day-to-day work that they don’t stop to ask themselves; “if I was in this client’s position, what would I do?” This is an incredibly valuable question to ask. Most clients want to feel confident that if they are missing any opportunities, that their accountant will point them out.The second most common complaint is that they are not quick to turn work around. This includes replying to emails/phone calls and completing compliance work such as tax returns. Such delays can cost clients a lot in terms of missed opportunities, delayed decision making and make it difficult to implement financial plans.What's involved in switching accountants?Switching accountants is actually a very simple and easy task.Once you have agreed to appoint a new accountant as your tax agent, they will immediately write to your incumbent accountant for two reasons:1. To confirm that there are no ethical considerations that may prevent them from accepting you as a new client – this is referred to as an ‘ethical clearance letter’ and is common in the accounting industry; and2. Request the transfer of your documentation including most recent year’s tax returns, any financial statements, accounting system access, depreciation and cost base schedules, entity documentation such as Corporate Constitutions for companies, Trust Deeds and so on.As a matter of professional courtesy, virtually all accountants respond to such requests promptly and often without contacting their (past) client. If you owe any outstanding fees, it is commonplace for an accountant to withhold their clearance letter until all fees are paid in full.Apart from signing an engagement letter with your new accountant, there is nothing you need to do.Do you have to tell the accountant you're leaving?The short answer is no. There is no obligation to have any contact with your incumbent accountant.If you are self-employed or operate a small business, you may have a close relationship with your accountant and are in more regular contact with them. In this situation, it may be courteous that you inform them of your plans to move to a new accountant, before any ethical clearance letters are set out.But there is certainly no obligation to do so, and very much depends on your relationship with them and the circumstances surrounding your departure.What will my new accountant do after they are appointed?I can’t speak for other accountants but typically there are a few steps we take when a new client appoints us, namely:§ Update the ATO’s records so that it knows that we are your new tax agent and where to send future correspondence. It may be necessary to update other registrations also, such as ASIC if you have a company.§ Review past tax returns and schedules to identify any mistakes, omissions or planning matters. This is even more important if you have a trading business, as there are more matters to consider.§ Once we have completed a review, we will be in a position to set out your key milestones, which could include the date when we will undertake tax planning, when we will require your information to start preparing your next return and so on.Does changing accountants attract the ATO’s attention?Some people are concerned that changing accountants might invite negative attention from the ATO. This is not the case. Approximately two thirds of Australians use a tax agent to lodge their tax return, so it’s natural for a certain number of people to change providers each year. There is nothing unusual with doing so.How to find the right accountant for youThe best way to find a good accountant is by referral. Speak to friends, family, colleagues and business associates. Someone is bound to have a recommendation for you.Whilst there are some generic questions you can ask, my advice is to focus your questioning on three topics:§ How many clients do they have that are in similar circumstances to you? Like with most professional services, experience is critical. If you do something every day, you’re likely to become an expert.§ What systems do they have in place to ensure that they deliver proactive advice? For example, we have a checklist we complete after each tax return we prepare that forces us to think about the big picture and look for all financial opportunities. Checklists and systems are crucial.§ How quickly do they respond to questions? There is nothing more frustrating than having to wait weeks for an answer to a simple question. I think it’s reasonable to expect a response to most of your questions within at least one business day. It might not be possible to give you the complete answer within that timeframe, but confirmation that they are working on a response is often satisfactory.Switching accountants is painlessSwitching accountants is a very simple, quick and easy process. In fact, your new accountant can do all the work.If you are unsatisfied with your current accountant, discuss your concerns with them. If they do not make amends, do not hesitate to move on. Because a proactive and holistic accountant is worth their weight in gold.
If the recent property price growth predictions become reality over the next couple of years, more homeowners may become ‘priced out’ of their desired location. What might be affordable today, could quickly become unaffordable, as prices can rise quickly.Sometimes it’s not possible to buy your dream home in one fell swoop. But do not despair. A steppingstone strategy could be the solution.Buying a dream home has always been a struggle, embrace itProperty has always seemed expensive. I bought my first property 23 years ago for $150,000 and it was a big deal. It was a stretch, financially. It was a dump that needed renovating.Getting onto the property ladder and buying your dream home will take work. Some sacrifices. A little bit of hustling. But that has always been the case. Focus on the solutions, not the problems.Focus on building your deposit/equityIf you are income-rich but asset poor, you need to build equity to extend your purchasing power. That equity could come in the form of cash savings/deposit or equity in an existing property.If your income earning capacity is limited, then accumulating more equity reduces the amount you need to borrow and as such, you are closer to being able to buy your dream home.Either way, your sole goal should be to build equity.How to implement a steppingstone strategyA steppingstone strategy involves buying an owner-occupier property with the sole aim of accumulating as much equity as possible, as fast as possible. Then, selling that property and using the equity to upgrade to a superior property. And continuing to do that until you have attained your dream home.There are three key steps to this strategy.Step 1: Pick a location that has attractive short term growth prospectsBuying a property in a location that is popular and is enjoying rising property price momentum can do a lot of the heavy lifting for you.The goal is to create equity as soon as possible. Therefore, it’s not as important to form a view about a given location’s long term growth prospects, unlike when buying a pure investment property. You just want to form a view about whether the price momentum will continue in the short term.Typically, locations that are gentrifying will exhibit above average growth rates. Gentrifying suburbs tend to have similar themes such as a changing demographic, increased renovation activity, new infrastructure and/or amenities that enhance the community feel (liveability) of the location and so on.Whilst it’s important to not buy at the peak of the market i.e. after prices have risen as much as they will, it is equally too risky to try to pick the next growth suburb, because you could be wrong. Essentially, you want recent evidence that the rising demand for the location is generating price growth. And that prices still have some future upside.Step 2: Buy an older house with scope to manufacture equityOften, but not always, it is best to buy a house instead of a townhouse, villa unit or apartment. Firstly, houses tend to have proportionately more land value. Secondly, houses tend to offer more scope to improve their overall value e.g. renovation of bathrooms and kitchens, landscaping, adding a room/living area and so on. This is called manufacturing equity when the property’s value appreciates by more than the cost of the improvements made.Older houses (e.g. built pre-1970’s) offer better opportunities than newer ones, because there tends to be greater scope to make improvements, such as adding an additional bedroom, adding living areas or make it ‘open plan’. The risk of unexpected cost overruns is less likely if you stick to making cosmetic improvements i.e. no structural changes. It is also important that the finished product is aimed at the typical buyer in that location – it doesn’t have to appeal to your tastes – just have wide appeal to prospective buyers.It is important to note that suburbs closer to the CBD tend to offer better growth prospects. Therefore, start with the blue-chip suburbs and then move further out until you find a location that allows you to buy a house that fits within your budget.Sub-dividing a large block and constructing a second dwelling can also be a great way to manufacture (build) equity. It’s important to obtain tax advice from an experienced tax agent before you undertake such a project.Step 3: Occupy the property to avoid CGTBuying, renovating and selling property is not a costless exercise. You pay stamp duty when you buy and agent fees when you sell. The last thing you want to do is make a donation to the ATO, as it will eat into your financial gains. Therefore, if you can nominate the property as your main residence, it will exempt you from paying capital gains tax (CGT).It might be difficult to occupy the property for the entire ownership period, especially if you need to complete significant renovations, but that should not prevent you from continuing to claim it as your main residence[1].In summaryBuy a house that is located in a suburb that is growing in popularity, as close to the CBD as your budget will allow. Select a property that has plenty of scope to add value e.g. renovate. Hold it for 2 to 7 years (as short as possible) before selling and moving closer to your desired (dream) location.Beware; this is a higher risk strategyWarren Buffett says risk comes from not knowing what you’re doing. This strategy will require a lot of homework including speaking to various property professionals. You must upskill yourself so that you can identify the best property prospects. It is still worth engaging a buyers’ agent as long as they have experience in buying the types of property in the locations you are targeting.In addition to upskilling yourself, you will need to assemble an experienced team including a mortgage broker, building inspector (you don’t want any nasty surprises), possibly a builder and maybe also financial advisor. Advice that makes money, pays for itself.The key assumption here is that the market will move in your favour. Of course, there is a risk that this might not happen, and you could be caught living in this property for longer than expected.Can your family help you?If you have enough income but don’t have a sufficient deposit, and alternative to the above strategy is to use a family guarantee, which I have discussed previously.Risk and rewardI acknowledge this strategy is more hands-on and won’t suit everyone. However, there cannot be any reward without taking some risk and working hard. It might take you a few properties (steppingstones) and years to get to your desired location, but once you’re there, you and your family will enjoy the benefits for decades to come.[1] Of course, this is a generalisation, and you must obtain personalised tax advice.
Exchange Traded Funds (or ETF’s) have become very popular, particularly over the past 5 years. In fact, the amounts invested in ETF’s has doubled over this time. Last year (2020), Australians invested over $20 billion in ETFs.It is true that there are some advantages to investing in ETF’s. However, of course, not all ETF’s make good investments and there are some common pitfalls you must be aware of.What is an ETF?An ETF is simply a managed fund that is owned in a company structure and that company is listed on the Australian Stock Exchange. The only assets the company holds are the underlying investments. For example, for an ASX200 ETF (such as A200 or IOZ), the company would own the top 200 listed stocks proportionally according to their market capitalisation (value).You can invest in an ETF using an online share brokage account, such as Commsec.What are the advantages of ETF’sPrior to ETF’s, the only way to invest in a managed (or index) fund was directly with the investment manager e.g. Vanguard.This required you to fill out an application form each time you wanted to make a new investment. The managed fund would charge you a fee each time you invested and/or divested (this is called a buy/sell spread). And some of the lower cost ‘wholesale’ funds were only available to people if they invested a minimum of $500,000.ETF’s provide a good solution as they allow you to invest in a wholesale managed fund for the cost of a share trade (which can be as low as $10) and no paperwork is required.ETF’s and LIC’s are differentETF’s tend to utilise rules-based investment methodologies (commonly referred to as index funds). These products tend to have two common characteristics. Firstly, they are very low-cost. Investment management fees are typically below 0.40% p.a. (some as low as 0.04% p.a.) Secondly, they tend to be very well diversified. You can find a list of all ETF products here.However, Listed Investment Companies (or LIC’s) are distinctly different as they tend to employ active funds management (remember that few active funds outperform their indexes in the long run). This means these funds can be more concentrated (less diversification) and tend to charge higher investment fees.Beware that they are designed for retail investorsETF’s are mainly used by retail investors (DIY investors), but a growing number of financial advisors have started to use them. In the US, substantially more institutional investors (such as large super funds) use ETF’s, but this trend has now occurred in Australia. This creates a few notable consequences.Firstly, ETF providers will promote products that align with ‘popular’ themes such as investing in technology. Popular investments attract more investors and the more money an ETF attracts, the more fees the ETF provider generates. However, we all know that what is popular doesn’t always make a sound investment. In fact, it is proven (empirical data) that investors that chase trends tend to achieve poor investment performance.Secondly, because ETF’s are mainly targeted towards unsophisticated (DIY) investors, the investment methodology and thematic must be easy to understand and communicate (i.e. marketing). If the methodology has some complexity, albeit fundamentally sound, it is less likely to attract enough interest. This means that some otherwise very sound (and attractive) methodologies will never be offered in an ETF format. As such, if you are limited to investing in ETF’s only, you are missing out on some sound and attractive investment opportunities.If they are not popular, they won’t surviveIf an ETF product does not attract enough money, at some point an ETF provider will likely wind the product up. You need to take this into account if you identify an ETF that you would like to use but may be less popular. There is no point taking a medium to long term investment position if the product/investment isn’t going to operate long enough for your investment strategy/thesis to play out.Make sure it does what it says on the tinThe ETF provider’s goal is to get you to invest. Therefore, they will name and describe the product to make it seem as attractive as possible. But you should never allow yourself to be fooled by this marketing. It is imperative that you conduct thorough research (for example, our firm spends a lot of money on such research, because its critical).By way of example, there is a “Battery Tech & Lithium” ETF with the ticker code ACDC. You might think that investing in companies in the battery space makes sense given electric vehicles are becoming more popular. However, when you look some of the companies this ETF invests in, some give you exposure to other sectors e.g. it invests in Renault and Nissan. I’d argue that is more of an automotive exposure, than battery, and may not be desirable. This ETF also has a significant concentration in one geographical market (27% in Japan). The index it uses is relatively new and unproven. And, as you would expect, it invests in US darling stock, Tesla, which is trading on a PE ratio of over 1,300 times (anything over 20 is relatively high)!I’m not necessarily suggesting this ETF is a poor investment, although I do have some reservations and I have not recommended it to any of my clients. But my main point is that you must undertake thorough due diligence prior to making any investment. Our research provider looks at the investment team’s experience, investment approach, transparency, liquidity, fees, performance and risks.Other considerationsThere are a few other important factors to consider:§ Is the ETF trading close to its Net Tangible Asset (NTA) valuation. NTA is how much the underlying investments are worth. Sometimes an ETF can trade as a discount or premium to NTA value. Admittedly, this is more common with LIC’s.§ Is there enough liquidity? That is, should you want to sell your ETF shares, will there be someone that will buy them from you? ‘Market makers’ will provide liquidity if required, so make sure they use a reputable one.§ Some ETF products are synthetic. That is, they do not hold the physical underlying assets/securities. Instead, they use financial derivatives (such as swaps) to achieve the desired exposure. This is more common for mineral/resource ETF e.g. a gold ETF. Typically, I would recommend avoiding synthetic ETF’s as they lack transparency, which makes it more difficult to assess risk.Proceed with cautionETF’s offer some great advantages.If you are a DIY investor, I would suggest you only invest in the ETF’s that provide broad-based (i.e. proven indexes) exposure to one or multiple geographical markets. For example, Vanguard offers some really good, diversified ETF’s – see here.However, if you have a lot of money to invest, it would be wiser to use a combination of ETF’s and managed funds and invest in obtaining independent financial advice.
It is generally an accepted investment principal that diversification can reduce your risk and improve investment returns. The common vernacular is, spread your eggs amongst various baskets. I would agree with this principle, so long as it doesn't result in deterioration of investment asset quality.Sometimes property investors should not diversify. That's because the quality of your investments, will determine your future investment returns. You cannot expect to invest in average quality assets and expect to generate above average quality returns. If you're going to invest in property, you are much better off to buy one very high-quality property, than two average quality properties.To be a successful investor, you must invest in the highest quality property that your budget allows.It is also imperative to recognise that the dollar value appreciation of your property is an important metric which indicates whether you will enjoy a comfortable retirement.In retirement, we pay for living expenses in dollars, not percentagesThe value appreciation of property in dollar terms is an important metric. Whilst we can’t use capital growth to pay for living expenses, unless we sell the property, it still impacts our overall wealth. For example, if a retiree had $1,000,000 of super and wanted to spend $100,000 per year, they risk running out of super within 10 years (ignoring future investment earnings for simplicity). However, if at the same time, their property portfolio was appreciating by $200,000 per year, they are actually in a relatively strong financial position.In 1991, 30 years ago, the median house price appreciated by around $10,000 per year – which is equivalent to $20,000 in today’s dollars (i.e., after adjusting for inflation). Since the average self-funded retiree spends circa $100,000 per year, this property appreciation ($20,000) is equivalent to 2.5 months of living expenses.At the moment, the average median house price across Melbourne and Sydney is around $1,000,000. Assuming the median property appreciates by approximately 6% per annum (on average, over the long run), that equates to a dollar value rise of $60,000 (i.e., 6% of $1 million). That is equivalent to over 7 months of living expenses.Annual property price appreciation in real dollar terms over the past 30 yearsThe chart below illustrates the historic change in median property price between 1991 and 2021, adjusted for inflation, that is, in today's dollars. The chart also includes a projection of how the median property price might appreciate over the next 30 years, assuming a growth rate of 6.50% p.a. and an inflation rate of 1.50% p.a.This chart suggests that the median property value might be appreciating at a rate of over a $100,000 per year by around year 2030-2033 in today's dollars. And by 2045, the median property price may be appreciating by circa $200,000 in today's dollars – equivalent to two years of living expenses.Putting aside liquidity considerations, this suggests that if you're at least 15 to 20 years away from retirement, that investing in one investment grade property could be sufficient to assist in funding your retirement.What does this mean for investors?When it comes to investing in property, quality matters a lot more than quantity. The above chart suggests that owning one investment property (worth $1m or more) might be sufficient.Some investors are obsessed with acquiring a multi-property portfolio. They express their investment goals in terms of the number of properties, rather than their financial performance. Having such a goal does not encourage you to focus on the quality of the underlying assets, merely the number.As I wrote about in this blog a few weeks ago, over the last three to four decades, the Australian property market has benefited from a rising tide. Almost anyone that bought a property in the 1970s or 1980s has probably done well, capital-growth wise. However, in that blog, I suggest that this rising tide has been stimulated by a handful of unique factors that probably won't persist over the next three to four decades. As such, I suggested investors should develop their investment strategy with the underlying assumption that this rising tide will not continue. As such, asset selection (i.e., the quality of the property you invest in) is likely to be a more important factor over the next 30 years, than it was over the last 30 years. The chart above suggests that one high-quality, investment-grade property will do a lot of the heavy lifting in 20 to 30 years’ time with respect to funding retirement.How do you put all your property eggs in one basket, safely?The first thing I invite you to do is to examine any preconceived notions in regard to your maximum investment property budget (purchase price). Most investors will have a purchase price limit. Sometimes it's wise to test these comfort levels, as long as it's financially prudent to do so. Increasing your budget may allow you to buy a higher quality property.If you're going to invest over a million dollars into a property, it makes absolute sense to get professional advice in relation to which property to buy (i.e., use a buyers’ agent). The difference between an investment grade property and a property that has some impaired attributes in terms of investment performance, can be significant. For example, a 1% p.a. higher growth rate over 20 years will result in over $500,000 more equity in today’s dollars. Would you pay $20,000 to make $500,000? I would. Honest and professional investment property advice easily pays for itself in the long run.If you have more than $2 million to invest, it may be wise to spread your money across two or more properties. Geographical diversifying your property portfolio, can serve you well on many fronts, which I discuss further below.If you are going to put all your property eggs in one basket, then one factor that you'll need to give a lot of consideration to, is any potential capital gains tax liabilities (when you sell the property). One of the downsides of property, is that it's a lumpy asset, which means that you need to make a decision to sell all or none of the asset (unlike shares, which you can sell in smaller tranches). This means you could crystalize a significant capital gains tax liability in the future, particularly if you buy a high growth asset. It would be wise to consider various ownership structures that might help you minimise any future capital gains tax liabilities.Of course, there are some risksThere are some risks associated with investing in one property as opposed to multiple properties. The first one is that you only have one tenant. If your property becomes vacant, you'll have to rely on your own financial resources to pay all holding costs, including mortgage repayments.The second risk of only holding one investment property is that you should expect periods of time where you won’t experience any value appreciation, as highlighted in this blog. Whilst practically, this has no financial implications, as we know we must hold property for the long-term to enjoy the financial benefits. However, it is something to consider from a risk profile perspective, to ensure you are comfortable with this potential outcome.Finally, one of the benefits of investing in multiple properties, is that it gives you greater flexibility, particularly in retirement. For example, an investor that buys three investment properties when they're 20 or so years away from retirement, can do so with the intention of potentially selling one property after they've retired, to allow them to substantially reduce their debt exposure at that time. Whereas if you only hold one property, you don't have that flexibility.Focus on qualityThe purpose of this blog is to make two important points.Firstly, an investment grade house in most capital cities costs a million dollars or more these days. This is a lot more than what properties cost 30 years ago. As such, whilst the percentage capital growth rate is important to focus on, it is also important to understand the dollar value impact on our financial position. Put simply, one investment grade property will over a much greater impact on our financial position than it did 30 years ago.Secondly, if you're going to obsess about one thing with respect to property investing, it should be about quality. Quality is absolutely critical. You are much better to put all your money in the highest quality asset you can afford, than spreading your money across several average quality assets. And leveling up in terms of quality is the best way to reduce your investment risk. It's a little bit like buying a pink diamond. A pink diamond is rarer than a normal white diamond, and as such, due to immutable laws of supply and demand, will always be more valuable than a white diamond. Therefore, you only want to invest in pink diamonds.If you want above-average returns, you must invest in above-average quality property.
One good financial decision will have positive consequences. But five good decisions in a row will be life changing. It will create a lot more than five times the positive outcomes than one good decision will. That’s because good decisions are a compounding asset.Our lives are a sum total of the choices we have made - Wayne Dyer.When it comes to building wealth and fulfilling your lifestyles goals, true success comes when you master all six facets: (1) good cash flow management, (2) having a clear and efficient investment strategy, (3) invest in the right assets using the right methodologies, (4) optimising superannuation, (5) minimising tax and (6) protecting your assets for your family’s benefit.We all know that to achieve a good level of health requires us to focus on optimising our diet, exercise regularly and get plenty of quality sleep. We also realise that we will not achieve our full potential (health wise) by just focusing on only one of these factors. Optimising your finances is the same – a holistic approach yields the best results, which takes several good decisions.Here are some examples of some good financial decisions you can make.(a) stop wasting your moneyMoney is wasted on things that don’t improve your standard of living. The key here is to make conscious financial decisions. If you aren’t conscious about your expenditure, your money will be wasted on things that you really don’t care about.Holidays are a very good example of conscious expenditure. We tend to get a lot of happiness and satisfaction from holidays. They creates long-lasting memories. And if we stopped spending money on holidays, we’d really miss it.However, buying takeaway coffee is a good example of unconscious expenditure. They are nice to have, but if you are able to make yourself a cup of coffee at work, you probably won’t miss it. These small expenses tend to add up to a surprising amount. Two takeaway coffees per day might end up costing you more than $10,000 per year! That is more than one investment property’s holding costs!It is pretty simple to implement good cash flow practices, and it doesn’t have to be a painful process. The fact is that you won’t miss spending money in wasteful items. This blog last year walks you through a simple structure many of my clients use with great success.(b) invest in the right assetsI believe investing is easy if you stick to sound fundamentals, only adopt evidence-based strategies and never watch the news or read newspapers. That is why I wrote Investopoly – to provide a set of rules, a framework, to guide people down the right path and avoid making financial mistakes.What you invest in (the asset), and which methodology you chose to adopt, will determine your future returns. In a way, your destiny is determined when the initial decision is made . It only takes one decision to buy the right property or to seek advice. Once that decision is made, its merely a matter of waiting a decade or two for the results to materialise. These ‘decisions’ are incredibly important to get 100% right.(c) ask for helpTwo points. Firstly, you don’t know what you don’t know. Secondly, experience is far more important than knowledge. You can fast track knowledge, but there are no shortcuts with experience. Experience tells you how and when to apply knowledge – you need both to avoid making mistakes.Therefore, the question is, do you want to make your own mistakes or pay someone that has already learnt how to avoid these often inconspicuous mistakes? The choice is yours. Seeking advice from someone with more experience than you is often the lowest-cost and most successful approach.Please don’t tell my sons I said this, but I don’t know everything. Yes, it's true. J For example, after my wife and I sold a commercial property last year I paid a tax expert for some specific advice. I probably could have worked it out myself, but I didn’t have enough experience. As it turned out, the advice saved us literally hundreds of thousands of dollars! Just because you might be able to work it out yourself, doesn’t mean you should. Don’t let your ego get in the way of asking for help. Risk comes from not knowing what you’re doing (Buffett quote).Asking yourself (1) who can tell me what to do, not (2) what should I do, is a good decision. It’s a who question, not what question.(d) resist the temptation to cut cornersIt is tempting to find an “investment” like Tesla, Afterpay or Bitcoin to make a quick 10x return. But this isn’t a successful methodology because the likelihood of you finding the next unicorn is very low. And to do it consistently, year after year, without making a mistake is near on impossible. Even the ‘experts’ can’t do this.Investing with the aim of achieving much better than average returns (I.e. way more than 10% p.a.) is a fool’s game. It’s a mere distraction. As soon as you say ‘yes’ to something, you inadvertently say ‘no’ to something else. So, as soon as you say ‘yes’ to trying to cut corners and make some quick profit, you say ‘no’ to implementing a far more predictable, repeatable and successful investment methodology.Having the discipline to ignore the shiny objects isn’t always easy. In the short run, you’ll feel like you’ve missed out. That’s because the rewards from sound, evidence-based strategies may only be evident in the long run.There’s only a handful of decisions you need to get rightIt is your money. It is your life. And it is your prerogative about what decisions you make. But the reality is that there’s probably 5 or less financial decisions you need to perfect in your lifetime. If you can nail those financial decisions, you will enjoy financial security. Four simple decisions such as the ones listed below is a perfect example:1. We will track our discretionary expenditure;2. We will engage an independent financial advisor to develop and implement a plan for us;3. We will not invest in speculative assets or take silly risks; and4. We will always invest a set amount of cash flow each year.If you are unhappy with your current financial position, I suggest you focus on improving the decisions you make.
A common question people ask is, “can property values continue to rise at the same rate which they have over the past 3 to 4 decades?” The short answer is no, they cannot. Mathematically, this is unlikely to occur as incomes are not rising at the same pace.I came across the interesting graphic/visualisation (below) which sets out how property values have changed in real terms (excluding inflation) since 1970. The surprise for me was how much Canberra prices have risen (thanks, public servants and politicians!) and how attractive Brisbane prices appear.https://public.flourish.studio/visualisation/4555913/What has driven growth over the past 3 to 4 decades?In order to form a view with respect to future property growth, it is important to understand what has driven property values over the past few decades. There have been some events which are unlikely to be repeated. Below are some of the key factors, in no particular order.Population growthAustralia’s population has been growing at a faster rate than other developed countries, mainly due to higher levels of overseas immigration. Population growth increases demand for housing, especially in capital cities as skilled migrants are attracted to job opportunities.Increase in access to borrowingsAustralians are borrowing 2 to 3 times more than they were in the 1970s. Banking deregulation in the ’80s and ‘90s opened up more competition between lenders and reduced home loan margins i.e. mortgages became cheaper. The tables were turned, and suddenly potential borrowers were being approached (marketed to) by the banks, not the other way around.Increase in household incomeIn a family unit, it is a lot more common for both spouses to work compared to fifty years ago. In fact, often it is necessary for both spouses to work in order to afford to live in their desired location. The transition from one to two household incomes has extended property purchasing power.People are buying their first home later in lifeIn my experience, most first home buyers are in their late twenties to early thirties. This is partly because homes are relatively unaffordable for younger people in their early twenties.But also, younger people tend to prefer to focus on their career thereby maximising their income earning capacity before they buy a home and/or have children. This puts them in a relatively stronger financial position compared to first home buyers 50 years ago.Access to more informationThe internet has opened up a wealth of information. People are able to educate themselves about how to build wealth with property, including the advantages of borrowing to invest. This blog is an example of this. I write over 50,000 words a year, sharing almost 20 years of experience, which people can read for free. Such information was non-existent before the 2000s.More, bigger, betterDrive around a newly developed residential suburb and you will notice that the homes are massive. More bedrooms, bigger living areas and smaller back yards. New home buyers are building larger homes with improved amenities and finishes compared to a few decades ago. These improvements contribute towards the increase in the value of property. The same is true when people renovate existing properties in established locations.All of the above factors have contributed significantly to property price growth over the past 3 to 4 decades.Which of these will reoccur over the next 20 plus years?Some of the above factors will persist, some won’t, and some might impede future growth. Here are the factors that I think will influence property price growth over the next few decades.Population growth will be equal or higherOf course, the negative health and economic impacts caused by Covid have been devastating, and I don’t seek to diminish that. However, from a global perspective, Australia’s handling of the virus will be looked upon very favourably. Whilst New Zealand has also done well, Australia offers more job opportunities.As such, I think Australia’s handling of the virus will be the biggest contributor to an increase in demand for immigration in the future. Assuming the government’s immigration policy remains unchanged, our population growth rate is likely to be the same or higher over the coming decades. This will be a positive contributor to property demand.Borrowing capacity will not increaseBanks are willing to lend borrowers approximately two to three times more compared to the 1980s. However, borrowing capacity has reduced over recent years. In summary, lending capacity rose significantly between early 1990s and 2007/8. However, since the GFC, borrowing capacity has contracted. It is my view that borrowing capacity won’t change materially from hereon in.Therefore, the event of large increases in borrowing capacity (i.e. loose lending standards) won’t be repeated again.Incomes will also constrain borrowing capacityIt is unlikely that incomes will rise at a rate greater than inflation, at least not in the foreseeable future anyway. That means, in real terms, incomes will either be flat or falling.In addition, in my experience, families with young children are already working as much as they can, so there’s limited ability to increase their income further. As such, the income uplift created by both spouses seeking work (compared to just one), won’t be repeated. [As a side note, the cost of childcare is a real problem. People often balk at the cost of private school fees, but childcare can sometimes cost more.]Overall, at a macro level, supply of new lending and incomes will not have the same positive impact on property growth as they did previously.Congestion will get worseMost economists and demographers would agree that Australia has under-invested in infrastructure including roads and public transport. As such, our capital cities are becoming more congested. This trend is unlikely to ease anytime soon. As such, living closer to the CBD becomes even more attractive.Yes, working from home will be a permanent trend. But I believe that most people will opt for a hybrid model consisting of a few days in the office and a few at home. More importantly, there are other attractions to living in a city including proximity to family and friends, schools and recreational/entertainment opportunities.These factors will likely include demand for, and therefore prices of, property growth located in inner-ring, blue-chip locations.Economic inequality will get worseSadly, the gap between rich and poor gets wider each year. Unfortunately, Covid will exacerbate this as the lockdowns have clearly impacted lower income earners (whereas data shows the top 40% of income earners have not been impacted at all).If this trend continues (and it almost certainly will) there will be a significant cohort of high-income earners that will be willing and able to pay more for property in sort after locations. As such, the value gap between blue-chip locations and outer suburbs will widen.We may not be able to rely upon a rising tideAs the saying goes, in a rising tide, all ships rise. Since the early 1980s, the property market has benefited from a rising tide (for the reasons discussed above). You could have bought a property in the early 80’s in any capital city in Australia and it would have made you a lot of money.But the tide may not continue to rise. Population growth is probably the only factor that will universally contribute to positive property value appreciation. However, apart from that, the factors that have helped middle-to-lower income earners increase their purchasing power over the past few decades, probably won’t repeat themselves.Not all property will rise in value perpetuallyThis means the type and location of the property you invest in will matter a lot more over the next few decades than it did over the previous few decades.It is best to adopt the investment assumption that the ‘rising tide’ will not continue. Therefore, asset selection is critical to get right.Even if this assumption turns out to be incorrect, you’ll achieve better than average returns.
Interest rates on savings accounts were over 5% p.a. in 2011… only 10 years ago. Today, you would be lucky to receive more than 0.5% p.a.! That means your savings won’t even keep pace with inflation, let alone provide you with any investment return.As such, many investors are wondering what to do with their cash savings, other than depositing the money with a bank.This blog discusses some alternatives to bank deposits. However, please do not make any financial decisions solely on the information contained here. It is general information only and does not consider your unique circumstances. It important that you receive personalised and independent financial advice before investing any monies.I have listed each investment option in order of risk (the lowest risk options first).Option 1: Deposit monies in an offset linked to a mortgageIf you have a variable rate mortgage, typically the best use of cash savings is to deposit the monies in a linked offset account. Given home loan interest rates range between 2% and 3.5% (depending on whether it’s a home or investment loan), this will save (or make) you a lot more interest compared to depositing your money in a savings account. Most importantly, it’s a risk-free return. That is, your return will always be equal to the mortgage’s interest rate – there is no risk.Of course, you should offset non-tax-deductible (home loan) debt first. Once your home loan is fully offset/repaid, you should then offset investment debt.Sometimes people worry that offsetting an investment loan will reduce their negative gearing tax benefits. However, firstly, negative gearing benefits are relatively small at current interest rates – investors aren’t saving huge amounts of tax anyway. Secondly, if you invest your cash savings elsewhere, you will have to pay tax on any returns (unless one spouse has a low/no income). Therefore, as both options have tax consequences, they net each-other out, and are therefore not relevant.Option 2: Invest in government and treasury bondsA bond is a loan instrument where the investor is the lender, and the borrower is the issuer. The federal and state governments issue bonds to raise debt. You can invest in these bonds i.e. in essence you lend money to the government.Most states have high credit ratings (AA or AAA), which means these bonds are extremely low risk. The federal government has maintained its AAA rating (the highest rating) despite significantly increasing its borrowings over the past year.Australian government bond index funds are yielding (interest rate) in the range of 2.5% and 3% p.a., which is obviously a lot better than deposit rates.International bonds typically provide lower income returns and you need to be mindful of foreign exchange rate fluctuations.Option 3: Invest in Australian corporate bondsCorporate bonds are similar to government bonds. However, they are issued by companies, often large, listed companies. Corporate bond index funds only invest in investment-grade rated bonds, which means they are relatively low risk, albeit higher risk than government bonds.Corporate bond index funds are currently yielding between 3% and 3.5% p.a. – sometimes more, depending on the type of fund and how it invests.Option 4: Invest in hybrid securitiesHybrid securities are issued by the Australian banks. They are instruments that have both bond and share characteristics e.g. they will convert to normal shares if certain events occur. They pay a variable rate coupon (interest rate) that is typically fully franked i.e. franking credits are attached to the coupon payment which makes it tax-effective.Actively managed hybrid funds are currently yielding circa 3.5% (gross).Option 5: Invest in REIT and InfrastructureInfrastructure involves investing in businesses that operate high-cost assets such as toll roads, communication assets, airports, electrical systems and so on. These investments usually generate predictable and stable incomes, particularly in a low interest rate environment. However, the value of these assets have been negatively impacted by Covid lockdowns because people aren’t traveling as much. As such, they are trading on lower multiples and therefore make more attractive investments. Infrastructure funds typically yield between 3% and 4% p.a. and at the moment, and there is probably some capital appreciation upside (post Covid).Australian Real Estate Investment Trusts (REIT) tend to have too much exposure to retail property e.g. shopping centres. Therefore, my preference is to invest in international (currency hedged) REIT’s, as they tend to offer more diversification. Again, the value of some of these assets have been negatively impacted by Covid e.g. holiday parks/resorts. However, these valuations should recover over the coming years as the impact of Covid dissipates. Global REIT’s current yield in the range of 2% and 4% p.a. with some capital upside.Option 6: invest in sharesYou can invest in Australian listed shares to generate dividend income. Of course, dividend income is not guaranteed and could change at any time. In addition, the value of your investment (value of shares) could change too. Therefore, investing in shares purely for income is much higher risk than all of the above options.That said, if you are able to tolerate the volatility and you won’t need to sell any investments over the next 5-10 years, then in the long run, it could form part of a good strategy.There are a number of low-cost index funds that focus on maximising dividend income. Gross (pre-tax) income returns currently range between 5.5% and 9.5% p.a. Again, these income returns can be volatile, as can be the value of these investments. You cannot expect to generate higher returns without accepting higher risk.Depositing monies in offset is a lazy strategyMany investors are concerned that accumulating cash in an offset account doesn’t really generate a high return, because mortgage interest rates are so low.There are two competing considerations to take into account.Firstly, the best time to repay debt is when interest rates are low as more of your repayment can go towards the repayment of loan principal, not interest. The next 3 to 5 years at least, provides an excellent opportunity to repay debt.Conversely, in the long run, investing in alternative assets will likely generate higher returns (i.e. more than the mortgage interest rate). Particularly if you focus on overall returns (capital + income), not just income.If you have substantial savings, use multiple optionsLike with most things is life, moderation is the best approach. Investing in a combination of low and higher risk options allows you to construct a portfolio that is commensurate with your risk profile and financial goals.The correct allocation of your cash savings will depend on your financial position, investment strategy, goals and risk appetite.
The beginning of a new year is a great time to take stock and set personal and financial goals for the coming year. I wanted to share the process that I use personally. It has worked well for me and of course, I use the same approach when advising my clients too.It’s particularly useful to undertake this exercise after you have had a break, which most of us do over the Christmas/New Year period. That way you should have enough emotional energy to think and reflect clearly. It’s not a good idea to review finances and set goals if you are tired and in need of rest.This whole process shouldn’t take more than a couple of hours for most people. This small amount of time is perhaps the best investment you can make in any given year.Step 1: Review what went well and not so well during 2020Mistakes tend to offer us the best learning opportunities – when everything goes exactly to plan, we typically learn very little. Therefore, the first step is to review everything that went wrong, or you could have done better last year. That could include not investing when you had the opportunity, not selling assets, wasteful spending and so on.Procrastination or the inability to make a decision can be just as costly as making the wrong decision. The share market certainly taught us that last year. If you had invested in a world share market index fund in April or May 2020 (i.e. not the bottom of the market), the value of your investment would have increased by more than 20% to date (which equates to an annualised return of 34% p.a.).Once you have identified any and all mistakes, ask yourself what you can do in the future to avoid repeating them. I like to ‘blame the system, not the person’. That is, don’t blame yourself. Instead, aim to systemise your financial decisions. Set rules that you must follow. As I have written about previously, it is challenging to remain unemotional when decisions involve your own money, so don’t be afraid to ask for help.Step 2: Review existing investments and any unachieved goals from 2020The next step is to review all existing investments to ascertain whether any changes need to be made.Have any investments under-performed, or do you need to take profit on investments that have done well? Do any investment properties require maintenance or are you unsatisfied with your property manager? Do you need to refinance or restructure your mortgages including fixing interest rates? Increase personal insurance? Update your wills? Consolidate superannuation accounts or review its investment performance? These are examples of some of the questions you must ask yourself.Were there any tasks or goals that you set to achieve during 2020 that were not completed? If so, you’ll need to add these items onto your list for this year.Step 3: Estimate your surplus investable cash flow for 2021The next step is to work out how much surplus cash flow you expect to have this year. Remember, the basic principle to successfully build wealth is always spend less than you earn and invest the difference. Or, put diffidently, invest a fixed amount as a priority and spend what’s left over.I set out the most successful cash flow management banking structure in this blog last year. Almost all of my clients use this structure and have found it to be very successful and a painless way to eliminate any wasteful expenditure1. It also allows them to manage expenditure levels on an ongoing basis without needing to track every dollar or cent.Are you good at managing your cash flow? Do you confidently know how much you spend and where? Most people know whether they need to tighten up cash flow management or not. If so, I strongly recommend implementing the structure I have set out above.Once you have ascertained how much you will contribute towards building wealth i.e. the difference between your income and expenses, you can move to step 4.Step 4: Allocate cash flow to maximise long term wealthThe next step is to work out what to do with this cash flow. Of course, there are many options including repaying or offsetting debt, acquiring additional investments such as shares or property, making additional contributions into super, accumulating a cash savings buffer and so on.The best question to focus on is “how do I allocate my cash flow in 2021 in order to maximise my financial position by 2031 (or later)?”. This question forces you to focus on the long-term fundamentals and more importantly, ignore any short-term noise. Financial decisions that are based on sound fundamentals almost always turn out to be the correct decision.Low interest rates create two competing opportunities.Low interested rates maximise your surplus cash flow thereby making it easier to repay or reduce debt. Of course, it is much easier to repay a loan when the interest rate is 2% p.a. compared to 8% p.a. Therefore, 2021 provides a good window of opportunity to reduce debt.Conversely, repaying debt might save you between 2% to 3% p.a. in interest expense. That is not a very high return. And if we expect interest rates to remain low for a few years, it is reasonable to assume that its likely you can earn a higher return by investing in other assets such as shares.Both of these observations are correct. Often, the most appropriate approach is to find a balance and do both – reduce debt and invest. But of course, it depends on your financial position and goals.Step 5: Review ongoing mattersThe final step is to review all other ongoing financial matters including estate planning documents (wills, power of attorney, etc.), personal insurance (income protection, life and TPD, etc.), tax planning, interest rates and mortgage structure, superannuation and so on. These matters should be reviewed periodically – at least every 1-2 years – just to ensure they are current.The goal is to identify anything that needs to be actioned during 2021.Step 6: Set goals and an action list.After you have undertaken the 5 steps above you should have a clear list of things to do or action during 2021. Prioritise the list and do the most important task first. Delegate as much as possible. You should surround yourself with a professional and trustworthy team that may include a financial adviser, accountant, mortgage broker, insurance advisor and property advocate.Of course, notwithstanding my vested interest, it would be remiss of me to not mention that engaging a holistic financial services firm makes this whole planning experience a lot simpler. You have one team, that is all on the same page, working for you to make your financial and lifestyle goals become a reality.A goal setting tip…I hope it doesn’t sound too ‘out there’ but there are some steps you can take to increase the likelihood of you achieving your goals. I have used these methods over the years, and they have worked for me.The first idea is to create a vision board – see here. A vision board is a visual representation of your goals.The second is to write a vision i.e. describe a day in your life assuming that you achieve your goals. Be as specific as possible. Where you live, how much money you have in the bank, your relationships, what you do day-to-day, how you feel, etc. – whatever is important to you.And thirdly, created accountability for achieving the tasks/goals that you have set out for yourself. Select a friend or family member and share your goals with them. Then ask them to meet with you every quarter to hold you accountable. Being held accountable massively increases your chances of success.If you haven’t done anything like this before, it may sound a bit weird. But I’d encourage to give it a go. There’s a very good chance it will work.
During 2020, most economists and commentators predicted that property values would plummet by 10%, 20% or even 30%! In May I wrote a blog outlining the reasons why I disagreed with these overly bearish forecasts. We now know that property prices didn’t fall by any more than 2% to 3% and have since recovered.In 2021, I predict the property market rhetoric will switch from “values will fall” to “values are too high”! The media will start saying that property prices are too high, they’re over-valued and so on. Again, they will be wrong. Be prepared to expect and ignore this useless hyperbole.Here are 4 reasons that we should expect a very strong market next year.(1) The past 5 years have been below averageThe property market needs to make up for the past 5 years of lacklustre growth. According to the Real Estate Institute of Australia, on average, median house prices in Melbourne and Sydney have appreciated by a measly 2.85% p.a. in the 5 years ended June 2020. That is well below the average growth rate of 7.5% p.a. over the past 40 years (Melbourne and Sydney). We know that all markets have a strong trend of mean-reversion. That is, periods of below trend growth are typically followed by periods of above trend growth.Over the past 5 years the property market has had to navigate a number of unique and significant events. Severe tightening in credit occurred throughout 2015, 2016 and 2018. During 2018 and 2019, the market had to digest the potential impact resulting from the banning of negative gearing and higher CGT as proposed by the ALP (remember, the ALP were tipped as clear winners). As we all know, in 2020, the market had to deal with the impact of Covid.These three major events have occurred consecutively over the past 5 years, hence the below trend growth. Investors should take comfort from the fact that property has actually performed relatively well considering the circumstances.(2) Low interest rates inflate asset valuesLow interest rate settings are put in place by governments to stimulate economic activity. Low interest rates encourage businesses and consumers to increase spending (because their interest expense falls) and investment (because money is cheap). The cost to hold assets, such as property, is reduced and as such these assets tend to rise in value. It’s a commonly acceptable economic principal.I wrote a blog in May this year citing that in many situations, it’s cheaper to own property than rent it. Since May, rates have fallen further, especially for owner-occupiers. This phenomenon won’t last for long. Property values will rise until, once again, it’s cheaper to rent than own. This would have happened already if it wasn’t for the event of recent years (discussed above).The government has slated some substantial changes to credit laws which could significantly increase borrowing capacities from March 2021. If this becomes reality, it will further fuel the impact of low interest rates.(3) There’s plenty of support for the property market by banks and governmentsIn November, the property market benefited from a number of changes announced by state and federal governments.The federal government extended its HomeBuilder package that was set to expire at the end of 2020. NSW announced that it will seek to replace stamp duty with an annual land tax. The Victorian government will discount stamp duty for home buyers spending up to $1 million on new and established property.These initiatives tend to improve overall market confidence.As we have seen throughout 2020, the banks are prepared to help borrowers that have been impacted by Covid. I anticipate that this will continue into 2021 and it will minimise forced sales. Of course, some mortgagee sales will be inevitable, but they are unlikely to be material.(4) Covid-free and better than anticipated economic recoverySo far, the Australian economy has recovered from the impact of Covid faster than expected.The number of borrowers on loan deferrals has reduced from a peak of circa 10% to 3.9% at the end of October. If the trend continues, and I’m sure it will, the number of loan deferrals by year end will be materially lower.Credit card spending data released by the banks suggests that people are spending more than they were pre-Covid. I discussed this in my blog last month here.Last week Westpac announced that consumer confidence had completely rebounded from Covid and is now at a 10-year high.Overall, whilst I expect some industries and Australian’s will be severely impacted by this year’s events and take many years to recover, that at a macro level, Australia’s economic recovery will be much better than other developed nations. Together with its handling of Covid, this will make it an even more desirable location to immigrate to, which will fuel population growth over the next decade. Population growth is a significant contributor towards property price growth.Of course, there could be another x-factor!Of course, an unexpected x-factor could arise next year to upset my forecast above. We have been well conditioned over the past few years to expect the unexpected. But let’s cross our fingers for a far less eventful year next year.Don’t bet against the property marketThere are a number of fundamental factors that exist in Australia that underpin the robustness of the property market. That is not to say that the market can never crash. Of course, anything is possible. But because the property market is almost ‘too important to fail’, the likelihood of a crash is remote in my view. The government and banks have a strong incentive to maintain a healthy property market.We can argue about whether that is right or wrong, but the fact remains. You can use it to your advantage. The choice is yours.
One of the advantages of investing in property is that you can make improvements to enhance its value and consequently your personal wealth. A disadvantage is that dwellings require ongoing maintenance, and this expense reduces an investment property’s cash flow.Minimising or avoiding maintenance costs is often a false economy. Maintenance cannot be avoided, only deferred. Problems either remain unresolved or they get worse. Either way, you will have to complete the maintenance at some stage or accept a lower (eventual) sale price, as most potential purchasers will factor in these costs.How much should you spend on maintenance and improvements?As a general rule-of-thumb, it is a reasonable expectation to spend circa 0.40% to 0.75% p.a. of a property’s value on ongoing maintenance. You may not need to spend that each year, but over a 10-year period, that would not be an unrealistic expectation. Houses tend to require more maintenance than apartments.Items that increase rental incomeIt is important to ensure that your property is in good tenantable order so that its comparable to other properties in the surrounding area. Also, it is wise to look for items that will enhance or maximise its rental income. Such items tend to include:§ Air conditioning, particularly in apartments, is highly desirable and can often increase your weekly rental income by up to $20. That is a pretty good return on investment considering a split system cost around $3k to $4k to install.§ New carpets.§ Re-grouting tiles in kitchens and bathrooms. Not only is this good preventative maintenance, but it can have a positive impact on a property’s appeal.§ Sprucing up bathrooms and kitchens. It is advisable to maintain both the kitchen and bathroom to the same standard, otherwise it looks a bit odd. These projects can be completed cost-effectively by replacing the flooring (e.g. new vinyl), painting cupboard doors and replacing handles, replacing benchtops, appliances, tapware and so on. Avoid full kitchen refits where possible.The standard of any maintenance and improvements must be in-keeping with the area and in line with tenant expectations.Items that increase the value of a propertyCompleting maintenance typically preserves a property’s relative value. However, completing improvements often increases a property’s value, although its typically a once-only improvement.Some examples of improvements include renovating kitchens and bathrooms, improving natural light (e.g. through painting, installing skylights, etc.), adding a bedroom (for houses). These enhancements can improve a property’s value by more than their cost.Non-cosmetic expenses such as rewiring, reroofing, plumbing and so on tend to have little to no impact on value, but sometimes they are unavoidable.Don’t go overboardYou cannot expect a tenant to take good care of your property if you don’t. Therefore, it is important to maintain your property to a good standard, commensurate with tenant and potential purchaser expectations, so that you attract quality tenants.However, improving a property is a financial decision, not an emotional one. You don’t need to put in marble kitchen benchtops and European appliances. It must be durable and attractive whilst also being cost-effective and good value for money.Apartments: common areas and facadeIf you own an apartment, you will know that the Owners’ Corporation is responsible for maintaining common areas and the building.It is important that these are adequately maintained to improve street-appeal, security and structural integrity. Also, where possible, an Owners’ Corporation should seek to improve amenities so that they are comparable to contemporary apartments e.g. installing video intercoms for additional security, renovating stairwells to make them more inviting, resurfacing driveways and so on.Tax treatment of maintenanceThe cost of repairs and maintenance are generally tax-deductible in the year they were incurred. However, some expenses are of a capital nature and must be depreciated over their useful life (see table 3 beginning on page 39 in this ATO guide) including:§ Replacement of an entire structure or unit of property such as rebuilding a fence, replacing a stove; and/or§ Improving an item beyond its original condition, renovations, extensions and alterations; and/or§ Initial repairs after acquiring the property.Your registered tax agent can advise on these matters.It’s an investment, not an expenseUndertaking such improvements are often positive from a cash flow perspective.For example, if installing a split system air conditioner costs $4,000 and improves your rental income by $10 per week, I estimate you will be better off by $324 p.a. after tax:Additional income after tax$276 ($10 p/week less 47% for tax)Plus tax saving (from depreciation deduction)$188 ($4,000 over 10 years @ 47%)Less interest costs$140 ($4,000 @ 3.5% p.a.)Net benefit after tax$324This isn’t going to change your life, but at least it’s not impairing your cash flow and its likely enhanced the value of your property. Overall, it’s an astute investment, not an expense.How to fund maintenance costsWhere possible, it is always advantageous to fund all major maintenance and renovation projects via additional borrowings. Even if you have sufficient cash savings, you are better off to increase your borrowings and retain your cash savings in a linked offset. This doesn’t cost you more interest, but the benefit is that you maximise your future tax deductible loan.The simplest way to provide for any future known and unknown expenses is to include buffers into loans. For example, when a client purchases an investment property, we always add a buffer of $20k to $50k into the loan, which they can draw on whenever required.How do you arrange it?Your property manager can arrange competitive quotes to undertake minor repairs and improvements such as installing a split system.However, for larger projects such as kitchen and bathroom renovations, it is best to outsource these to businesses that specialise in completing these projects as they maintain relationships with various trusted tradies.When to minimise maintenance costsIf you have a house that is very rundown, it is likely that any potential purchaser will bulldoze the dwelling and rebuild. In this circumstance, given your property is predominantly land value, it would be wasteful to spend a lot of money on maintenance and improvements. As such, the best approach is to spend as little as possible whilst doing enough to keep it in a tenantable condition.You’ve got to give to receiveLooking after your property and looking for ways to enhance its value and appeal will serve you well in the long run. It will help minimise vacancy, maximise rental income and enhance its capital growth prospects. Property maintenance and improvements are an important ingredient to successfully build wealth through property investing.Acknowledgment: Thanks to Jordan Telfer from Wakelin Property Advisory for his input into this blog.
Without wanting to seem too philosophical, I believe that life offers us lessons, but we must be prepared to look for them. As we are approaching the end of 2020, I thought it would be a good idea to reflect on what Covid has taught us about our financial decisions.I have been very proud of how my clients have stayed-the-course this year. Only one client insisted on selling down some investments when the pandemic hit. To be fair, there were some extenuating circumstances. Thankfully, we helped many clients invest new monies during the peaks of market volatility. Whilst these investments were made with the sole goal of maximising long-term value, their performance to date has been very rewarding.I wanted to share some important lessons that I think the Covid experience has offered us (even as a reminder).Expect markets to crashMarket corrections are not uncommon. They seem to occur every 8 to 12 years. Of course, the cause of these corrections is always different, unique and completely unpredictable. That’s why they cause a lot of volatility, because the market gets spooked by an event it didn’t or couldn’t have anticipated. And that’s why it always feels like “this time is different”.Whilst every crash feels different, they are all the same. Firstly, the market overreacts, and all investments are punished, almost regardless of quality and outlook. In March, everything fell in value – shares, bonds, gold… everything! But the reality is that a crisis will impact some asset classes to a greater extent.Secondly, markets tend to rebound much faster than we expect, which is evident in this chart I shared in a blog at the beginning of March.The lesson is to be ready for times of very high uncertainty. Stay the course. Don’t let these events tempt you to make any rash decisions i.e. selling. If appropriate, be prepared to make additional investments.In the midst of a crisis, focus on the long termIn times of a crisis, it’s difficult to focus on the long term because it’s hard to visualise how the crisis might play out. However, despite that, there is great value in sticking to the long game.For example, the world share index has generated good returns over the long run i.e. 10.7% p.a. between 1970 and 2019 to be exact. Investing in an index like this during a crisis might not generate above average returns in one month’s time, or even one years’ time. But because we know that markets always rebound strongly within a 5-year period after a crisis, it is likely it will generate above average returns in the medium term. It is this approach that serves investors well.And this is the approach I adopted when investing clients’ monies during March, April and May (and anytime really). I invested in a way that aimed to maximise medium to long term returns. I was not focused on trying to generate short term profits. However, as it turns out, the result in the short term have been fantastic.The lesson is that focusing on the long run helps people make investment decisions during times of (very) high uncertainty. In fact, it’s the only option, as adopting a short-term outlook tends to be paralysing.Cash buffers are importantHaving plenty of cash savings provides a safety net in case your income unexpectedly falls, or a large expense crops up. I typically advise my clients to hold between 6 and 12 months of living expenses in cash savings. Depending on your financial position and risk appetite, it might be important to hold more.Whilst it’s unlikely that you will be without any income for between 6 and 12 months (and without income protection insurance cover), it does provide that “sleep at night” factor. A cash buffer ensures you have sufficient time to make whatever adjustments that are prudent, including selling assets. This reduces unnecessary stress and anxiety and pressure to sell assets quickly.If you don’t have between 6 and 12 months of living expenses in cash savings, then perhaps this should be your number one goal.Financial security gives you a ‘sleep at night’ factorMany people have been working hard for many years or decades and have very little to show for it other than their home and compulsory super. Building a nest egg outside of these assets provides greater financial strength to weather any storms. If you lose your job and have liquid investment such as shares, you know you have a fallback position. You have assets to sell, other than your home.If you haven’t been regularly investing, perhaps Covid is your wake-up call to start doing so. There will be another crisis, probably within the next 10 or so years, that will cause a high level of uncertainty and pain. It might not be another pandemic. It might be something else. But there will be something. Building a nest egg of assets that you can fall back on makes good sense. And the best time to start is today.Be careful what information you feed your brainI stopped watching commercial TV when the pandemic hit in March, and I know many of my colleagues and friends did too. The coverage was often alarmist and unbalanced. It didn’t help me to become better informed. It just created higher levels of uncertainty.We all know that we cannot expect to have a healthy body if we only eat unhealthy foods. The same goes for our brains. We must proactively filter what we watch and read. We cannot expect to make good, long term financial decisions if we are in a constant state of anxiety influenced by misinformation.To a lesser extent, this also applies in normal, “non-pandemic” times too. Some parts of the media will talk negatively about investing, borrowing, the property market, financial advisors and so on. They will explore endless reasons why not to invest, not trust professionals, to delay buying a home and so on. This content is written to attract your attention (which they sell to advertisers), not help you.This year can be a lesson to us all, to think very carefully what we read, what we watch and the people we spend time with.I eat my own cookingFinancially, this year has been a wonderful year for my wife and me. We have bought and sold residential property when no one else wanted to (i.e. during a seemingly endless stage 4 lockdown in Melbourne). We have invested in shares and commercial property.I share this information to make the point that I follow my own advice. Often the best time to invest is when no one else is willing to do so.One thing is for sureThere will be another crisis. It will be a unique event. In the height of all the hysteria and uncertainty, it will feel like the world has changed forever.So, I have two important questions for you. What can you start doing now to prepare yourself and your family for the next crisis? And what will you do differently when it hits?
Interest expenses are often an investors largest tax deduction. You must realise that the onus of proof is on the taxpayer (you), not the ATO. That is, you must be able to prove to the ATO that your deductions are legitimate. If you are not able to do that unequivocally, you risk the tax deduction being denied in full (and you will have to pay interest and penalties).Therefore, it is wise to understand some basic tax rules so that you do not inadvertently put any of your tax deductions as risk. There is a lot more detail (whole chapter) in my latest book, Rules of the Lending Game, but below is a summary of the top 10 rules that relate to investment loans.(1) You only get one chance to set the maximum tax-deductible loanThe initial amount you borrow when you first acquire an investment will be the maximum tax-deductible loan amount.For example, if you purchase a property for $800,000 the total cost of the acquisition will be $845,000 including stamp duty. If you have $300,000 of cash, you need to borrow $545,000. In this situation, $545,000 will be the maximum tax-deductible loan. You cannot go back to the bank and increase the loan at a later stage because the “purpose” determines it tax-deductibility (which I discuss below). A possible solution to this would have been to borrow the full cost and deposit monies in a linked offset – more about this below.(2) Loan applicants may not have tax consequencesWho’s name the loan is in (i.e. the loan applicants) typically has no impact on the deductibility of the debt. From the perspective of the ATO, especially with spouses, the main determining factor regarding deductibility is (1) who owns the asset in question – i.e. whose name is on the title; and (2) who has been making the repayments.For example, if the investment property is in the husband’s name but the loan is in joint names, and repayments are being made from a bank account that is solely in the husband’s name, the husband should be entitled to 100 per cent of the tax deduction (Taxation Ruling TR 93/32).It’s preferable (and cleaner) if you can arrange for the name(s) on the loan to match the name(s) on the title, as this eliminates any doubt. However, some lenders’ policies or procedures might make this difficult, costly (in terms of time or legal costs) or impossible. It’s wise to document why the loan has been established in this way – that is, because the bank declined to set up the loan solely in the owner’s name.(3) The owner must make loan repaymentsA common mistake is that repayments in respect to a loan used to fund an investment in one spouse’s name come from a joint account i.e. in both spouse’s names.In this situation, the ATO could argue that since both of you have been repaying the loan, the deduction should be split. However, since only one spouse owns the property, only that spouse is entitled to a deduction – and consequently now half of the interest is not tax deductible!To avoid this risk repayments should be debited to an account that is solely in the owner/s name.(4) A loan’s security does not matterThe property/s used to secure a loan has no bearing on its tax treatment whatsoever. For example, you could have an investment loan secured by your home and it would still be tax-deductible. The purpose for which the funds are used and who’s been making the repayments will determine the tax-deductibility.(5) Purpose is kingUltimately, the biggest determining factor as to whether interest is tax-deductible is the purpose for which the loan funds are used. This is what the ATO looks at in the first instance. If the item being financed is used for a purpose which has a direct relationship with earning assessable income (such as rental income and capital gains), then any interest charged in respect to the loan which finances that asset should be tax-deductible. Once this is established, the ATO then consider (1) who owns the investment; and (2) who’s been making the repayments. These factors determine who is eligible to claim a tax deduction.Therefore, if you established a loan to purchase an investment property which earns assessable income, and one spouse owns 100 per cent of that investment property and makes the repayments, then that spouse is 100 per cent entitled to the deduction.Sometimes people ask; “Should I borrow against my investment property to repay my home loan?” The answer is always ‘no’, because it comes back to the purpose test. The purpose of the new loan would be to repay the home loan, which is a non-deductible purpose.(6) Don’t mix loan purposes!There are lots of reasons not to use one loan for multiple purposes e.g. to use part of the loan to invest in property and part to invest in shares. Or worse, mix home debt and investment debt in the same loan. The predominant reason is that it makes record keeping difficult and therefore puts tax deductions at risk (because it weakens your justification for claiming a tax deduction).Another reason is that it can become a nightmare should you want to repay only part of the loan. The tax rule is that any repayment to a loan must be apportioned across the whole loan. You cannot allocate your repayment to just one loan purpose. Therefore, you must separate loans by purpose.(7) Redraw: be careful using itRedraw is the ability to withdraw any extra repayments. The ATO treats any redraw as a separate loan, and once again, its tax-deductibility comes back to the purpose test. For example, say that a client has a $300,000 investment loan and receives a $20,000 bonus from work. They intend to use the bonus to take a holiday at the end of the year, and so they park the $20,000 in their investment loan in the interim to save interest. This will be considered an extra repayment. If they then redraw the $20,000 at the end of the year to fund their holiday as planned, the ATO will deem that they now have two loans – one for $280,000, which is still tax-deductible (being the balance prior to the redraw), and one for $20,000. This latter amount is no longer tax-deductible, as the loan’s purpose was to finance a holiday.Essentially, when you repay a loan, you can deny yourself a future tax deduction, as you can’t simply redraw the loan back up to the original amount. You must be careful about when you use a redraw facility.(8) It is much better to offset debt, not repay itThe problem with repaying an investment loan (whether through regular or ad hoc repayments) is that you change the original tax nature of the debt. That is, as discussed earlier, if you redraw the money at a later stage, it will be treated as a new loan for tax purposes. Therefore, it’s important to preserve the original tax-deductible loan balance, which also preserves your potential future tax benefits.An offset gives you the best of both worlds – it allows you to park extra cash in it to offset the loan and reduce the amount of interest you pay, but also preserves the tax-deductible balance of that loan.The bonus is that if you ever need to pull that extra cash out of the offset to use for a non-deductible purpose in the future, you can do so in a more tax-effective manner. This is a perfect structure particularly for first home buyers as it allows them to minimise interest whilst preserving the loan amount in case their property becomes an investment in the future.(9) Borrowing expenses are tax deductibleAll borrowing expenses are tax-deductible if they relate to investment loans. Any costs under $100 are deductible in the year that they’re incurred. Any costs over $100 are deductible equally over the term of the loan or five years, whichever is less. As mortgage terms are almost always longer than five years, borrowing costs are deductible over the first five years of the loan. If you refinance or repay your loan earlier than the five-year period, you can claim the balance of the expense which you haven’t claimed a deduction for yet.Deductible costs can include expenses at time of purchase, such as application fees, title search fees, lender’s legal fees, valuations, mortgage insurance, mortgage stamp duty, loan repayment insurance, settlement fees, security or guarantee fees. Basically, any third-party fees that are payable up-front, whether they’re government or bank charges, can be deductible.(10) Keep a good paper trailIt is vital to maintain a proper paper trail. You must make clear, concise notes and keep track of all loan balances and transactions related to your investments throughout the year. If you do get audited, it’s handy to be able to go back to your notes and calculations to prove and demonstrate exactly how you arrived at a particular tax deduction and/or what that amount was used for. This is particularly relevant when you’re paying deposits, refinancing, transferring funds, paying related expenses for properties and so on. What is clear to you today won’t be as clear in five to ten years’ time, so good record keeping will help a lot.Get tax adviceThere are two reasons to visit your accountant. The most obvious – and something that people generally only consider once a year – is for the preparation of your tax return.The other thing an accountant will do is to provide taxation advice about how you should set up and fund your property investments. This is of the utmost importance and I highly recommend you be prepared to pay for it. Don’t be tempted to ‘shop around’ for an accountant based on fees alone. This is one area where you want to make sure they know their stuff.________Warning: Whilst the author, ProSolution Tax Advisory and all its directors are registered tax agents, you must not rely solely on the above information. This blog provides a summary only. Exceptions apply to all tax rules and as such, you must consider your individual circumstances. Therefore, you must obtain personalised tax advice prior to acting on any information contained in this blog.
Understanding how Covid lockdowns have impacted certain individuals and industries, helps to inform us about how quickly the economy and markets may recover.With this in mind, I thought it was useful to share a number of charts published recently by the RBA and banks which provide important and interesting insights.Covid has discriminated against younger workers and lower income earners Workers between the ages of 15 and 34 account for more than half of the jobs lost (unemployment) to August.The RBA broke up changes to employment into five groups - from the highest income earners to the lowest earners. As the chart below shows, the lowest paid 40% of Australian's suffered the largest loss of employment (over 80% of the total jobs lost to August).It is not surprising to see that Covid has impacted a finite number of industries, especially hospitality and travel.The good news is that employment has recovered significantly between May and August - as denoted above by the dark-blue dots versus the light-blue bars.Those that have been less impacted have been saving money and repaying debtFor those that have not been materially impacted by Covid, disposable incomes have actually increased (mainly due to low rates), consumption has fallen (due to lockdowns) and savings rates has increased significantly.People have been making repaying large repayments towards credit card balances.And borrowers have been making larger principal repayments and/or accumulating more cash in offset accounts. So, overall, personal debt has reduced during Covid.Offset accountsSpending and confidence has rebounded strongly National consumer spending (using credit card data compiled by ANZ) is 8% higher than this time last year. Victoria has rebounded strongly. This demonstrates that the cohort of people that have not been impacted by Covid more than make up for those that have. Large spending increases have been observed in furniture, homewares and electrical categories.Consumer confidence (per Westpac/Melbourne Institute) is now at a 7 year high. It is likely that confidence has been buoyed by Australia appearing to now be Covid-free and people can now see past 2020, looking towards a Covid-normal 2021. The possibility of a successful vaccine arriving if the first half of next year also helps the global economic outlook.What does all this data tell us? (1) Higher earners will probably drive the property market recovery The above data demonstrates that there are two cohorts of Australians.The first cohort that has unfortunately been adversely impacted by Covid. These are likely to be lower income earners and younger Australian's. As such, it is less likely that they will be owners or prospective buyers of property located in blue-chip suburbs.The second cohort are those that haven't been impacted by Covid (or only to a minor extent). These are likely to be higher income earners, over the age of 34, have more savings in the bank (offset) and have lower debt levels as a result of spending less (thanks to lockdowns). It is this cohort that will probably implement their property plans (purchase, upgrade, invest) sooner rather than later. Historically low interest rates will also benefit this cohort to a greater extent, as they tend to have high levels of borrowings.(2) Higher spenders will drive the economic recovery Lower income earners contribute less to overall consumer consumption. Importantly, consumer consumption accounts for circa 60% of Australia's GDP.Higher income earners (who have not been impacted by Covid) are not able to spend money on overseas holidays. This means these monies are likely to be spent in Australia instead - either on domestic travel/tourism or increased consumption. This cohort have a lot of spending power (as demonstrated by year-to-date spending data). This will aid Australia's economic recovery which will also drive stock market returns.Of course, there will be industries and sectors that will be hit hard and take many years to recover. But at the macro level, it's likely the thriving industries will more than compensate for the impaired industries.Overall, things look relatively optimistic Whilst Covid has had a significant emotional and financial impact, the data suggests that higher income earners have largely retained their income levels and improved their financial positions. Australia will be heavily reliant upon this cohort to drive our recovery. It also means that property in highly sort after, blue-chip locations will likely benefit from high levels of demand which will probably translate into price appreciation.
If you need financial advice, how much should you expect to pay for it? Of course, the cost is what you pay, but value is what you receive. The value needs to exceed the cost for it to be worthwhile. So, how do you assess the value of financial advice?Whilst the answers to these questions can vary significantly, we must take into account that value assessments can be subjective, and I wanted to share my insights to help people with this analysis.Financial advice fees create tensionOn one hand, the lower the financial advisory fee you pay, the more money you save to invest and that has to translate to a higher likelihood of achieving your financial goals.On the other hand, in many respects, you get what you pay for. The cheapest financial advice is not always the best.Your willingness to pay more for financial advice may create some valuable consequences:§ It is likely that you will attract an advisor with more experience. An advisor with 20 years of experience isn’t going to work for $20 per hour – a graduate with zero experience might;§ It will allow that person to spend more time thinking about (analysing) the advice they give you. However, if profit margins are very thin, it inevitably creates pressure to cut corners – and certainly no scope to provide proactive advice; and§ The more human and economic resources a firm has, the more it can invest in their people and systems to continually improve the value they provide you. Better research, more analysis and more thinking time creates value in the long run.The truth is, because of the tension advisory fees create, a balance must be found. The fees you pay must be as low as possible. But not too low that it risks the value of the advice you receive.How much does it cost to give financial advice?The cost of giving financial advice can typically be categorised into four components.(1) StaffingThe cost of employing the right people can be significant. The quality of the people determines the quality of advice and service that you can expect to receive.Of course, the knowledge and experience of the advisor is paramount. Someone with very vast knowledge and many decades of experience will usually command a higher salary.For example, I’ve spent years honing my craft, learning, investing in myself. Consequently, the advice I give is substantially more valuable than an advisor with only a couple of years of experience. But it comes at a cost.(2) Compliance and riskThere are a number of costs associated with having your own financial services license (AFSL). These include paying for an audit at least annually, training and education, license related fees paid to ASIC, professional indemnity insurance – the cost of which rivals some of the riskiest medical occupations and the time cost of fulfilling all compliance obligations.Giving advice does not come without risk. Advisors accept a huge responsibility for formulating the right advice. Advice on simple matters is of course a lot less risky. However, advice that involves large sums of money or complexity carry higher levels of advice risk, because even small errors or misjudgements can have significant financial consequences (in dollar terms). Higher risk engagements attract higher levels of advisor compensation (fees).(3) OverheadsAll businesses have overheads including office occupancy, technology and software costs and so on.(4) ProfitA sustainable business must make a profit. The profit must be sufficient enough to compensate the owners for the business risks and provide a return on the capital contributed towards the business including any sweat equity. You don’t necessarily want the firm to be making huge profits, but they must have a sustainable business.Average cost of adviceLast month industry consultants estimated that advisers need to charge an average fee of at least $3,500 per client. The cost to deliver a Statement of Advice is estimated to be $6,500, on average. The main theme is that the cost to operate a financial advisory business has increased substantially over recent years.I estimate the cost of compliance, risk and overheads to be over $2,000 per year per client. That’s a basic cost that needs to be covered before we even do one minute of work.Most advisors charge annual fees in the range of $3,000 and $20,000. Some advisor fees are based on a percentage of your assets, which you should avoid, as it is rarely a fair representation of the work involved.There needs to be enough scope for an advisor to add value in excess of feesThe more complexity you have and/or the more money you have to invest, the more scope there is for an advisor to add value. If you have a large investment balance, a small improvement in investment performance can have a significant impact in dollar-value terms. Hence the cost of advice is easily offset by the value of the advice.However, if there is little scope to add value or you have little to invest, offsetting the cost of the advice (with value received) will be challenging.For example, I estimate it would cost me at least $3,000 per year to look after a client with a share portfolio of $200,000. That fee only covers my costs. That fee equates to 1.5% p.a. of the portfolio’s value. Therefore, for the client to be better off, I would have to generate an additional investment return of more than 1.5% p.a. than say what a diversified index fund could provide. Of course, this is possible, but why take the risk. As such, I would never agree to take on this client. Fees are certain, returns are not.Of course, if this prospective client had other needs that I could help with, the value of that would need to be taken into account.How do you value advice?Clearly the value that financial advice produces must significantly exceed its cost. Most prospective clients find this value assessment a difficult and subjective assessment to make. For example, sometimes perfectly sound financial advice doesn’t improve your net worth until some years later. Does that mean it is worthless? Of course not.I have identified four sources of value.Formulating a long-term planFew people have the requisite knowledge and experience to develop a holistic, long term financial strategy. A strategy must consider many factors including cash flow, risk, asset allocation, level of borrowings including how to repay them, how superannuation integrates, tax, estate planning and risk management. Having a clear and simple-to-understand strategy outlining what you need to do over the coming years to achieve a comfortable retirement is very valuable. Whereas, implementing the wrong strategy can cost a lot of money and waste a lot of time.Correctly implementing the planA financial plan is worthless unless it is implemented correctly. This includes knowing which methodologies to use and when, when to invest more or not at all, what tactical changes to make, which advisors to trust (e.g. buyers’ agents) and so on. I’ve seen people destroy a lot of value through incorrectly implementing an otherwise perfect strategy. Avoiding making just one insidious mistake could save you literally several tens of thousands of dollars. A small 0.5% p.a. higher return on $500,000 will generate nearly $50,000 in additional value after 10 years (and $190,000 over 20 years). Even small, incremental improvements in returns can create substantial value.Navigating inevitable changes and opportunitiesNo one needs reminding this year how unpredictable life and markets can be. It is valuable to be able to lean on a trusted advisor that understands your circumstances and your goals, to counsel you through turbulent times, difficult decisions and the like. In my experience, it can be difficult for clients to make decision when they are under emotional and/or financial pressure.Apart from things like pandemics, there are lots of things that can change over time including your personal circumstances, your goals, financial markets, new investment opportunities, tax and super rules and so on. Each change can create risks and opportunities.Higher confidence, less stress, freedom and happinessOften my clients say that they enjoy sharing the responsibility for making financial decisions for their family. That is, this responsibility no longer solely rest on their shoulders, which can be a burdensome obligation. Making financial decisions is also not their core skill, which adds to stress levels. Whereas I am almost always thinking about investing, as it’s something I’m deeply passionate about, unlike most (all) of my clients. It is also my job to take responsibility.Why most advisors prefer to not offer once-off adviceSometimes clients request us to provide once-off, piecemeal advice on a specific financial planning matter. We rarely do this work, particularly if they are not an existing client.Providing once-off advice is often unrewarding, both professionally and commercially. There’s a substantial amount of emotional labour involved in building a trusted relationship with a client. Getting to know them, their goals, risk profile and so on. To do all this work, as well as fulfil all the compliance obligations, without any expectation of being around in the future to see how the advice turns out is unrewarding.The best thing about working with clients on an ongoing basis is that you both invest in nurturing a relationship based on mutual trust. You have a shared goal. You share the successes along the way and, from an advisor’s perspective (at least mine), this gives me confirmation that the advice I give creates positive financial and lifestyle outcomes. I am proud of the work I do.This rarely exist with once-off advice, as there’s inevitably commercial pressure to rush towards the next assignment. That is why most advisors only work with ongoing clients.Advice laws need to changeAs we learnt from the Royal Commission in 2019, financial advice laws have done little to protect people from dodgy financial advisors. Now that investment commissions (vested interests) have been banned, laws need to be re-written.The ‘compliance’ cost of providing advice is way too high. If I know what a client should do and the best solution is obvious, I would like to be able to give them this advice without needing to fulfil onus and valueless compliance obligations (such as drafting a 30-page document). The ability to do so would reduce the cost of providing advice and consequently make it accessible to more people. The government (ASIC) is aware of this and has recently announced it will waste time and taxpayers’ money on a project to identify the cause – even though the answer is obvious!What are your options if paying for advice is uneconomical?If it’s not economical for you to pay for personalised advice (i.e. cost is greater than the value), then there are a few alternative resources available to you.Of course, you can educate yourself – there are lots of great blogs and podcasts that are available for free. And of course, books include a wealth of knowledge for only $30.Some of the industry super funds (such as AustralianSuper) have their own financial planning teams that offer fee-for-service advice. This can be an economical means of obtaining once-off financial advice. Of course, they are not independent (from a super perspective), and probably don’t provide advice in respect to direct property.If you would like advice in respect to investing in shares, Vanguard’s website has a plethora of valuable information and its diversified index funds are worthy of consideration (which you can invest in for free via its new Vanguard Personal Investor service).Give equal consideration to both ‘value’ and ‘cost’Financial advice can be incredibly valuable - a lot more valuable than it costs - as long as; (1) there’s enough scope for the advisor to add value; and (2) you select the right advisor (i.e. experienced, astute, independent and holistic). Yes, it can be expensive but that is only one side of the coin.
Most people acknowledge that a will is an important document to create, but we all hope there’s no urgency to prepare it. As such, many people rarely ‘get around’ to it.One of the reasons for this is they don’t know enough about it and how to get started. This blog answers commonly asked questions and matters that should be considered when drafting estate planning documents.Rules are State basedThe laws that govern the administration of wills and intestacy (if you die without a will) is the State’s jurisdiction. This means rules may vary from state to state.Generally, if you die without a will, it is referred to as dying intestate. There are many adverse consequences of this including your assets being distributed in a way that you would not otherwise agree with. In addition, it creates unnecessary work and complexity for surviving family members to arrange probate.Simple circumstances requires a simple willIf your situation is simple, you only need a simple will. Simple means that you do not have significant assets, you do not have any specific beneficiaries or financial dependents. In this situation, typically, a template will should be satisfactory. You can purchase these online for approximately $200. Make sure your will is witnessed correctly.However, the more assets you have (in terms of value), the greater the need for personalised legal advice. Like in many situations, often it’s what you don’t know that could cause problems.Kids complicate mattersIf you have children (or are contemplating having children), you should engage a lawyer to draft your will. Not only do you need to ensure that all financial dependents will be looked after, but you must address guardianship of your children. In the event that you and your spouse1 pass away, who will be the legal guardian of your children? This is an important decision which must be included in your will.I would typically advise people with children to insert a testamentary trust into their will. A testamentary trust is a special discretionary trust that is created upon death. The will maker can permit the executor to transfer the estate assets into the testamentary trust. Testamentary trust’s provide serval advantages including taxation savings (discussed below) and asset protection benefits.Blended families complicate matters furtherA blended family includes situations such as:* both spouses have children from a previous relationship; and/or * one spouse has children from a previous relationship as well as children with their current spouse.
Blended family arrangements can create a myriad of potential risks that must be considered and addressed when drafting estate planning documents. Anyone in this situation must seek personalised legal advice from an experienced estate planning lawyer.Beneficiaries with special needsIf you have beneficiaries or financial dependants with special needs such as a child with a disability, battling addiction, mental health or similar issues, it is very important that you receive personalised legal advice.Ways to minimise the likelihood of family conflictMoney and grief do not mix well. Otherwise healthy family relationships can turn sour when money is involved. But there are some steps you can take to minimise the chance of your family members fighting over your estate.Have difficult conversations You invite conflict if your wishes surprise your beneficiaries. The best thing to do to avoid this is be brave and have (sometimes difficult) conversations so that everyone knows your wishes before you pass away. For example, if you intend to exclude someone that may expect to be a beneficiary, distribute your estate unevenly or leave specific assets to certain people, be as open as you can about this.Use offset clauses in your will If one of your beneficiaries (often children) has received a higher level of financial support or an early inheritance, then offset clauses can equalise entitlements across all beneficiaries, if that is your wish.An offset clause will say something to the effect that any support already received by a beneficiary will reduce their entitlement. It is important to maintain clear records that are readily available to your executors. If possible, making all beneficiaries aware that any financial support you provide whilst you are alive will reduce their entitlement under your will is helpful.Keep assets out of your estate Your will covers the assets in your estate. Typically, that includes any assets owned by you personally. Assets that are not included in your estate include:* assets held in a discretionary family trust that you are not presently entitled to; * monies held in superannuation; and * assets owned jointly with other parties e.g. the family home. When a joint owner passes, ownership automatically passes to any surviving joint owners.
Therefore, if you are worried that your will could be challenged or could create family conflict, the best thing to do is minimise assets that are owned by you personally.Make gifts while you are alive Gifting monies or assets whilst you are alive is one way to avoid any potential conflicts. This also provides some practical benefits. Firstly, it’s likely that receiving monies sooner often assists your beneficiaries. Secondly, you will enjoy witnessing the positive outcomes that these gifts create.Superannuation death benefit nominationsSuperannuation monies are not included in your estate. Instead, the trustee of your super fund must decide who to pay your superannuation monies to. As such, most super funds allow members to complete “binding death benefit nominations”. Often these nominations must be updated every 3 years.Your nomination options include your spouse, children, interdependent relationships (i.e. where you provide financial and domestic support) or your estate. In most circumstances, it is advisable to nominate a financial dependant/s (spouse and/or children), as this will ensure the benefit payment will not be taxed.Steps you can take if you expect to receive an inheritanceIf one of my clients is to receive an inheritance, it would be my preference that they receive this in a testamentary trust.The main benefit is that a testamentary trust can distribute income and capital gains to a minor and they are taxed at adult tax rates. This means children and grandchildren under the age of 18 can receive approximately $20,000 p.a. tax free.Therefore, if you expect to be included as a beneficiary under a will, it is in your best interest to ensure the testator (e.g. your parents or family member) has included a testamentary trust in their will. I appreciate that this can sometimes be a difficult subject to discuss with family.Flexible will plus a letter of wishesIt is advantageous that wills provide wide powers so that your executor is able to achieve the outcomes that you desire. For example, if one of my sons becomes addicted to gambling or drugs, I don’t want my executor giving them large sums of money. That is why you don’t want to be too codified in your will.Instead, I prefer to keep my will such that the executor/s has wide powers as well as providing my executor with a letter of wishes. A letter of wishes is a non-binding document that sets out the manner in which you wish your executor to exercise their discretion. It can include any and all information that you feel is relevant. It might address the circumstances when, and when not to, distribute monies and any other matters. You don’t need a lawyer to draft a letter of wishes. You can draft it yourself and update it at any stage.Power of attorneyIt is important that you and your spouse have enduring (1) financial and (2) medical power of attorney’s so that important decisions can be made, and documents executed, in the event that you are not available or able to do so for yourself.Review your will regularlyA will must be prepared to accommodate your current circumstances and wishes. It is not always possible to draft a will that will accommodate all possible circumstances. For example, if you have young children your will might be structured differently than if you had well-established, adult children. Therefore, you need to review your will every 1-2 years to ensure its still current and the executors are still appropriate.Most potential problems can be avoided with good planning and adviceMaking sure that your estate planning documents are set up correctly really doesn’t take a lot of time. Also, it would be unlikely that you would need to make any substantial changes to them more often than every 10 years or so. Often it doesn’t need to be complex. A small amount of time invested in making sure your affairs are in order can save your family members a lot of heartache.
It is my observation that investment-grade apartments in Melbourne have under-performed (from a capital growth perspective) compared to houses over the past 8 to 10 years.That is, apartments have generated very little capital growth (sometimes none), whereas houses have grown in value by between 5% and 8% p.a. over the same period.I have prepared a detailed report investigating the factors that have contributed towards this capital growth performance gap. Whilst I have focused my analysis on the Melbourne market, many of the factors identified and discussed have had an impact in Melbourne and to a lesser extent, Sydney.I provide a brief executive summary below. I invite you to download a copy of the full report (link is at the bottom of this page).We know that property growth tends to occur in cyclesThe chart below sets out the distribution growth in the median price of apartments in Sydney, Melbourne and Brisbane over the past 40 years.It is clear that growth cycles tend to last between 5 and 10 years (although Brisbane between 1980 and 2002 is the main exception). This is constant with what I have observed for houses, as previously charted here.Chart 1We need growth of circa 9% p.a. to make up for the under-performanceIf you purchased an apartment 7 years ago for $600,000 in Melbourne, it may be worth $650,000 today. Most people would (and should) be disappointed with receiving only $50,000 of capital growth over 7 years. Applying the change in land values (as implied by the actual change in house prices) to apartments, one could argue that the intrinsic value of this apartment may be closer to $900,000. This intrinsic valuation is illustrated by the blue dotted line in the chart below.I calculated that this apartment would need to generate an average capital growth rate of 9.2% p.a. over the next 10 years to “make up” for its past under-performance (i.e. to grow from value A to value B).That is, the value of the apartment would need to increase from $650,000 to $1.55 million over the next 10 years. Whilst that might seem unrealistic, we note that apartments have delivered growth above 9.2% p.a. in the past, as illustrated in the chart above.Dramatic increase in supply of new apartments between 2008 and 2018It is likely that the increase in supply if new apartments (i.e. new construction) has been the main contributor to the low levels of capital growth. When supply equals demand, price growth does not occur. However, when demand exceeds supply (like it has in the housing market), this imbalance contributes towards price appreciation.The chart below sets out the number of residential unit constructions commenced per quarter. This trend data is provided by the ABS and is seasonally adjusted. In the main, supply began increasing in 2008/9 but has started to taper off around 2017/8.This increase in apartment supply is evidence in investment-grade suburbs too. The next chart below sets out the proportion of apartments listed for sale compared to houses in a selection of investment-grade, blue-chip Melbourne suburbs since 2011 (when the data series began).As you can see, in 2011, on average, 60% of properties listed for sale in these suburbs were apartments. By 2017, that proportion increased to 78%. Importantly, the proportion of apartments for sale is slowly trending down and is now 75%.Tightening in creditI have written a lot about the impact of credit tightening that has occurred since 2009 when ‘responsible lending’ regulations were first introduced. This tightening in regulation dramatically reduced everyone’s borrowing capacity. This affected first home buyers (FHB) to the greatest extent, as they tend to have relatively weak financial positions and borrowing capacities are tight.This may have encouraged more FHB to be attracted to lower-priced, off the plan apartments – away from higher-priced, established, investment-grade apartments, thereby reducing demand for this investment-grade sector.The Australian government has recently announced the relaxation of responsible lending rules (from 1 March 2021) which should materially improve FHB capacities.Foreign buyers used to be dominantIn the past, most residential developers targeted non-resident buyers. They would have teams of salespeople on the ground in China and other Asian countries selling Australian apartments off-the-plan. Developers constructed buildings solely to fulfil this demand.However, in 2015, the Australian government (its Foreign Investment Review Board or FIRB) started tightening rules governing the circumstances in which foreigners were able to purchase property in Australia. This has led to a dramatic fall in the volume of sales to foreigners.In the 2014/15 financial year, the FIRB approved the acquisition of over $60 billion of residential real estate. By the 2018/19 financial year, the amount of residential real estate approved for purchase by foreigners had fallen to $14.8 billion.The foreign buyer market is now less than 25% of its previous size. In 2019, the government introduced a cap on foreign ownership of new developments. As such, the volume of new apartments constructed is likely to be significantly lower over the next ten years compared to the previous ten years.Comparing apartments to houses is unfairComparing the performance of houses with apartments ignores that fact that the cost of an entry-level house is often more than double that of an entry level apartment. Not all investors are in a position to be able to invest in a house i.e. their financial budget doesn’t extend to this level. Therefore, in order to invest in an established, blue-chip suburb, they have to invest in an apartment.From a practical perspective, a fairer comparison is probably to compare investing in an apartment in an investment grade suburb versus investing in a house in a middle or outer ring location i.e. further away from the CBD.There’s a large body of evidence that demonstrates that average capital growth rates decline the further away a property is located from the CBD (e.g. this report – refer page 78 onwards). Therefore, typically, investors are better off investing in an apartment in an investment-grade suburb.There’s more detail contained in the reportIf you would like to learn more, I invite you to download a fully copy of the report but clicking the button below.
Investment update: How to navigate current uncertaintiesThere is never a perfect time to invest. The stars never align. In reality, there will always be reasons why investing now feels risky. The solution is to learn to dance with uncertainty.Generally, most people can achieve this by doing two things. Firstly, focus only on generating quality investment returns in the long run. Ignore any short-term outcomes, as they are rarely relevant. Stick to proven investment fundamentals. Only adopt evidence-based strategies. Playing the long game often inspires higher levels of confidence.Secondly, embrace the fact that uncertainty is your friend. Potential investment profits are greatly improved during times of higher uncertainty. Early April is a good example. We helped many clients invest in the share market during April and subsequent months. Whilst we are fixated on maximising long term investment returns, our clients have generated very good returns in the short run.With this in mind, I thought it would be useful to share my thoughts on a number of risks (read: opportunities) that present themselves at the moment, and how I think you best navigate these.The US electionThe first thing to realise is that markets focus on policies, not personalities. From a pure market/economics perspective, a Trump victory is probably more attractive, at least in the shorter term. The reason for that is Trump’s agenda is to continue reducing taxes, whereas Biden wants to wind back some of Trump’s previous cuts. It is questionable whether now is the right time to raise taxes, especially since the US economy needs all the help that it can get at the moment. That will be ‘the markets’ primary concern.There is also some divergence in energy policies. It is fair to say the Biden’s energy policy generally favours environmental protection (Biden plans to impose a ‘carbon adjustment’ fee).Of course, whether a President can implement their policy agenda depends on whether they control the House of Representatives and Senate. The Democrats already have a majority in the House of Representatives, so it needs to win the Senate in next month’s election to control all three arms of government. If they don’t, the Republicans can block legislation unless the Democrats can get rid of the filibuster, which you can read about here.The big question is whether Trump will go quietly. I’m sure most people would agree that this is unlikely. A refusal to leave the white house, a legal challenge and who knows what else are all possible outcomes. Market’s dislike uncertainty and such events will probably result in higher levels of share market volatility, which investors must be prepared for.In addition, any delay in inaugurating a new president will further delay the approval of a second trillion-dollar stimulus package which could exacerbate economic damage.There is nothing long term investors can or should do to accommodate these risks. It is merely a case of acknowledging that this volatility could arise, but it’s unlikely to persist for more than a few months (hopefully).US tech sector valuationsThe chart below eloquently illustrates the impact that the FAANGM stocks have had on the overall US share market index’s performance (the FAANGM stocks include Facebook, Apple, Netflix, Google, Amazon and Microsoft).These six stocks have contributed approximately 40% of the index’s return (i.e. the return over the past 7.5 years was 10.4% p.a. or 7.4% p.a. excluding the FAANGM stock).This creates a number of risks:§ Will (can) these large tech stocks continue to deliver these high levels of returns in the future?§ If you invest in the S&P500 index, you must realise that it is heavily weighted towards these tech stocks compared to say 10 years ago. These FAANGM stocks account now account for approximately 26% of the total index.§ It is true that these tech companies have massive scale. They have benefited from the impact of Covid i.e. more online shopping and working from home. They will play a significant role in the economy in the future and drive increased productivity. All these things are true. But it is also true that these are fully reflected in current prices. In fact, current tech valuations are reminiscent of the early 2000 dotcom bubble. What impact will the ‘tech bubble busting’ have on investment returns?My general advice is to ensure your portfolio is underweighted in the US tech sector. You can achieve this by adopting alternative evidence-based index methodologies (i.e. not traditional market cap) such as fundamental indexing and Dimensional’s approach. It is still important to have some exposure and you most definitely need to have exposure to the US market (as it’s the largest developed economy in the world).Covid impact on the property marketI have written a lot about my expectations for the property market over the past few months. My most recent article in The Australian newspaper earlier this month highlighted the reasons why I expect the $1 million plus property segment to lead the recovery.For those that are contemplating a property transaction (sale and/or purchase) in an investment grade location, I see no reasons for delay. But, by the same token, there is no need to rush either. Proceed as quickly as your circumstances allow.In the long run, the fundamentals for investment-grade property locations remain largely intact.Covid’s impact on overseas immigrationOf course, due to the closure of international boarders, Australia’s overseas immigration is non-existent. It may take two to three years for immigration to return back to pre-Covid levels. This is likely to have an adverse economic impact and a limited impact on investment-grade property.Two thirds of Australia’s population growth comes from overseas immigration. Population growth is incredibly important for economic growth because a higher population leads to increased productivity and consumer demand. Therefore, in the short term, lower immigration levels will adversely weigh on economic activity. Of course, the aim of the government’s Federal budget is to stimulate economic activity to offset some of this impact.It is unlikely that overseas immigrants contribute materially to the demand to purchase properties in investment grade locations. Instead, more immigrants will be renters, not homeowners as most are on temporary visas. Therefore, lower immigration levels may lead to lower rents in the short run, particularly in the student accommodation sector.The main reason we invest in property is for capital growth. For the reasons mentioned above, temporarily lower immigration levels are unlikely to have a material impact on capital growth rates in investment-grade locations.What’s the impact of interest rates being lower for longer?A few weeks ago, I wrote about how interest rates will likely remain very low for an extended period of time and how fixed rates are approximately 0.50% p.a. lower than variable rates. Home loan fixed rates (3 years) are now in the low 2%. Approximately 5 years ago the inflation rate was higher than this!These ridiculously low interest rates have two consequences. Firstly, they will inflate asset prices including property values. Secondly, it makes ‘investing in your home’ probably one of the most attractive investment strategies. I wrote about this in April here.I have always advised clients to buy an investment-grade property as a home, where possible. However, now more than ever before, this is an increasingly powerful strategy.Most ‘risks’ are not realPerhaps the common theme from the above commentary is that these “risks” tend to fall into two categories. They are either events that are short term in nature which investors should ignore and remain focused on long term outcomes. Alternatively, they create opportunities for those that are willing to look for them (such as low interest rates).
Have you ever had a strong opinion (prediction) about investment markets which was subsequently proven to be incorrect? A recent example was when many people predicted borrowers would be forced to sell their properties due to the Covid lockdowns and the market would crash. This outcome now seems unlikely.It is my view that a humble mindset is the best way to avoid being blindsided by unexpected investment risk, whilst at the same time spotting all opportunities. Let me explain.Predicting the end of the world isn’t a risky endeavourRobert Glazer wrote about the concept of cognitive dissonance in his recent blog:“… the authors examined the followers of cult leaders who predicted that the world was going to end on a specific date, and told everyone to prepare. When that day passed without a fiery inferno, you may have expected these cult leaders to have lost all credibility with their followers.Instead, the exact opposite happened. The leaders simply declared their prediction was incorrect and declared a new date. Like clockwork, their followers doubled-down and began preparing for the next apocalypse.Why would they do this? According to Tavris and Aronson, it was likely too painful for the cultists to admit they had fallen for a fraudulent prophecy. It was easier to avoid interrogating their own judgment, and to instead dig a deeper hole of delusion for themselves.”This shows the danger of holding strong opinions and leaving no room for the possibility that you could be wrong, particularly when you are investing money.Perpetual property bears seem to ignore the evidenceThere are two prominent commentators that have been perpetually bearish about the Australian property market since I started ProSolution in 2002.They are Martin North from Digital Financial Analytics and economist Dr Steve Keen, who is now working in London. Of course, there are others but these two stand out in my mind.They have both been outspoken and incorrectly predicted property price crashes on a number of occasions. In fact, I recall watching Dr Keen on the TV program, Sixty Minutes in 2008 telling all Australian’s to sell their property. Apparently, he even sold his apartment. He predicted that prices would crash by 40% between 2008 and 2010. He was so certain. Of course, he was wrong.People that hold perpetually negative views, that leave no room for the possibility they could be wrong and ignore all the evidence, lack credibility.Financial advisors that hold strong beliefs are also dangerousI know some advisors that hold very strong beliefs about the methodologies they utilise. They believe their way is right and everyone else is wrong.Whilst I admire their conviction, such strongly held beliefs are dangerous. In life, things are rarely that black and white. There’s almost always some nuance.Hold strong opinions, looselyThe saying “hold strong opinions, loosely” perfectly suits investing. You should have a strong conviction in the robust investment strategy you adopt, especially since it should be supported by sound, evidenced-based methodologies. However, at the same time, you must leave room for the possibility that you could be wrong. That every investment you make may not work out how you had hoped.This humble mindset will greatly reduce the risk that you will be blindsided by unexpected risks. It will also ensure you spot investment opportunities that you may not otherwise see.Beware of confirmation biasConfirmation bias is a tendency to look for, and take notice of, information or evidence that supports our beliefs. When it comes to investing, confirmation bias is dangerous.The best way to avoid confirmation bias is to force yourself to argue for the opposite case. For example, when I wrote in May that property values wouldn’t fall materially, I forced myself to think of all the reasons why there could be a property crash. I pretended to debate myself.I do that with economists and portfolio managers that I meet too. I argue for views that are opposite to mine e.g. why the US tech sector isn’t overvalued (BTW, I think it is!). Being the devil’s advocate allows you to test your own views and to not get sucked into confirmation bias.What strongly held views do you hold? And are they limiting your investment options?Here’s some examples of beliefs held by people I have met over the years:§ Investing in shares is risky.§ All financial advisors are greedy and should not be trusted.§ Property is over-valued and cannot generate double digit returns in the future.It is my view that none of these beliefs are correct in absolute terms. For example, some share investing methodologies are high risk. But there are lower risk methodologies too.It is good to regularly test your own beliefs and look for evidence to the contrary.
This year’s budget was definitely aimed at business rather than individuals, and it needed to be. The main goal of the federal budget is to create jobs to repair the damage that Covid has done to the economy and Australian community.Therefore, if you already have a job, there’s not much good news for you in the budget. However, there is plenty of good news for the Australian economy which will probably enhance the share market and property investment returns.What’s in it for individuals?The major benefit contained in the budget for individuals was income tax cuts. These tax cuts are backdated to begin on 1 July 2020. The table below sets out the tax savings (second column from the right) that you may enjoy.The budget also included some other miscellaneous benefits, which are listed below.Improving the super industry and performanceThe government will direct employers to pay super into existing accounts (as advised by the ATO) to avoid opening a new account with a new super fund when you start a new job. This will avoid workers unknowingly accumulating multiple super accounts.The government will also take measures to improve the accountability and transparency of super funds, which is a problem I have written about previously. This includes building a MySuper website which will allow people to rank investment returns and fees. Any improvements in this space are long overdue.Interestingly, the government did not announce that it would postpone the increase to the compulsory super contribution rate from 9.5% to 10% p.a. At this stage, this is still set to begin on 1 July 2021.Granny flat arrangementsGranny flats will now be exempt from CGT where a formal written agreement is in place.Relaxing the paid parental leave qualification criteriaParents will qualify for parental leave payments if they have worked in 10 of the last 20 months, instead of 10 of the last 13 months, preceding the birth or adoption of a child. This is to accommodate the impact of Covid.Additional government grantees for first home buyersThe government will make available an additional 10,000 First Home Loan Deposit Scheme guarantees in the 2020/21 financial year. This arrangement allows first home buyers to borrow up to 95% of a property’s value without needing to pay for Lenders Mortgage Insurance (LMI).Summary of major incentives for businessThe below sets out a list of incentives for businesses:§ Full write off of any capital expenses (no cap) incurred before 30 June 2022 for businesses with a turnover of less than $5 billion. This means large business will be able to get a full tax deduction for any asset purchases they make over the next 2 years.§ If a business makes a loss in the 2020/21 and/or 2021/22 financial years, they can offset that loss against tax previously paid in the 2018/19 and 2019/20 financial years. This means they may receive a refund of tax previously paid.§ If businesses employ an apprentice between 5 October 2020 and 30 September 2021, they will be able to claim a reimbursement of up to 50% of their wages up to a maximum of $7,000 per quarter.§ Eligible businesses will be entitled to a credit of $200 per week for one year beginning 7 October 2020 for each new employee they hire that is aged between 16 and 29 years (or $100 per week if aged between 30 and 35 years).§ The government will reduce FBT record keeping obligations.Please contact us if you would like more information above any of the above initiatives.Treasury’s economic forecastsThe good news is that off the back of these very substantial business indicatives, Treasury estimate that real GDP growth will rebound strongly next financial year by 4.75%. Admittedly, this is off a lower base, with estimates suggesting that GDP will decline by 1.5% this financial year.Treasury estimates that the unemployment rate will be 7.25% by June 2021. It forecasts it will gradually fall to 5.5% by June 2024, which is almost at pre-Covid levels.Government debt will increase from circa 25% of GDP (in June 2020) to 40% by June 2022. This still very low by global standards and somewhat unavoidable.Enhancement of share market returnsWhilst Australian equity markets are substantially influenced by global markets, particularly the US, I think these budgetary measures will be positive for our bourse.In particular, the personal income tax cuts, business employment incentives, business investment incentives and relaxing of mortgage lending rules will greatly assist the big 4 Australian banks. The banks account for approximately 17.6% of the top 200 (ASX200) index. Only two years ago, they accounted for 23.5% of the index but due to Covid, their share prices have been smashed. As such, the Australia’s stock market’s recovery is heavily dependent on the recovery of the big banks. And the initiatives outlined in the budget will go a long way to aiding this recovery.According to data published yesterday by ANZ economics (see chart below), personal spending around Australia is tracking at or above the same level compared to one year ago, with Victoria the only exception. That said, interestingly, spending in Victoria appears to be recovering from its Stage 4 lockdown lows. On the whole, considering the events this year, the Australian economy is faring pretty well.Property market recovery and growthMy article that appeared in The Australian newspaper over the weekend (click here) cited a number of reasons why I believe higher value property (i.e. > $1m) will lead the property market’s recovery. The initiatives contained in the 2020 Federal Budget do nothing to loosen that view.I believe that properties (1) located in blue-chip inner-city suburbs and (2) regional centres that offer a balance of work-from-home convenience and lifestyle benefits will perform the best over the next couple of years.Locations that are dominated by lower-income earners may lag in the recovery. But on the whole, I think the prospects for the property market are positive.Good news for AustraliaIn summary, the 2020 Federal Budget is relatively good news for the Australian economy and our Covid recovery. Whilst there are not a lot of financial planning opportunities, the good news is that it will likely have a positive impact on our property and share investments.
The government made an important announcement last week. This change could substantially increase your borrowing capacity in the next year. It is perhaps the most significant change that has occurred in the last decade and will further fuel property price growth.I also wanted to update you on interest rates, particularly in light of recent expectations that the RBA will soon cut rates again.A positive change for investors and the property marketIn 2009, the government re-wrote the laws governing the provision of loans. This required mortgage brokers and lenders to ensure that any new loans provided to borrowers were ‘not unsuitable’.The background is importantSince the introduction of this new legislation, the government (ASIC) has been gradually tightening the laws, particularly over the last 3 to 4 years. In October 2018, I compared the loan application process to a forensic investigation (see below). This was not an exaggeration.A few months ago, even the Governor of the RBA agreed that the tightening of credit rules had gone too far. There have been many examples of banks trawling through bank statements questioning small ($20) expenses. This pedantic approach added very little to the quality of the credit assessment.Your current spending tells me little about your ability to repayPerhaps the most significant recent event was Westpac’s success in defending an action initiated by ASIC regarding its alleged non-compliance with the credit laws. This case is now referred to as the 'Wagyu and shiraz' judgment. That is because Justice Perram said "I may eat Wagyu beef everyday washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare…”.When faced with the decision of whether to go out to dinner or make a mortgage repayment, almost everyone will make the right decision. To some degree, a high level of discretionary spending is arguably strong evidence that you have surplus cash flow that you could otherwise divert towards loan repayments.The upshot is that 100 pages of ASIC guidance has created a very bureaucratic, inflexible, one-size-fits-all approach to assessing loans. This creates undue complexity, long delays, avoidable costs and sometimes perverse outcomes. No one wins.The main proposed change is…The main change proposed by the government is that lenders will be allowed to rely on information provided by borrowers, unless there are reasonable grounds to suspect that information is unreliable. This means the bank can ask you about your expenses and, in most situations, rely on the answer you provide. This avoids them having to trawl through your bank statements, like they do now. When formulating your answer, you can give consideration to what your “base level expenses” are. That is, all fixed and non-discretionary expenses. This may better represent your capacity to afford any proposed loan repayments.In addition, the 'Wagyu and shiraz' judgment confirmed that it is acceptable for banks to use “benchmark expenses” when assessing a loan application. In this situation, some banks may not choose to ask you what you spend. The banks have a substantial amount of data about what their customers spend, which should allow them to determine reliable benchmarks.Criticisms and what I hope happensThis recent announcement by the government has attracted a lot of criticism. The main concern is that shifting the responsibility from the bank onto the borrower could invite lenders to repeat past mistakes i.e. giving loans to people that cannot afford it.It is my view that the lending regulation should never be relaxed back to pre-2009 levels. Governance and oversight at that time was far too lose. Conversely, its current form is too restrictive. The correct level is somewhere in the middle.Banks and brokers must ensure they only give loans to borrowers that can afford it and where it is in their best interest. Sometimes, declining a loan (or declining to help someone) is in their best interest.At the same time, regulation must allow some discretion so that different borrowers are assessed in different ways. For example, I think we all can agree that a borrower that has $10 million of property plus $5 million in cash can probably safely borrow $1 million, almost irrespective of their current income, expense levels and age.This could increase borrowing capacity by 20-30%Any changes will not come into effect until after 1 March 2021, at the earliest. Lenders have not yet responded to the government’s announcement. Therefore, it is impossible to ascertain what impact these changes will have on borrowing capacity, but it’s likely to be material.My initial calculations indicate that it could increase a borrower’s capacity by as much as 20% or 30%.An increase in loan volume will fuel property price growthLast week, I wrote that I expect property prices to rebound strongly over the next 12 to 18 months (i.e. by 10% plus). This change in lending policy strengthens my expectation.I have previously explored the relationship between loan volume and property price growth (see here). There is a strong positive relationship. This increase in borrowing capacity will lead to higher loan volumes and inevitably create upward pressure on property prices.2021 is shaping up to be a good year for property investors.Update on interest rates and fixed ratesThere are two important matters I wanted to highlight.(1) RBA rate cutsThere has been a bit of talk about the RBA cutting the cash rate from 0.25% to 0.10% p.a. Whilst this might sound like good news for borrowers, I don’t think it will have any impact on mortgage interest rates.The main reason the RBA wants to cut rates is to reduce the government’s borrowing costs. The government recently issued 10-year bonds at a cost of circa 1% p.a. The expectation is that the RBA would like to reduce the government's borrowing costs from 1% to closer to 0.50% p.a. It can do this by cutting the cash rate and perhaps implementing additional quantitively easing.The federal government will deliver its budget next Tuesday (6/10/20) night and it will almost certainly include a lot of government spending funded from debt. As monetary policy initiatives (cutting rates) have been exhausted, it is now up to governments (fiscal policy) to spend money to stimulate an economic and jobs recovery. Government can do that effectively because the cost of debt is so low. But the RBA must ensure the Australian government’s cost of debt is globally competitive and comparable.The upshot is that I don’t anticipate that the banks will pass on all or any of future cuts to the RBA cash rate. Variable mortgage rates are unlikely to be impacted.(2) Fixed ratesFor the first time in over 20 years, I have fixed some of my personal mortgage rates. Historically, I have not been a fan of fixed rates, as I have always preferred to maintain as much flexibility as possible. As an active investor, I tend to refinance my loans every 2-4 years (as discussed here).Also, the chart below that I drew for my latest book, Rules of the Lending Game, demonstrates that in most situations, fixed rate borrowers are worse off.https://www.prosolution.com.au/wp-content/uploads/2020/09/fixed-rates.png However, this is a unique time in history because we know the variable interest rate floor. That is, we know that it’s almost impossible that variable rates will decrease (materially) below current levels, especially home loan rates. As such, variable rates will only rise in the future (albeit maybe not for a very long time). That makes comparing fixed and variable rate options a lot easier.3-year fixed rates are, on average, much lower than the current variable rates:* 0.30% to 0.50% p.a. lower for principal and interest home loans; and * 0.50% and 0.80% lower for interest only investment loans.
As such, fixing your mortgage for 3 years can provide some attractive interest rate savings over the next 3 years.There are some good reasons not to fix including preserving the ability to make large principal repayments, if you plan to sell a property, to retain an offset and so on. Therefore, I suggest you get some advice before making the decision to fix.Powerful combination of higher borrowing capacity and low fixed ratesFixing interest rates on existing debt and waiting for these aforementioned borrowing capacity changes to be rolled out could result in substantially positive outcomes for investors. It is important that you are taking full advantage of the opportunities this situation provides.
n May, I wrote a blog after CBA released its bearish ‘worst case’ forecast for the property market. It predicted a 32% drop in prices! I outlined in my blog why I thought that was rubbish and prices would not fall by more than 10%. To date, according to various data sources, property values have not slipped by much more than 2% to 3%, which is barely noteworthy.CBA revised its forecast on 9 September admitting they got it wrong.Now that the virus is under control in Melbourne (and also nationally), I thought it was an opportune time to share my forecast for next year. It is my view that prices in well-established, inner-city, blue chip suburbs will rebound strongly in 2021 and deliver double-digit growth.I set out the reasons for adopting this view below.Covid has hurt low-income earners and younger people the mostUnfortunately, lower-income earners have been more financially vulnerable to the impact of Covid. They tend to work in occupations that do not lend themselves to working from home. In addition, industries such has hospitality, travel and tourism have been severely impacted, especially in Melbourne. As such, Covid has disproportionately affected lower income earners to a much greater extent.A high proportion of middle and higher income earners are likely to either recover their income back to pre-Covid levels very quickly or haven’t been impacted at all.In fact, there is a large cohort of people that are in a stronger financial position today. That’s because their income has been unaffected, their discretionary spending has reduced e.g. less eating out and no holidays and interest rates are at all-time lows. As such, many people have either accelerated debt repayments or accumulated more savings.The best evidence of the financial strength of this cohort is reflected in the credit card spending data compiled by the banks. This data gives us a real-time indication of how much people are spending by category. Overall consumer spending is up 5% compared to last year. This demonstrates the unaffected cohort more than makes up for the people that have lost their jobs and income. This thematic is likely to translate to the property market too, especially in blue-chip suburbs.Low rates will inflate asset pricesIt is a generally accepted economic principal that lower interest rates result in increased asset prices. For example, if a company can source capital at a lower interest rate to fund growth, its profits will be higher and as such, its shares will be worth more.This concept applies to property too. If money is cheap, then it costs less to hold an asset and holding all other factors constant, its value will appreciate.I wrote a blog in May that highlighted that it is cheaper to own a property than rent it. This defies logic and is likely to encourage more people to buy rather than rent, assuming their financial situation allows it. As such, demand for property is almost certainly going to increase.The RBA has said that it does not expect to increase the cash rate for at least 3 years. However, many economists predict that interest rates will remain lower for a much longer period of time. This interest rate expectation will further fuel demand.Supply shortage will drive prices higherThis year national property listings have averaged below 300,000 for the first time since August 2010. The fall in listings is even more severe in some blue-chip suburbs where volumes are averaging 30-50% lower compared to previous years.This stands to logic as the Melbourne property market has been closed since stage 4 lockdown restrictions were enforced at the beginning of August.Listings will eventually increase but probably only gradually over the next 6 to 9 months. The reality is that most people won’t feel confident putting their property on the market until after several months of buoyant results. Its herd mentality.Therefore, by the time stock levels have normalised, which is probably mid to late 2021, most Australian’s would have financially recovered from the impacts of Covid and there should be enough demand to soak up the higher volume.Until then, the market will be driven by a shortage of the supply of properties for sale. Demand will outstrip supply and drive prices higher.Prepare for a government spending spreeThere has been a lot of discussion about the September ‘fiscal cliff’ when JobKeeper and loan repayments pauses were set to mature. Both of these measures have been extended. I’m confident that there won’t be any mass selling of property as a result of Covid.The Federal government will release its budget on 6 October 2020, and we should be prepared for a spending spree. I expect that JobKeeper will be in place for as long as it’s needed e.g. hospitality operators in Melbourne will likely need it longer than most. The government will spend big on infrastructure to create jobs. And its likely there will be targeted campaigns similar to the UK’s “Eat Out to Help Out” scheme.A few weeks ago, the Australian government sold $21 billion of bonds that mature in 10 years for an interest rate if around 1% p.a. Whether you subscribe to Modern Monetary Theory or not, the fact is that money is cheap! It doesn’t cost governments a lot in interest to borrow to stimulate their economies. Most economists acknowledge that the cost of not helping the economy recover from Covid is far greater than the future burden of higher government debt.Population growth will bounce back stronglyWhen it becomes easier to imagine a world without Covid, even if we don’t anticipate that occurring until late 2021 or 2022, I think overseas imagination will bounce back strongly. I think Australia will be seen as a very safe place to immigrate to, especially when compared to the UK and USA.As such, demand for immigration over the next 10 years, will probably be materially higher than it was pre-Covid. If this turns out to be correct, the resultant increase in economic activity and demand for property will start to be reflected in prices.In the short-run, Covid has wiped out overseas migration, and that’s a negative thing. However, in the long run, Covid could be its largest stimulus.Beware of temporarily overinflated valuesIf the volume of property listing remains very low for an extended period of time, it might result in some properties selling for prices well above their intrinsic value. Such results could subsequently attract a flow of new listings. And that could see prices quickly dip back to more realistic levels. This is a risk that is present in a market that is driven by very low supply.If you are wanting to buy an investment-grade property, you should always be willing to pay fair market value. But don’t let FOMO drive your property decisions. Low supply rarely persists for longer than six months. Don’t be impatient and overpay.Investment-grade markets may perform betterMost property price predictions relate to capital city median house values, not investment-grade locations. This commentary relates to blue-chip locations.It is possible that prices for properties in suburbs dominated by lower-income earners could under-perform. Because of the way Covid has affected the income earners differently, it could result in a two-speed property market.In the long run, it doesn’t matterIf you are buying a property and intend to hold it for 10 or more years, it doesn’t really matter how prices will behave over the next one to two years. The most important matter is what you buy, not when you buy.
The compulsory superannuation contribution rate is set to increase by 0.5% each year for the next six years (i.e. from 9.5% to 12%) beginning from 1 July 2021. It is understood that the Federal Government is considering postponing next year’s increase, due to concerns about whether the economy can afford these higher employment costs and at the same time as deal with the current economic challenges.A lot of the commentary about superannuation, including whether next year’s contribution increase should be postponed, is often motivated by political and vested interests. Therefore, I thought it would be useful to cut through this rhetoric and focus on the facts alone (i.e. maths).In particular, I wanted to focus on two questions; (1) how long will your super last after retirement, and (2) how important are higher contributions compared to investment returns and fees.How long your super will last depends on what you spendObviously, a key determinant of how long your super balance will last is how much you spend. The less you spend, the longer your money will last – no surprises there!The best way to assess how much money you will probably need in retirement (to maintain your current standard of living), is to base it on how much you spend today. Of course, it is likely that you will spend your money on different things, but the aggregate amount tends to be very similar (between when you are working to when you are retired).This table sets out what people tend to spend, based on my experience. The rule of thumb is that living expenses (see my definition of General Living Expenses here) tend to be in the range of 40% and 50% of your gross employment income (but typically not less than $50,000 or more than $150,000).Comparing annual contribution levels of 9.5%, 12% and 15%In my analysis, I measured the impact of a 30-year-old contributing a total of between 9.5% and 15% of their income each year for 30 years i.e. until they are age 60.In most circumstances, contributing 12% or more of your income each year had a material impact on the longevity of super. In fact, for higher income earners that are 20 to 30 years from retirement, it was a magic bullet. That is, it would likely give them a sufficient super balance to fund their whole retirement.Comparing investment returns of between 6.9% and 8.5% p.a.I compared investment returns produced by the top 8 industry super funds for the last financial year in this blog. Based on data to the end of August 2020, 10-year returns ranged between 6.9% and 8.5% p.a. That is a large range i.e. 1.6% p.a. and it makes an enormous difference, particularly for higher income earners.Picking the best fund out of the top 8 versus the worst, could be the difference between your super running out in your early 70’s versus it lasting for the rest of your life. It is important to note that the top performing fund will probably change over time, which is why it’s important to proactively manage your super (to ensure it is always invested well).Comparing fees levels of 0.6% and 1.0% p.a.Whilst super fees were important, they were the least important factor of the three compared. That is not to say that you shouldn’t actively reduce the super fees you pay.What are my findings?The chart below (click to enlarge) sets out my findings. I compared three scenarios:1. A situation where a family has minimal surplus income and therefore little capacity to make additional super contributions. In this scenario, I assumed total family income of $150k and living expense of $75k p.a. The number one factor to focus on in this scenario is ensuring they maximise investment returns. Doing so could result in their super lasting well into their 90’s. 2. Higher income and average expenses i.e. family income of $230k and living expenses of $95k p.a. It is important to note how sensitive investment returns are. Making additional contributions were important too, but arguably unnecessary if long term investment returns are maximised. 3. High income but also high expenses i.e. family income of $340k and living expense of $150k p.a. The key observation in this scenario is; if you want to spend an above average amount in retirement, you must contribute an above average amount whilst you are working.
How much super should you have today?You can apply the findings of this analysis to your situation even if you are materially older than 30 years today, as long as your super balance is on track.As an indication, your family’s total super balance (i.e. both spouses) should be in the following ranges to be considered “on track”:* 30 years old – between $40k and $100k. * 40 years old – between $300k and $400k. * 50 years old – between $600k and $800k.
If your super balances are in the ranges provided above, then pick the scenario that best reflects your circumstances and apply the conclusions I have set out.What should you do if your super balance is low?If your super balance is less than the indicative ranges provided above, then it’s likely you will have to implement both tactics; (1) maximise your contributions and (2) maximise investment returns.However, be warned that you probably still won’t have enough super. It may allow you to fund the first 15 years of retirement i.e. until mid 70’s. As such, you must implement additional investment strategies (outside super) such as share market or property investing. If not, you must come to terms with having a lower standard of living in retirement.Are there better things to do other than make higher contributions?Making additional super contributions is a worthwhile tactic, especially if you commit to making them over long periods of time. However, depending on your circumstances and goals, it may not be the most effectual use of surplus cash flow, particularly in a low interest rate environment. Also, like with lots of things in life, diversification is a good idea. Spreading your wealth in and outside super reduces the risk that your retirement plans will be adversely impacted by a change in super rules.Holistic, long term planning is importantThis demonstrates how valuable it is to formulate an astute, well-considered, holistic wealth accumulation strategy. Having such a strategy gives you the confidence that you are doing all the right things at the right time. And as the analysis above demonstrates, that can have a substantial impact on your lifestyle and retirement.
Investing well is important. However, investing well over long periods of time is most important.Everyone would agree that making a one-time 50% return on an investment is a wonderful outcome. But making a 7% return each year for 40 years is a far better outcome, as it multiplies your initial investment by a factor of 15!This is an important principal to remind ourselves of, especially at the moment when our lives (and, to some extent, markets) have been turned upside-down by Covid-19!Even moderate returns over long periods generate massive wealthThe chart below published by Vanguard (click to enlarge) calculates how much $10,000 invested in 1990 would be worth today.The Australian (ASX200) index is currently trading at 5,985. If it grows at 2% p.a., what will its value be in 50 years’ time?The answer: The ASX200 would be 16,100.If it grew by an average of 4% p.a., it would be worth 42,500. Now, imagine it if grows by 8% p.a. – which is still below the 8.9% p.a. growth rate over the past 30 years. That would push the ASX200 index above 280,000!!This simple example illustrates the beauty of playing the long game.But to successfully play the long game, you must resist the temptation to get sucked into the incessant short term ‘noise’, worry and predictions.I am usually sceptical when people tell me things have changed foreverThe world is full of forecasts. At the moment, many commentators are telling us that the work-from-home (WFH) movement will result in companies deserting commercial office space en masse. And increased WFH will also result in a permanent increase in demand for regional property – since we don’t need to travel into the CBD anymore.As Mr Buffett says, “forecasters will fill your ears but never your pockets”. You should be sceptical when anyone tells you that things have changed permanently overnight, because they rarely do.Let me use WFH as an exampleIt is my view that WFH will have some impact on demand for commercial office space and, to a lesser extent, residential property in regional locations. But the size of its impact has been grossly overstated.The forced increase in WFH (thanks to Covid-19) has certainly increased its acceptance. I suspect in the past many people thought WFH was used by people as an opportunity to ‘hide’ and reduce their workload. However, now everyone knows WFH means you work just as hard as you do when you’re in the office - often harder, as there’s fewer distractions.Some CEO’s have also mentioned to me that that they used to feel obligated to be “seen” in the office each day, but this expectation has now changed.However, just because you have successfully WFH for the past 6 months does not mean you will be able to do it for the next 6 years.The reality is that permanent WFH does not suit the majority of industries, employees and employers. Most of us will still need an office to retreat to. Therefore, I think the likely long-term outcome is that more people will spread their time between the office and home. The ‘office’ is not dead, and neither is WFH.How to derive stable and attractive returns from property over the long termIn order to persistently achieve a capital growth rate of approximately 5% p.a. above inflation, you must invest in a location that has robust fundamentals. These fundamentals will ensure that demand will consistently exceed supply over long periods of time. And that translates to capital growth.In most developed economies around the world, income and wealth inequality is getting worse. The rich are getting richer, and the poor are getting poorer. According to the ABS, the wealthiest 20% of Australians own 63% of private wealth. Whereas the lowest 20% own a mere 1% of private wealth.Of course, most of us would agree that this concentration of wealth is unfair, and governments must implement bipartisan policies to improve equality. However, this trend has been getting worse since the 1970’s (as cited in this US study). Frankly, I don’t anticipate it abating anytime soon. Capitalism seems to be an unstoppable force.The reality is that the supply of houses (land) in blue-chip suburbs is finite. However, our population is growing at a much faster rate than other developed economies (i.e. 2.5 to 3 times faster than the UK and USA, for example). As such, it is not difficult to see why there is a growing cohort of people wanting to buy into Melbourne’s blue-chip suburb, Hawthorn (for example). And these people seem to have the endless ability to “pay more” than the last person, partially due to the distribution of wealth. Most of the wealthiest 20% want to live in inner-city suburbs that occupy less than 20% of the capital city (in land size).Playing the long game with property means you must invest in a location that is supported by the laws of supply and demand. It’s not about investing off the back of short-term trends or fads.How does this apply to investing in shares?Australian listed company Afterpay is often cited as a stellar stock – rising from $9 per share in March 2020, to over $90 a few weeks ago (it’s since retreated to $75). No one is going to be disappointed with earning a 10-fold return.However, there’s a few problems with investing in Afterpay. Firstly, your success is dependent upon knowing when to sell, as the company doesn’t make a profit, burns through cash and will soon attract substantial government regulation and increased competition. So, its share price is a fragile house of cards, with no foundation. As Kenny Rogers said, “you’ve got to know when to fold ‘em”.If you successfully make money from investing in Afterpay, what do you do next? You’ll have to pick the next winner – and keep doing that consistently well for years on end. Good luck.Alternatively, you could adopt an investment methodology that avoids the risk of picking the wrong stocks, sectors or investment managers.Adopting the lowest risk methodology is the best way to achieve the most predictable and consistent returns in the long run. Much like those that are illustrated in Vanguard’s chart above.And finally, applying it to cash flowThe difference between saving $100,000 once every 10 years or $10,000 consistently each year is substantial.The ability to predictably and reliably contribute a regular amount towards an investment strategy will be substantively more effectual. For example, it will allow you to spread your timing risk, adopt a gearing strategy and so on.By the way, jump to the 26-minute mark in this video for a description of a banking structure that allows you proactively manage your cash flow, eliminate unconscious expenditure without needing to track every dollar and cent.Focus on both: the quantum AND length of the returnGetting distracted by shiny objects is an easy investment mistake to make, especially when markets feel volatile and unpredictable.But it is times like these that we must remind ourselves about the fundamentals of investing.Adopting an investment approach that generates attractive and consistent returns over the long run has always been the most successful approach.
The difference between a great and an average accountant can be significant. Not only is tax one of your biggest annual expenses, but a great accountant should be able to proactively identify other financial opportunities, in addition to tax-saving measures.Typically, the more complex your financial situation is (e.g. if you are self-employed, running a business, have a trust or SMSF, etc.), the more you have to gain from having the right accountant. That said, working with a great accountant is in everyone’s best interest.How do you know if your accountant is great or not?It’s difficult for clients to tell whether their accountant is proactively looking for, and has identified, all financial opportunities. The reality is, you don’t know, what you don’t know.To help you, I have listed below some common traits or behaviours that may indicate if your accountant is great or not!They take a long time to respond to your calls/emailsThis is a common complaint by many people. A lack of timely responses causes two problems.Firstly, it suggests that they have too much work, are under-staffed or have poor organisational skills. Neither of these things will allow them sufficient time and space to be able to provide you with proactive advice – because they will always be (reactively) rushing onto their next task.Secondly, it will discourage you from seeking their advice or keeping them updated about changes in your circumstances. However, if you know your accountant is fast to respond to emails, then you will be encouraged to run things past them. Doing so will give your accountant more scope to add value.They don’t ask questions – just follow last year’s workIt should come as no surprise that preparing the same tax return, year-after-year can be repetitive work. That said, its dangerous to fall into autopilot mode because if you make a mistake or miss an item one year, you will continue to repeat that mistake in subsequent years.To combat this risk, good accounting firms regularly rotate staff so that the same person is not preparing the same work many years in a row – and also have well defined review procedures.If your accountant rarely asks you questions or for additional information during the return preparation process, then it could be a sign that they are running on autopilot.They don’t share ideas to improve your circumstances.Great accountants have a very broad amount of knowledge and experience including tax planning (of course!), investments, superannuation, business acquisitions and optimisation, insurance and so on. They have learnt a lot through observing past client decisions.This puts them in a position to be able to identify opportunities for their clients. But this process must be embedded in their processes and systems. For example, at the end of completing each job, your accountant should be asking themselves “if I was in their shoes, what would I be doing or thinking about”. How often does your accountant do that?They are stuck in the 80’s!Accountants are not known to be dynamic, forward-thinking people. But the truth is, great accountants are.Great accountants realise that their clients don’t want to pay them to manually prepare workpapers and keep doing things the old-fashioned way. Therefore, they are constantly on the lookout for ways to automate and streamline their processes, which inevitably requires the adoption of technology. This approach allows these great accountants to spend more time on more proactive work.If your accountant is paper based, resits the adoption of technology and is stuck in the 80’s, you should be concerned.They used lack of licenses as an excuseIn order to provide financial advice, your accountant must hold an Australian Financial Services License. And to provide mortgage advice, they must have an Australian Credit License.Some accountants use this as an excuse to avoid thinking about their clients; “sorry, I’m not licensed to answer that question”. It’s a very convenient (yet selfish) excuse to get out of doing any extra work.As such, you are best to use a holistic firm that holds these very important licenses because you want your professional advisors using their best efforts to help you achieve your lifestyle and financial goals. This includes them workshopping ideas with other suitable qualified, experienced and licensed professionals to uncover valuable strategies for you. Unfortunately, this type of generous work is not all that common.They are not investors themselvesA person that has a natural interest in investing and building wealth will make a better accountant. It is likely that they will spend a lot of their personal time thinking about, researching and educating themselves about investing, because they enjoy it and find it interesting. Of course, they may be doing it for personal reasons, but the benefits from this flow onto their clients too.An accountant that has a high level of intellectual curiosity about investment matters is more likely going to share such ideas with you.Being too income tax focused can end up costing moreYou really want your accountant to look at the big picture. You don’t want your accountant to do something just to save a few dollars in income tax if it costs you more money in other ways.A common example of this that we see is owning personal cars in a business’ name. Depending on the cost of the vehicle, this can give rise to very costly consequences such as Fringe Benefit Tax and the requirement to remit GST when you sell the car. A great accountant would never make or suggest such a mistake.Making sure a client’s tax strategy is congruent with their investment strategyAggressively reducing a client’s taxable income may also, in effect, reduced their borrowing capacity. Whilst the tax savings might be pleasant, the inability to borrow may prevent them from achieving lifestyle goals or investing. This will probably be less desirable than the tax savings.Again, this is why it’s important for your accountant to keep an eye on the big picture.Is it difficult to change accountants?No, it is a very simple process.What is the process?If your new accountant is a member of a professional body such as CPA or CA ANZ (and they should be), then they must send your incumbent accountant an ‘ethical letter’. An ethical letter asks them whether there “is any professional or ethical reason why we should not accept this appointment”. At the same time, the new accountant will ask the old accountant to forward any documentation to ensure continuity of service including past tax returns, scheduled, etc.This is a very standard practice and in almost all circumstances, accountants respond on a timely basis and in a courteous manner.Concurrently, we would add the new client onto our ATO tax portal, ASIC register and update any correspondence details.In summary, your new accountant does all of the necessary work.How do I find a great accountant?You already have! You are on their website now (click here for more about our service). JThe best way to find any trusted professional is by referral. Ask a few friends, colleagues or family members that are in similar financial situation to yourself.
This blog’s title is a bit deceptive, because every property you buy is important, for either lifestyle or financial reasons.I contemplated using the title: “why the first property you buy is the most important one”. But the reality is, if you have made a mistake on your first property, you can always start again.The general theme of this blog is to demonstrate that the compounding impact of buying the right property is critical to understand.Why is it so important?Let me explain using an example:Rick and Karen are buying their first home and are comparing two properties. Property A is considered to be investment grade and has great growth prospects i.e. 6% p.a. growth rate. Property B is a newer property but has inferior growth prospects and barely keeps up with inflation – growing at 1% p.a. Both properties cost $750,000. Rick and Karen need to borrow $700,000.After 5 years of principal and interest home loan repayments, the balance of Rick and Karen’s loan would have reduced from $700,000 to approximately $622,000. The value of Property A would be approximately $1 million, and Property B would be $790,000. If Rick and Karen purchased Property A, they would have $378,000 of equity. However, if they purchased Property B, would have less than half the equity i.e. $168,000. That is a substantial difference of $210,000!But it’s how this difference compounds that’s most importantIf in 5 years’ time, Rick and Karen were contemplating upgrading their property to buy a larger family home, the differential in equity will have a substantial impact on their budget.Assuming that they want to borrow a maximum of 80% of the new home’s value, a deposit of $378,000 will allow Rick and Karen to spend up to $1.45 million (allowing for 6% for costs including stamp duty).However, a $168,000 deposit will only allow Rick and Karen to spend $650,000, which is less than their current property value! If they buy for $1 million, they will have to borrow 90% of the value and pay for mortgage insurance (which will cost over $35,000!).Therefore, using this example, the difference between buying the right versus wrong property could be the difference between being able to take the next step (and buy a family home), or not.It should be noted that this equity gap will continue to grow. If Rick and Karen purchased Property B, they may be forced to buy their larger family home in a suburb further away from the CBD (due to budgetary constraints). This will mean they will have a lower value asset that attracts a lower growth rate – the equity differential could be massive, as charted below.And you can put that equity to workTo make matters worse, not only will buying the right property help Rick and Karen build more equity in their home, but they will be able to leverage that equity to build an investment portfolio. This could include borrowing to buy an investment property or invest in the share market.Should you buy a property purely to make a quick profit?No. In order to minimise your risk, it’s important to buy an investment-grade property that has sound long term fundamentals. A property that is well positioned to generate an above average capital growth rate over the long term. That must never be compromised.However, if your goal is to upgrade or invest in the shorter term, then it does make sense to pick a property type or location that is expected to deliver a reasonable amount of growth in the shorter term.This could include a number of things:1. Picking a property type that you expect to out-perform e.g. buying a villa unit rather than an apartment (this is only an example – I’m not suggesting villa units will in fact out-perform, although they might in some locations);2. Picking a location that already has above average growth momentum. This can be more difficult to accurately pick, so be careful. Some investment-grade locations are more popular or trendy than others, and riding that momentum can be helpful; and/or3. Buying a property that would benefit from cosmetic improvements. Economically upgrading the kitchen and bathrooms; a coat of paint and new carpets can substantially improve a property’s value and ‘create’ equity.However, the above strategies are not mutually exclusive. You MUST still ensure that the property has sound, long-term fundamentals. That way, if you mess up the abovementioned tactics, at least you will still enjoy decent growth in the long run. Plus, if you buy a quality asset, the chances of losing money are substantially reduced.This is particularly pertinent for first home buyersThe understanding that is it important to buy well is particularly important for first home buyers. The reason is that first home buyers tend to have a relatively weak asset base and therefore have more to gain from creating as much equity as quick as possible. Also, they tend to have lower incomes which makes building equity via debt repayment all the more difficult.As such, making an astute decision with respect to your first property (i.e. buying well) could create a substantial amount of equity, in dollar terms, compared to their starting deposit and/or income. That is, a first home buyer with a $40,000 deposit and a modest income could amass well over $100,000 of equity in a relatively short amount of time.This ‘financial kick start’ could catapult a young adult’s financial position dramatically.What if you currently own the ‘wrong’ property?Of course, we all make mistakes in life and that sometimes to extends to buying the wrong property. But all is not lost. The most important step is recognising you have made a mistake and develop a plan to fix it.The next step is to divest of your dud property whilst still maximising its sale value. That means you don’t want to give it away. But you also don’t want to wait 10 years before selling it either. Be realistic about its current value and pick the best time within the next 1 to 3 years to sell it.Once you have done that, you can apply some of the ideas I discuss above to ensure you do not repeat same mistakes.This applies to homes and investment propertiesWhere practical, I counsel my clients to apply an investment lens when selecting an owner-occupier home. Buying your home well, will improve your asset base, and therefore your ability to invest to build wealth.I hope this blog goes some way to demonstrating how generating equity relatively quickly can catapult your investment plans. Good luck.
My professional life has been all about “the numbers” for more than two decades! So, as an accountant and financial advisor, it pains me to say that numbers are not always right!Numbers are factual, verifiable, logical and the ‘robustness’ gives me a lot of confidence. However, when it comes to investing in property, a focus on numbers alone can cause very costly mistakes.Evidenced-based approaches are rooted in simple mathI am a strong believer in only employing evidenced-based investment methodologies. That is, only invest when there is overwhelming evidence that the methodology will generate the investment returns you desire. If there is no evidence, then it is too risky. You may as well throw darts at a dartboard.Of course, normally we look to math to verify the evidence. Therefore, I appreciate that me stating that numbers can’t always be trusted may be somewhat contradictory.Why can the numbers be wrong?It is very important to understand what has driven the data, because not all data is reliable or meaningful.Suburb median data is a good example of this point. Sometimes I see advisors or journalists reporting median house price growth in a given suburb, often to support an investment case. But it’s important to understand the data before drawing any conclusions.Was the volume (number) of sales statistically significant? Were the properties that sold during the period representative of the property type you are considering investing in? Were the results driven by a once-off change such as the release of more land, major developments or the gentrification of the suburb?Just because a suburb has generated price growth of 9% p.a. over the past 5 or 10 years, doesn’t necessarily suggest its future growth will be in line with this.Property specific dataProperty specific historical data can also sometimes be unreliable.It is important to ascertain whether past sales were representative of the true market value of the subject property. Situations such as sales between related parties, transactions in very buoyant markets (i.e. if purchaser overpaid), if any capital improvements were made to the property during the period and so on. These can all affect the implied capital growth rate.Not every sale perfectly reflects a property’s intrinsic value, so care must be taken.Data can over or under inflate historic growth ratesData might suggest that a particular suburb or geographical location is primed for future growth, but if the data is wrong or unreliable, you could make a very costly investment mistake.Similarly, individual property growth data might suggest a property is a good or bad investment, but the reality might be different. You must understand the story behind the numbers.And this is where the art comes in…You should never make important property decisions on data alone. The data only gets you part of the way. You must compliment that data with local area knowledge and expertise.Having many years of experience in a geographical market allows you to understand a market better and appreciate any changes in value drivers. This is where the “art of property” plays an important role. It gives context to the data and allows you to decide on its relevance.Paying for someone else’s experienceAccording to the Guardian, psychologist Dan Ariely (sidebar: he has given some interesting and entertaining TED talks), tells a tale to demonstrate the value of experience:There was an industrialist whose production line inexplicably breaks down, costing him millions per day. He finally tracks down an expert who takes out a screwdriver, turns one screw, and then - as the factory cranks back to life - presents a bill for £10,000.Affronted, the factory owner demands an itemised version. The expert is happy to oblige: "For turning a screw: £1. For knowing which screw to turn: £9,999."Investing in property requires several hundreds of thousands of dollars. Getting it wrong can be very costly in terms of lost money or opportunity cost. Engaging an expert with several years of experience will help you avoid making a costly mistake.It is for this reason that it is critical if you are going to engage the services of a buyers’ agent, they must be an expert in their geographical market. Some buyers’ agents will buy property all over Australia but to me, that just feels too risky and waters down the very value that a buyers’ agent should provide.There is overwhelming evidence that using the right buyers’ agent does minimise the likelihood of you making a costly mistake.Reviewing property performance each year can be meaninglessI have written many, many times that reviewing your investment’s performance is very important. However, with property, that can be difficult to do as performance is almost never evenly distributed i.e. straight line. Just because your property hasn’t delivered any capital growth for a few years doesn’t necessarily mean it’s a dud asset. Again, in this situation local market expertise is critical – even more critical than financial analysis.It’s both art and scienceAs I wrote in a blog in 2016, investing in property is part-art and part-science. Trawling the internet for data is an important step in completing investment analysis. However, it is only one of many important steps. Beware of being sucked into analysis alone. There is no substitute for practical experience, in many vocations including property investing.
According to the ABS, the number of people refinancing their mortgage increased by over 63% in the year to May 2020. Quite often people think the only reason to refinance is to obtain a lower interest rate. However, this thinking is incorrect. Typically, you don’t need to refinance to obtain a lower interest rate (more about this below). As an experienced investor myself, I can tell you that there are far more important reasons to refinance your loans.What is a refinance?This might sound like a basic question. However, there are two types of refinances; internal and external. A refinance essentially involves entering into a new loan agreement. You can do that with your existing lender/bank, and this is called an internal refinance. Alternatively, you can switch to a new lender and this is called an external refinance. This distinction is important for my discussion below.The first two reasons are the most importantOver the past 20 years, the primary motives for refinancing my personal mortgages were because of the first two reasons below. I’ll share why later in this blog.Reason # 1: restructure your loansYour loan structure can have a big impact on your cash flow and ability to invest. Restructuring your loan repayments, how loans are secured, loan terms and so on can provide substantial financial benefits. Here are a few examples:Resetting your interest only termAs I explained in a blog last year, interest only terms typically run for 5 years only. Once that initial 5-year term expires, most (but not all) lenders allow borrowers to rollover onto an additional 5-year term. However, once you have used two 5-year terms, the only way to get another is to complete an external refinance, and switch to a new lender.Resetting your loan term to 30 yearsAlmost all loan contracts are based on a 30-year loan term. If you elect to repay interest only, then your 30-year term will be split into two parts; one 5-year interest only term and the remaining 25-years on principal and interest (P&I) repayments. Therefore, if you use two 5-year interest terms (a second interest only term is typically only permitted for investment loans) and then switch to P&I repayments, your repayments will be based on the remaining term of 20-years. This will increase your minimum repayments. For example, repayments on a $800,000 loan over 20 years are approximately $4,440 per month. However, refinancing the loan to back to 30-years reduces the repayments to $3,380 per month thereby improving a borrower’s cash flow. You can achieve this by completing either an internal or external refinance.Release security, especially if you are planning to sell a propertyIt is important that loans are structured correctly to minimise your risk (minimise security), maximise control and ensure tax deductions are never compromised. To this end we often assist clients in restructuring their loans which could include unwinding cross-securitisation, consolidating loan accounts, splitting accounts, releasing property as security and so on.If a client plans to sell a property, we will consider doing two things in advance. Firstly, where possible, we will release that property as security. This ensures that bank has no control over the sale funds. Secondly, we will consider whether to retain the existing loan to preserve the client’s borrowing capacity.Reason # 2: maximise borrowable equityMaximising your borrowable equity is important as accessing additional capital will help you build your investment portfolio and/or achieve your lifestyle goals.Bank valuations can differ materiallyIt is not uncommon for a valuation of the same property by two different banks to differ by several hundreds of thousands of dollars. This can be the difference between being able to acquire another property, or not. Therefore, it is important to have a realistic assessment of the value of your property and then find a bank/valuer that shares your viewpoint.Higher borrowing capacityEach bank will have a different borrowing capacity for different client scenarios. These policies can change over time. As such, it’s possible that the lender with the highest borrowing capacity today, might have one of the lowest borrowing capacities 5 years from now. If your lender changes its policies or your circumstances change, it might necessitate a change in lenders.Put some distance between a previous credit assessmentSometimes it's important to switch to a new lender to benefit from a fresh pair of eyes. For example, if your existing bank has determined they don’t want to lend you anymore money, then you need a brave credit manager to overturn that decision, even if a few years have elapsed (since that decision was made). That could be the case even if your financial position has improved.However, a new lender isn’t influenced by any previous credit assessment. Instead, it will focus solely on the merits of your application.Reason # 3: reduce overall costThe third reason is to obtain a lower interest rates and/or fees. However, as I explain below, you may not need to refinance to a new lender to achieve this.The typical attraction of refinancing to a new lender is because they either offer you a higher variable rate discount or they offer the lowest fixed interest rates.Many lenders are offering cash incentives of between $2,000 and $4,000. This more than offsets the cost associated with refinancing. Refinancing typically incurs three fees:1. Your incumbent lender will charge a discharge fee to deal with the administrative aspects. This is normally around $300 per loan.2. Your new lender will charge a settlement fee – again to deal with the administrative aspects of setting up the new mortgage. This fee is approximately $200 per loan.3. Mortgage deregistration and registration fees. These are government fees and depend on the state the mortgage is registered in. These fees usually range between $200 and $300 per property (security).How to get a lower rate without refinancingMost lenders will offer borrowers higher discounts to retain your business. But, of course, they won’t do that proactively. You must ask! Also, the lender must know that you are prepared to walk if they don’t reduce your interest rate. This is why it’s important to cite a competitive offer.If you need any guidance with doing this, please don’t hesitate to drop Jodi an email.You should do this before contemplating switching lenders.Why are the first two reasons the most importantThe first two reasons are important because they help you safely extend your borrowing capacity. Borrowing is a scarce resource. That’s because its supply is finite – no one has an infinite borrowing capacity. We all have a limit on the amount we can and should borrow. This limit could be restricted by your financial position or risk appetite. Or perhaps its restricted by the banks.The important thing is that you take steps to safely maximise it. Doing so will ensure you have access to as much capital as possible to continue to build your investment portfolio and achieve your lifestyle goals.How often should you refinance?Speaking from personal experience, as an investor that is actively building wealth, I have typically refinanced every 2 to 4 years. I never plan to leave my existing lender/s. But if they start saying no, I don’t listen to them. Instead, I find a lender that will accommodate my realistic plans. That has allowed me to continue to achieve my financial and lifestyle goals.If you are not an active investor, then it’s very possible that you won’t need to refinance as often.Beware. Refinances take timeThere’s almost no such thing as a quick refinance, especially since lenders back-office processing has been adversely impacted by the Covid lockdowns here and overseas. Depending on the lender, refinances can take 2 to 3 months to complete – from start to finish.When it comes to refinancing, patience is definitely a virtue.Join me next week?To mark the release of my latest book (Rules of the Lending Game), I am hosting a webinar next week (Wednesday at 12:30) called: “5 steps to (safely) maximise your borrowing power during the pandemic". I hope you can join me. Click here to learn more and register you spot.
There are three ways to generate passive income; start a business, invest or speculate. The key word in that sentence is passive. Passive means you can generate economic benefits without the requirement of your personal exertion. Since it doesn’t require personal exertion, it frees up your time to spend it on activities or with the people you love.Each of these three options have merit. But the important thing to note is that not all three will suit everyone. This point is very important to appreciate, and could save you a lot of time, stress and money!A quick bit of theory firstLegendary author and prolific researcher, Jim Collins formulated a concept called the “Hedgehog Concept”. The Hedgehog Concept was based on the famous essay by Isaiah Berlin in which he refers to an ancient Greek story: “The fox knows many things, but the hedgehog knows one big thing.”It was Collins’ thesis that successful companies are laser-focused on the Hedgehog Concept, which is the intersection of 3 important considerations or questions (i.e. the orange portion in the illustration below):1. what you are deeply passionate about,2. what you can be the best in the world at, and3. what best drives your economic or resource engine.Successful companies focus on delivering products or services that they can be the best at and ignore all other opportunities.(By the way, Jim Collins’ book, Good to Great is one of the best business books I have read.)Let me share a quick story about meBefore I relate this theory to personal investment, let me share a story with you.I have some friends that are successful property developers and make substantial six-figure profits. In the past, I have considered whether I should get involved in property development too, especially since I have the property, finance and taxation knowledge. However, many years ago, I decided to focus on my Hedgehog. Property development just isn’t for me.Property developing takes a lot of time. So, I could either spend my time on developing property with the aim of generating a once-off profit. Alternatively, I could spend that time thinking about and helping my clients build wealth. Just one idea that helps a client creates a lot of value for them and me. That client will continue to do business with my firm and will likely refer their friends. And that will generate long term value for both of us.I am deeply passionate about delivering the best independent financial advice. I am good at the work I do. And accumulating a number of happy ongoing clients generates stable economic returns. This is my Hedgehog and when I stick to it, my personal wealth grows. The reverse is true when I have deviated (which I did before I learnt this lesson).One of my mentors, who has operated a successful business for more than 50 years and built significant personal wealth, advised me; “Every time I’ve done something outside of my core business, it has cost me time and money.”Medico mortgage default rates are low if they stick to what they knowThe big 4 banks all have special divisions that target doctors (and have for many years) because it is widely accepted that mortgage default rates are substantially lower than the average. This stands to reason given few doctors are ever unemployed and their income is very stable and typically higher than the average.This is true when lending to a doctor for home or investment purposes. However, statistics demonstrate that when a doctor borrows for another purpose e.g. property development or unrelated business, default rates skyrocket. Most doctors are smart, hard-working people. But that doesn’t necessarily translate to them also being successful business owners. Statistics would overwhelmingly indicate that doctors should stick to their day job.My client Simon…Simon has been (mortgage broking service) client for over 10 years (this is not his real name of course). Over this period, he has tried to find many shortcuts to wealth. This has included investing in different property types and locations, which might have been sexy at the time but lacked fundamentals. He has also dabbled in various businesses. None of these activities have created a lot of wealth and some have been a disaster.Simon’s has earned an above average income for a long time and doesn’t over-spend (lives relatively frugally).Simon would be in a substantially better financial position today if he stuck to an evidence-based strategy and quite frankly, not listened to his own advice or ideas.Mistakes often compound. Making a bad investment decision that causes financial loss often tempts people to brainstorm ideas with the sole aim of mitigating any financial losses. These ideas are invariably aimed in the pursuit of short-term profit (which is at the cost of long-term value). In effect, one bad decision is often followed by another.Do you have the ability and passion to become an investment expert?The proverb “A little knowledge is a dangerous thing” needs to be rewritten for investing. The proverb should be “Anything short of complete knowledge is a dangerous thing”.Some of my clients are quite financially astute. They understand and know most things – they are just missing the last 5-10% of knowledge or experience. But that last 5-10% is usually critical. You only have to be a little bit wrong to be completely wrong.The fact is, that some people will never become great investors. Some people will never be successful entrepreneurs. But that’s okay. You must find what you are good at and delegate all other important things.The Hedgehog Concept applies perfectly well to personal investing. You must ask yourself two questions:1. Can you be the best in the world at formulating and implementing Australian-based investments; and2. Are you deeply passionate about investing – passion is more than just an interest?If you can honestly answer yes to both of those questions, then it’s likely it is in your best interest that you make your own investment decisions.However, if your answer is ‘no’ to either or both questions, then you are better off sticking to your day job and paying for (and following) high quality financial advice. When it comes to building wealth, often the slow and boring path is the most successful one in the long run.
Despite the share market volatility as a result of Covid-19, all major industry super funds produced a positive investment return over the past financial year. Whilst that might seem entirely good news, there are some concerns for which industry super fund members should be aware of.Let’s start with the good news firstI have compared the largest 8 Australian industry super funds. According to data collated by our research provider, Lonsec (SuperRatings), Cbus produced the best returns in the 2019/20 financial year. However, AustralianSuper produced the best long term (10 years) return, although there not a big difference between the top 3 funds (Hostplus, UniSuper and AustralianSuper). I have compared the investment options with similar levels of growth assets – but more on this below.See table on blog (website)Of course, longer term returns are what is most important. It is not always possible or even desirable to produce the best returns each and every year. Sometimes a fund has to take too much risk to do so.Investment returns are important for marketingThere is no better marketing than achieving the highest investment return as it attracts a lot of new superannuation members.I was very interested to read this article in the Australian Financial Review about Hostplus’ balanced option. For the financial year up until May 2020, it had lost 3.5%. However, as timing would have it, on 29 June 2020, the Fund decided to revalue its unlisted property 6.8% higher. This resulted in halving its its Balance options loss to -1.74% for the financial year. How convenient. I discuss my concerns with respect to transparency and accountability below.There are a number of ways a super fund can window-dress its returns including revaluing unlisted assets and changing the asset allocation i.e. being more or less aggressive than the desired allocation of the investment option.Fees vary substantially between fundsIf your super balance is relatively low, fees (and contributions) matter more than investment returns. However, as your balance grows (and certainly if your balance is above $250,000), investment returns become the most important factor.Out of the selected funds, First State Super (FSS) charges the highest fees for its balanced option at 0.95%, whereas UniSuper is much cheaper at 0.53%. That is, UniSuper’s fees are nearly half as much as FSS, and that is likely to have a substantial impact on your balance over time.Importantly, you do not have to pay higher fees in order to generate higher investment returns. You will note that UniSuper is the most inexpensive fund with close to the highest returns while for FSS, the reverse is true. The less you pay, the more you receive.Concern 1: Some funds invest more aggressively it appearsPre-mixed investment options allow you to invest your super in a way that is commensurate with your risk appetite. If you are conservative, then you must select a conservative investment option. However, if you are aggressive, then a ‘growth’ or ‘high growth’ investment option might suit you. And if you are in between, like most people, a ‘balanced’ investment option is the way to go.However, most ‘balanced’ options are not really that balanced. Instead, their asset allocation is closer to growth. The reason for this is they are chasing higher investment returns, to make their fund appear more attractive.You might be surprised to learn that the assets super funds invest in can vary dramatically. For example, Cbus only invests 31.5% of his ‘balanced’ option in shares compared to 60% for UniSuper – this is what has helped them achive the best returns last financial year. Therefore, don’t be fooled by the investment option’s name – you must review its actual asset allocation. The chart below illustrates these variations.Perhaps the most concerning allocation is what is called “alternatives” because this asset class is very opaque. Alternative investments typically include infrastructure, private equity and credit (i.e. corporate bonds), but can include anything really including derivatives, currencies, commodities and so forth.This lack of disclosure and consistency makes it impossible for investors and their advisors to accurately understand how their money is invested and the associated risk. Furthermore, because most of these ‘alternative’ investments are unlisted, their pricing (valuations) are not transparent. More on this below.Concern # 2: in-house investment managementIn the endeavour to reduce investment fees, most of the industry super funds are increasing the amount of investments that are internally managed by their staff, as opposed to using external investment managers. For example, AustralianSuper currently manages 39% of its ‘balanced’ investments but aims to increase that to 50% by 2021.Whilst this might sound like a good idea, its impact on future investment returns is uncertain. It creates some potential challenges. Firstly, it is more difficult to sack an under-performing staff member compared to a fund manager. Conversely, retaining a team member that produces above average investment returns is equally difficult – as other super funds and money managers will try to poach them. Finally, staff turnover can also adversely impact investment performance. In short, it’s all about attracting and retaining the right people which is an added challenge for these funds.Concern # 3: Almost no transparency leads to very little accountabilityThe only way to create a strong level of accountability, is to ensure complete transparency. That way, it’s impossible to hide. Everything is out in the open for people to see; including risk, performance and fees. This is true for any and all investments, not just super.There is almost no transparency with respect to industry super fund investments, individual investment performance, risks and so on. It is near on impossible to ascertain what your fund invests in. This was the concern that research provider, Lonsec cited when it downgraded AustralainSuper’s rating recently.The existence of unlisted investments can be a cause for concern as prices/values are not set in an open market. Of course, the funds are subject to financial statement audits and the like, but this still gives rise to a large amount of subjectivity. An unlisted investment’s value is inherently more uncertain compared to an asset that trades on the open market.A recent example of this is Hostplus’ property revaluations on 29 June 2020 which I referred to above. Whilst these revaluations may well be prudent and accurate, the timing together with an overall lack of transparency, invites scepticism.By comparison, listed companies have continuous disclosure obligations by law. This mean companies must report to the ASX any information that“a reasonable person would expect to have a material effect on the price or value of the entity's securities”. This created a very transparent market and provides information for investors to base decisions upon. It is my belief that super funds should be subject to similar reporting requirements. That is, the requirement to disclose any information that a reasonable person would expect to have a material impact on the value or performance of their super balance. This would allow members and their advisors to make more informed decisions. Of course, most organisations rarely want to invite such transparency and accountability for obvious reasons.Industry fund index optionsMany industry super funds offer 100% index investment options e.g. a balanced fund that is only invested in index funds. Whilst these investment options do provide significantly more transparency, as I wrote about last week, I do have concerns with the underlying risk in these portfolios. In addition, their asset allocation is different to their actively managed options which has meant the investment returns have been circa 1% p.a. lower over the past 5 years. It is for these reasons that I’m not a fan of these index options, even though I’m a staunch believer in indexing investing.Our super portfolios under-performed last financial yearAs I wrote in this blog last week, some company and sector valuations in the share market appear irrational and very risky. I always construct investment portfolios with the aim of maximising investment returns over the medium to long term. Short term results are largely irrelevant. This is evident by the fact that after a return of 19.48% in the 2019 calendar year, the weighted average return across my clients’ super portfolios for the 2019/20 financial year was a loss of 3.81%.Stockbrokers and fund managers typically only advertise returns when the news is good, for obviously reasons. But I’m happy to be held accountable for the returns we produce. I know that it is not always possible to achieve the best returns each and every year, particularly if that is not your aim. For the 10 years ended December 2019 our returns were identical to AustralianSuper’s – which means we beat every other industry super fund.I am very clear on the reasons why we have generated lower returns over the past 12 months. It’s because we have had materially lower exposures to over-valued companies, sectors and markets. I see no reason to invest my clients’ monies in asset price bubbles. Not only is that high risk, but it’s also likely to impair longer-term investment returns.Most importantly, my clients and I have full transparency – we know how and where their monies are invested and how each investment has performed compared to its index. This invites a high level of accountability.Past returns are not a reliable indicator of future returnsThe most important predictors of medium-term investment returns are (1) how your money is invested i.e. asset allocation and methodology and (2) the investment fees you pay. Past returns can sometimes be a guide but are not always a reliable predictor. Super investors would be well severed to consider some of the risks I’ve outlined above.
You may have read commentary that the share market isn’t reflecting reality at the moment. For example, the share market can rise by 3% on the same day that we receive bad news in respect to the spread of the virus. Spectators are left thinking how can market values rise when global economic expectations are so negative? That is a fair question.Then there’s stocks like Tesla in the US and Afterpay in Australia.Electronic car manufacture, Tesla's share price has risen by 50% over the past couple of weeks. Its market value is now equal to the total value of Australia’s big 4 banks plus BHP combined. The difference is that the banks and BHP make total profit of $12 billion p.a. whereas Tesla loses money (and has never made money)!These exuberant valuations are happening here too. Towards the end of March, Australian listed FinTech company Afterpay was trading just above $8 per share. Today, it is trading at circa $70 per share and is worth over $20 billion. It also doesn’t make a profit.So, how do you navigate a market that doesn’t make a lot of sense?The Robinhood effectOne of the contributors to this irrational exuberance is the influx of amateur investors – often first-time investors. Back in May, Australian regulator ASIC noted there had been a 340% increase in the opening of new share trading accounts. The US has also reported a record number of new account openings this year.The theory is that people are becoming bored being locked in their homes. Sports betting and casinos are closed. So, people have turned their attention to “gambling” on the share market.FinTec companies, particularly in the US have jumped onto this trend. US provider, Robinhood is best known for gamifying share trading. It offers free stock to anyone that opens a new account – and additional free stock if you refer friends. The screen turns green if your trade is in profit (and red if its not), sends you confetti when you buy and gives you your money straight away after you sell, so you can trade again (it takes 3 days in Australia). Many brokerages in the US now don’t charge commissions or fees – instead they hide their margin in the quoted share prices. All of these things are aimed at encouraging people to gamble, not invest.Similarly, ASIC has noted its concern with Australian retail investors trading in pursuit of quick profits. Its data suggests most are unsuccessful and lose money. For example, per ASIC, in the week of 16-22 March 2020, retail clients’ net losses from trading CFDs were $234 million.Of course, this behaviour is against everything we believe at ProSolution and is more akin to gambling than it is investing. But speculators (gamblers) can have a substantial impact on markets in the short term – Bitcoin is an excellent example of this.Everything is popular until it’s not. This will end in tearsWell-respected stock market analyst, Rob Arnott highlighted in this interview that Amazon is currently valued on a price-earnings (PE) ratio of 120 times. Even if you believe that Amazon could grow its sales by 20% p.a. over the next 10 years (which would mean that in 10 years it would be larger than the entire retail marketplace globally – you’d have to be sceptical whether that is possible), it should be priced at a PE of 70, not 120! The only way an investor can generate a positive return after paying 120 times earnings for a stock is if the bubble continues to grow, as long as they sell before it bursts.As mentioned above, Afterpay is now trading above $70 per share. This implies a valuation of over $20 billion – which is almost as valuable as Coles supermarkets. In the 2019 financial year, Coles made a profit of over $1.6 billion whereas Afterpay lost $24 million (and has never turned a profit in its history).I have no doubt that valuations like these are indicative of a bubble. And all bubbles burst at some stage. Unfortunately, thousands of amateur investors will end up losing a lot of money.Traditional index funds will have to buy overvalued stocksIt is important to note that traditional index funds are forced to participate in these rising stock valuations. That is, now that Afterpay is a top 20 company in Australia, traditional market cap index funds will need to buy more of this stock when they rebalance. Most index funds tend to rebalance one to four times per year – often around the end of the financial year. This is one of the criticisms of traditional market cap indexing i.e. they tend to follow price bubbles.Are all stocks overvalued?These irrational valuations (as discussed above) can distort the market as a whole. As such, I have been reading an increasing amount of commentary that suggests “markets” are over-valued i.e. they are not factoring in the potential risks caused by the Covid-19 lockdowns. The charts below provided by JP Morgan show the Australian and US market and PE ratios at various times of the past 25 years.The Australian market (ASX200) is currently valued at a PE of 19.1 times and the US market (S&P 500) at 21.7 times. These valuation levels appear expensive when compared to the average – being 14.3 times for the Australian market and around 17 times for the US market.But whilst the market overall seems overvalued, it is clear that this is concentrated in certain stocks and sectors.In the US, the following sectors have the most elevated valuations: Consumer Discretionary (e.g. Amazon), Industrials and Technology. In Australia, it is Technology, Health Care and Industrials.More importantly, there are sectors in both markets that exhibit below mean valuation metrics.‘Growth’ is very expensive compared to ‘value’You can allocate stocks into two main categories being growth and value.A growth stock is a business that is expected to generate a very high level of growth in the future. As such, its current revenue and profitability level is not representative of what an investor might expect in the future. The thesis is that you are happy to pay more for a growth stock on the assumption that the future increase in profitability will more than compensate you. Tesla, Afterpay and Amazon are all growth stocks.A value stock is one that is currently undervalued by the market having regard to historical valuation (PE) multiples for that stock and its underlying fundamentals.Over the past 5 to 10 years, growth investors have been rewarded and value investors have, as a result, been punished as they have achieved much lower returns.The chart below (also prepared by JP Morgan) shows how expensive growth has become compared to value. Growth is a bubble ready to pop!How to invest in a market that doesn’t make senseThe best way to invest in share markets at the moment in a way that minimises your risk is to adopt value and quality overlays.A value overlay essentially filters stocks out of a given index that are trading at very high valuations. Various valuation metrics can be used including PE, price-to-book and so forth.A quality overlay filters out stocks that exhibit low quality characteristics which can include high debt, volatile earnings and low profitability or return on equity.All of these are rules-based, statistical filters and do not require any subjective assessment. Furthermore, these approaches can and have been back tested.The idea is that a value approach will protect you from overinflated sectors of the market and a quality approach will protect you (to some degree) from the risk of a prolonged recession, as high-quality, strong companies are likely to better whether economic storms.It is not an all or nothing decisionInvesting in the share market should be a slow process.In most situations, it is erroneous to decide to invest nothing but is also silly to invest everything.Instead, you would be well-served by considering two questions:(1) which approach or methodology helps you avoid the risks whilst capturing the future opportunities (which is what I have discussed above); and(2) what quantum of investment would you be comfortable making? For most people, the answer ranges between $1 and $1 million i.e. it’s not zero. If markets are making you nervous, invest in smaller, regular tranches.It’s a bubble and we should be concernedSome sectors of the market (and individual stocks) are very worrying. Some sectors are bubbles waiting to burst – without a doubt, its “when” not “if”.But that is not to say that all share market investments carry equal risk. The best thing is to seek independent, professional financial advice to ensure you are adopting the most appropriate approach.
Melbourne’s Covid transmission outbreak has been widely publicised by the media. Melbourne’s daily positive test rate is relatively benign by world standards (i.e. 0.5-0.6% versus 7.5% in the USA). However, the reinstated 6-week lockdown of Melbourne is likely to have a negative impact on Australia’s economy. Melbourne is responsible for producing over 19% of Australia’s GDP.Spending has bounced back strongly with Victoria laggingFirstly, let’s start with the good news. The good news is that according to ANZ Economics, spending has bounced back relatively strongly (see charts below - click to enlarge).Spending overall is up 5.5% year-on-year to 3 July 2020. Households are spending more on goods and groceries but substantially less on travel and entertainment.Spending in Victoria is lagging compared to other States, due to the stricter lockdown rules.Victoria’s lockdowns will give rise to higher unemployment and a prolonged recessionUp until a few weeks ago, I was firmly in the V-shape camp. That is, I expected the Australian economy would recover sharply after lockdown restrictions were lifted. I based this view on the assumption that there would be more targeted government stimulus post September. To date, economic data (similar to the spending data above) has been supportive of this view.However, given Melbourne accounts for over 19% of Australia’s total GDP, Melbourne’s reinstated lockdown is likely to weigh heavily on the nation’s economic recovery.It is my view that a second lockdown will substantially harm consumer and business confidence. A few weeks ago, restaurants and entertainment venues were contemplating reopening. Now they won’t be able to do that for at least another 6 weeks. There are not many (otherwise) viable businesses that could survive a 5-month closure. As a result, I fear that more businesses will not survive this period and as such, unemployment will rise and take much longer to recover.Based on data from March & April, the following categories of expenditure will likely suffer the most: dining and takeaway, accommodation, entertainment and travel.Impact of immigration, education and population growthBorder closures will have a negative impact on population growth due to reduced levels of overseas and interstate migration. And population growth drives economic activity and property values.As discussed in my recent presentation (here), it is important to understand the migration statistics. Around 60% of Australia’s population growth is from net overseas migration. Anyone that lives in Australia for 12 out of the past 16 months is included in this statistic. Approximately 75% of immigrants are on temporary visas. Given temporary visas holders must sell any property within 3 months from leaving Australia, it is fair to assume that most of these people rent accommodation, rather than own it.Net overseas migration (including both temporary and permanent) is typically represented by three main categories:§ 33% from the higher education sector – students aged between 18 and 22;§ 29% from skilled migration or working holiday makers. Typical age is between 22 and 37 and 85% go to the three Eastern States; and§ 21% from non-working visitors (these are all temporary visas holders of course).Therefore, whilst overseas migrants definitely contribute meaningfully towards rental property demand and economic activity, they contribute to a much lesser extent towards demand for property ownership.Therefore, whilst lower overseas migration will negatively impact the economy, I anticipate that it will have a much lower impact on the demand for property ownership.More government and banking support are almost guaranteedOn 23 July, the Federal Treasurer will confirm whether JobKeeper and/or similar support will continue beyond September. As I have stated previously, further or increased government support is almost guaranteed, but it will be more targeted (including providing additional support to Melbourne-based businesses).I note that the Australian Banking Association confirmed overnight that the banks will provide repayment pauses for an additional four months to those borrowers that continue to be impacted by the Covid lockdowns. As I have stated previously, it is in the banks best interest to minimise mortgage defaults and forced property sales.What will happen to property prices?As I have written previously, there is a very weak relationship between property prices and unemployment (see here). However, there is a much stronger relationship between lending volumes and property prices (as discussed here). Higher lending volumes stimulate property price growth.I think both demand and supply for borrowing, particularly by Victorians, will be below normal levels for the next year.Supply will be reduced because banks will be weary of lending to borrowers that may be impacted by a weak Victorian economy.Demand will be reduced because of the higher unemployment in the entertainment, hospitality and travel sectors will have flow on effects to the rest of the economy. Even if people’s finances aren’t impacted, it will negatively impact confidence. As such, people may delay borrowing until they feel more confident, which probably won’t happen until 2021, particularly if a vaccine is not found sooner.As I have stated previously, to date, property prices have remained relatively stable. This is because there has been a sufficient number of willing and motived buyers to support the below average volume of property on the market. That is, the level of demand has outstripped (low) supply. I don’t anticipate that this will change and as such, property prices should continue to hold up well.What does this all mean?My view before they reinstated Melbourne lockdown, was that the Australian economy would bounce back strongly, particularly in the last quarter of this year.I expect that this might remain the case for States and Territories other than Victoria. However, it is now my expectation that Victoria’s economic recovery will be protracted.In terms of property, I don’t expect Melbourne’s volumes or sentiment to recover to more normalised levels until early to mid 2021. That said, I still do not expect any major price corrections. But Melbourne is likely to underperform other property markets in the shorter term. That is, growth is likely to be stagnant whereas other states may experience property price growth sooner than Melbourne.Importance of diversificationPerhaps this situation reinforces the importance of diversifying your investments as unsystematic risks can impact investment returns. This means you should invest across various asset classes e.g. property, shares, bonds and so on. Also, where possible and practical, when investing in property, seek geographical diversification.The good investment news is that Melbourne’s “lockdown 2.0” is unlikely to have a material impact on the long-term performance of investment grade property. The Melbourne housing market has previously endured deep recessions, stock market crashes, double-digit interest rates and many other challenges and still produced a median house growth rate of over 8% p.a. over the past 4 decades.But economically, we do have some challenges ahead of us.
The price you pay for an investment property will only matter if you purchase the wrong asset. An investment grade asset will, in the long run, mask any purchase price errors that you may have made. That is why focusing on the quality of the asset is easily the most important thing you must do when investing in property. Simple math proves timing the market or buying below fair value is relatively meaningless.Purchasing above or below intrinsic valueLet’s face it. We all want to get the best deal we can, and no one wants to pay any more for a property than they have to. It is my guess that the desire to buy well is driven mainly by two things; ego and misinformation.Most people feel stupid if they subsequently realise that they overpaid for an asset - and none of us like feeling stupid.The misinformation problem is that most people think the price they pay for an asset will have an impact on its performance. But that is not true for investment grade assets.Show me the numbersAnyone that has followed my blogs for any length of time knows that I love to dive into the numbers. This topic is no different. My findings are summarised in the table below.I compared the after-tax compounding returns resulting from investing in a $750,000 property, holding it for 20 years and then selling. I assumed that you borrowed the full cost of this acquisition (including stamp duty). The only cash you had to contribute to the investment is the holding costs i.e. the difference between the loan repayments and net rental income. I then calculated the internal rate of return - which essentially is your annual compounding investment return after tax.I then varied two assumptions:§ Whether the price you paid for the asset was above or below intrinsic value; and§ The average capital growth rate over the 20-year holding period.The reason the investment returns ranges (far right column) might seem high, particularly for higher growth scenarios, is because of the impact of gearing i.e. you achieve relatively large returns for minimal cash contributed towards the investment.What did I find?If you purchase a property that has very low growth prospects e.g. 3% p.a. over 20 years, the price you pay for that asset will have a big impact on your investment return. For example, if you purchase the asset for a price 10% below its intrinsic value (i.e. buy well), you improve your return by 75%. Whereas if you overpay by 10%, you reduce your return by 77%. But the important point is that the return range is relatively low i.e. between 1% and 7.5% p.a.However, if you buy a high-quality asset that will deliver say 9% p.a. of capital growth on average over the next 20 years, it doesn’t really matter if you overpay. For example, if you pay 10% too much, your return reduces by 8% - but you still achieve a compound annual return of over 21% p.a., which isn’t anything to sneeze at.This data shows that the best way to mitigate risk is to level up on quality.Great property for a fair priceAdapting a quote attributed to Warren Buffett, I assert that “I would much prefer to buy a great property for a fair price than a fair property for a great price”. That’s because a high growth asset will mask any purchase price mistakes.Buying well (or not) will only impact your investment returns for one year (it’s a one-off event). However, the quality of your asset will impact investment returns each and every year. As such, you will remember (or be reminded of) an asset's quality long after you have forgotten how much you paid for it.Sometimes the desire to ‘buy well’ encourages investors to set their budget too low and as such, they repeatedly miss out on the opportunity to purchase high-quality assets. This approach is misguided as the simple math above proves that quality is more important than price. Price determines what you pay, quality determines what you receive.What is a high-quality property?A high-quality property is one that benefits from perpetually high demand but is in finite and short supply. This is often referred to as an investment-grade property.There are three critical attributes a property must exhibit to be regarded as investment grade being:1. It must have a long and stable history of above average capital growth. That is, when you track past sales of the subject property and surrounding properties that are directly comparable to it, it should demonstrate that it has grown in value at a rate that exceeds the median for the capital city it is located within.2. By its very nature, investment-grade property is predominantly (i.e. more than 50%) represented by land value. That is, the building value is less than 50% of the property’s overall value. This is necessary to ensure it has the long-term fundamentals that drive long term capital growth. Land appreciates. Buildings depreciate.3. The asset must have two elements of scarcity. Firstly, it must be in a location that is highly desirable without any available vacant land for sale in close proximity i.e. scarcity of land. Secondly, the dwelling style must be in scarce supply. This excludes high-rise apartments for example. Small blocks of units typically build in the 1970’s or earlier are good examples of scarce assets. Heritage architecture styles such as art-deco or Victorian are in finite supply and benefit from wide appeal.See here for more.Buying for less than intrinsic value is dependent upon luckIt is possible to purchase property for less than intrinsic value. However, my thesis, from personal and professional experience is that the opportunity to do so is driven more by luck than anything else. That is, you have to be in the right place at the right time.As we all know, luck can strike randomly. You might be lucky straight away and find a great property at a great price after only a few weeks of looking. Alternatively, it might take many, many years, if at all. In the meantime, the missed capital growth will cost you dearly.Since I am only attracted to evidenced-based strategies, I always counsel my clients to forget about trying to find a “good deal” and make friends with the fact that you may have to pay a fair value for an excellent asset. But, of course, if a great deal pops up, you should be ready to jump on it.Of course, if you are not actively in the market, you have zero chance of seeing any good deals.
Over the past decade, investors and large institutions have been deserting expensive active fund managers in return for using their cheaper index equivalents.According to Morningstar, investors in the US withdrew $USD204 million from actively managed investments (net) in the 2019 calendar year. However, low cost index funds continued to grow in popularity receiving (net) $USD162 million of new money. The transition away from active management into low-cost index funds has been happening for over a decade.Whilst it is true that traditional market cap indexing has outperformed many professional managers over long periods of time, it does have its shortcomings, particularly in markets other than bull markets.It is my thesis that investors would be well advised to employ a selection of fundamentally sound indexing methodologies. Doing so can reduce a portfolios risk and potentially expose it to higher future returns.What are the recent stats of index versus active?Index funds are popular for good reasons. As I have written about previously, index funds typically produce better returns over the long run and charge much lower fees.For example, only 16% of active fund managers have produced better returns than the index over the past 15 years in Australia (and only 11% in the US). However, it is important to note that the same fund managers have beaten the market each and every year. In fact, active fund managers may only outperform for one or two years. Statistics show that their outperformance almost never persists for longer periods of time.According to data published by S&P Dow Jones, 81 Australian fund managers where in the top quartile in terms of performance for the 2015 year. Only 11 out of 81 remained in the top quartile a year later i.e. 2016 calendar year. And only 5 out of 81 were able to string three good years together (i.e. were in top quartile in terms of performance for 2015, 2016 and 2017). It is clear that ‘picking’ an active manager that will outperform is a very difficult thing to do, as it is likely you will need to chop and change fund managers every 1-2 years.Three types of index methodologiesIndexing strategies typically fall into three categories:1. Traditional market cap indexing – this is the type that you are probably most familiar with and has been popularised by Vanguard since the mid-1970’s. Market cap indexing spreads your investment across an index proportionately according to a company’s value (compared to the index’s aggregate value). For example, if you invest in the ASX200, 8.2% of your money will be invested in CSL, 7.6% in CBA and so forth.2. Factor-based indexing – factor-based index methodologies uses measures other than a company’s market value (which is linked to its share price) as a means of diversifying your investment. These methodologies seek to break the link with price. The thesis is that price does not always accurately reflect a company’s risk and future returns. Examples of these mythologies include fundamental indexing and Dimensional.3. Equal weight indexing – This is probably the most unsophisticated indexing approach. It invests an equal amount of your money in all companies that are included in an index. For example, if you invest in the ASX 200 index, then one 200th of your monies will be invested in each of the top 200 companies.How have they performed recently?The chart below compares the relative performance of the abovementioned three index methodologies for the 5 years ended 18 June 2020 (fundamental indexing has been selected as an example of a factor-based methodology).Equal weight has performed best with a price return of 4.7% p.a., then traditional indexing at 1.4% p.a. and fundamental indexing has returned a loss of 1.6% p.a. This analysis excludes income (dividend) returns.Total returns (growth plus income) for the 5 years to the end of May 2020 were 5.94% p.a. for equal weight, 4.04% p.a. for traditional indexing and 2.84% p.a. for fundamental indexing.You would be excused from concluding that equal weight is the best methodologySimply selecting the methodology that has produced the highest historical return isn’t always the most sensible approach. Instead, it is important to understand what has driven past performance. Once you understand that, you will then be able to form a view in respect to whether past performance is likely to be repeated.Why has equal weight beaten traditional indexing?A large part of this has to do with the lower exposure to the financial services sector and big 4 banks in particular. The equal weigh index invests 17.4% in financials compared to 27% for the ASX200. But the big for 4 banks are mostly responsible for the poor returns. Three of the big 4 have fallen in value by around 43% over the past 5 years (being ANZ, nab and Westpac). CBA has fallen 25%. Given these 4 stocks constitute approximately 20% of the traditional index (but only 2% of the equal weight index), they are almost certainly responsible for the underperformance compared to equal weight.Why has fundamental indexing underperformed traditional indexing?The reason fundamental indexing has underperformed traditional indexing is that it is underweight in the healthcare sector e.g. only 4.8% is invested in healthcare versus 15.1% for the index. The main cause of this is CSL. The fundamental index only has 1.2% invested in CSL compared to 8.2% for the traditional index. CSL’s share price has increased by 230% over the past 5 years, so investing less in it has dragged on returns. In addition, Healthcare has been the best performing sector over the year to May 2020 – returning over 28%.The aim of fundamental indexing is to skew investments away from businesses that appear to be overvalued. Given CSL’s price-earnings ratio is around 45 times (more than double the general market level), it is no surprise the fundamental methodology results in a materially underweight position in CSL. The big question is can CSL continue to increase its earnings and/or valuation at the same rate over the next 5 years, especially if the US economy slows?Your starting valuation has a strong inverse relationship with long term returnsA large amount of empirical stock market studies demonstrate that your starting valuation is a reliable predictor of long-term returns. That is, if you invest when markets are “cheap”, you can expect above median investment returns over the long run (e.g. 10 years).However, if you invest when markets are expensive, and therefore future returns are already reflected in the current value, then the prospect of receiving below median returns are high.Markets tend to switch from growth to value quickly and sharplyOver the past decade, the market has rewarded growth investors and as a result, punished value investors. US companies such as Amazon, Tesla and Netflix are great examples of this – all trading on price-earnings ratios of more than 100(!) – except Tesla – it’s not even profitable. Australian unlisted tech business Canva, was recently valued by investors at $8.7 billion. Its annual revenue is circa $50 million and makes less than $4 million in annual profit! Am I crazy or are these valuations insane?!At some point, the market will start to reward companies with strong cash flows and profitability, low debt and stable dividends i.e. sound fundamentals. This is exactly what happened in the early 2000’s at the end of the dot-com bubble.Investing in equal weight invites you to take two positionsFirstly, that recent winners and loser will cease winning or losing. If you invest $200 in an equal weight product, then $1 will be invested in Westpac. If Westpac’s share price increases by 20%, your shareholding will be worth $1.20. When it comes time to rebalance (which occurs each quarter), the equal weight fund will sell down that exposure back to $1. There is little logic behind this.Secondly, by investing that same amount in each of the top 200 companies, you will resultantly have more money invested in smaller companies – compared to the broad index. Therefore, you are taking a position that suggests you believe small-cap companies will outperform large-cap companies. That might not prove to be true, particularly if the economy weakens.It is for these two reasons that I’m not attracted to the equal weight methodology. In addition, it is my view that the unique set of factors which conspired to produce outperformance over the past 5 years are unlikely to be repeated.Astute portfolio construction can increase returnsMany commentators suggest nab, ANZ, Westpac and to a lesser extent CBA represent good value at the moment. That is, the suggestion is that perhaps all potential risks are fully reflected in their current prices. I tend to agree with this thesis. As such, their future returns over the next 5 to 10 years are likely to be above median levels.Importantly, there is robust evidence that confirms that in thelong run, market valuations and investment returns do eventually revert to their long-term mean. This assists us in forecasting future returns. According to Research Affiliates’ financial modelling, fundamental indexing is expected to outperform developed market indexes by circa 4% p.a. over the next decade.Nearly 6 decades of historic data shows that value and quality strategies outperform in more uncertain economic climates (see Table 4 here).If you agree with this thesis, then perhaps there is merit in considering diversifying indexing methodologies.Sit on the fenceDiversifying is proven to be a wise financial strategy. This also extends to ruled-based, low-cost indexing methodologies too. I believe that you should employ a number of methodologies to hedge your bets.At this time, I am keen to have greater exposure to value and quality methodologies as I feel it exposes a portfolio to lower risk and potentially higher future returns. But that is not to say that I have abandoned traditional market cap indexing. It still has a role to play in portfolio construction.
If you have a couple of thousand dollars surplus cash each month, what is the most effective way to invest it?You could invest in the share market, repay your mortgage(s) or invest in property.But there’s another strategy that might be particularly more attractive, especially since mortgage interest rates are ridiculously low at the moment.You may not want to repay debt or invest in shares or propertyIt certainly doesn’t cost a lot of cash flow to borrow to invest in a residential property at the moment. However, it is difficult to buy an investment-grade property for less than $600,000, which means you need to borrow a relatively large amount of money. If you already own some direct property, you may not feel comfortable borrowing this amount of money.Repaying debt at the moment might only save you 3% p.a. in interest costs, which isn’t terrible, but it’s hardly a big return on your investment.And of course, you could invest your cash flow in shares in your personal name or family trust. But if you are relatively close to retirement (within 10-15 years), investing inside super could be a lot more tax effective.So, what about borrowing to fund additional contribute into super?First, let me clarify how you can contribute money into super.What is a non-concessional contribution?There are two types of super contributions being ‘concessional’ and ‘non-concessional’.Concessional contributions are more commonly utilised because these contributions are made pre-tax i.e. you receive an income tax deduction for them. You can make concessional contributions via salary sacrifice or by making a personal contribution into your super account. These contributions are taxed inside super at a flat rate of 15%.Non-concessional contributions are after-tax contributions i.e. they do not affect your income tax position (no tax deduction). As such, they do not attract any superannuation taxes either (no contribution tax).If your super balance is less than $1.4 million at the beginning of the financial year, you can make non-concessional contributions of up to $100,000 per year. Alternatively, you can bring forward 3 years of contributions into one i.e. contribute $300,000 in one year and nil for the following 2 years.This page on the ATO’s website provides more information.Borrowing to make non-concessional contributions isn’t normally a good ideaIf you borrow to make a non-concessional contribution into super, the interest in respect to the loan is not tax deductible. This makes it an expensive strategy when interest rates are higher than they are today, and therefore rarely worthwhile.However, with interest rates so low today, I thought I would consider whether borrowing to make non-concessional contributions is an attractive strategy.My financial analysisAssuming an investor has a surplus cash flow of $2,000 per month, they could borrow $200,000 today and contribute the full amount into super (i.e. make a non-concessional contribution). They could then direct their monthly surplus cash flow of $2,000 towards repaying this loan. The loan would be fully repaid within 10 years.As noted above, interest charged in respect to this loan will not be tax deductible.I have assumed the investor fixes their interest rate for 5 years at 3% p.a. After the 5-year fixed rate expires, I have assumed the variable rate has increased to 4% p.a. and then increases each year by 0.50% to reach 6.5% p.a. at the end of the 10 years.I calculated that the value of the total interest paid over 10 years in today’s dollars (assuming inflation at 1.5% p.a.) is approximately $32,000.What are the results?After 10 years, the investor is approximately $51,000 better of in today’s dollars as a result of borrowing the $200,000 now, compared to investing it progressively over the 10-year period (i.e. projected future balance of $323,000 versus $272,000).Therefore, after subtracting the interest cost ($32,000), the investor is approximately $19,000 better off in today’s dollars.The investor is approximately $50,000 better off after 20 years. I have used conservative investment return assumptions of 3.5% p.a. of income plus 3.5%p.a. of growth. If actual returns are higher, the differences could be substantially more.Admittedly, these are not huge numbers. However, this additional wealth is accumulated as a result of this chosen strategy, which doesn’t really cost you very much time or money to implement.No capital gains taxRemember, one of the benefits of investing inside super is that income is taxed at a flat rate of only 15%.And, if you do not sell any investments until after you retire, it is very possible that you will pay no capital gains tax. This provides substantial future tax benefits compared to investing in your personal name.Is it a good time to make this investment?Given recent volatility in share markets, it could be a good time to make this investment, particularly if invested well.I’m not confident that in 6 months we will look back at June 2020 and consider it a smart time to invest. However, I have a much higher level of confidence that in 6 years from now (for example) we’ll wish we had have invested more in June 2020. That is a very important point. What happens to markets over the next few months is immaterial – no one can pick markets so it’s not worth worrying about.What is absolutely critical is that your average investment returns are healthy over the next 10 and 20 years.Double your downsizer contributionThe government allows people to contribute up to $300,000 from the proceeds when downsizing their home. These contributions are not included in the non-concessional cap.Therefore, if someone plans to downsize their home in 3 years’ time, they might borrow $300,000 today to make a maximum non-concessional contribution. Then in 3 years’ time they can repay this loan using their home’s sale proceeds; make a downsizer contribution; plus another non-concessional contribution into super at that time. Doing so effectively allows them to shift up to $900,000 of their home’s equity into super.Don’t invest it all at onceI would almost never recommend investing $200,000 into super in one hit. Instead, I would spread the timing risk and invest the monies in a of number tranches over several months. Dollar cost averaging is an important risk management strategy.What could go wrong?No investment strategy is without risk. It is important to first consider all the things that could go wrong, before you become enamoured with all the things that could go right.Borrowing to invest magnifies returns. Therefore, if you borrow to invest and your super fund does not deliver the investment returns you hope for, is it very possible that you could be worse off.Also, if interest rates rise at a faster rate than what I have assumed, this strategy will not produce the benefit I have projected.Make sure you have a high-quality super fundThe quality of your assets directly impacts the quality of your investment returns. You cannot expect good returns from average quality assets.A quality super fund is one that has strong historical performance; adequate transparency and accountability; and low fees. The investment returns that many of the big-name funds produce can vary significantly over long periods of time. Investing in the wrong fund can cost you hundreds of thousands of dollars in missed returns.Strategy is free moneyOften a small enhancement to an investment strategy can produce substantial benefits for little to no additional cost. I regard this as ‘free money’ because its available to anyone with the right advice for no additional risk or cost.As the saying goes, “you don't know what you don't know until you know it”.
With the financial year coming to a close, I thought it was timely to share some of the common strategies we consider when helping clients minimise their taxation liabilities.Of course, none of the information below should be considered personal taxation advice. I don’t know your circumstances and everyone’s situation is different. Therefore, please don’t act solely on the information contained in this blog. It is best to check with an experienced and appropriately licensed professional.New work from home deductionsTo accommodate the fact that the majority of people have been working from home during the Covid shutdown period, the ATO has provided a shortcut method for these related deductions. In simple terms, employees are able to claim a tax deduction equal to 80 cents for each hour they have worked from home between 1 March and 30 June 2020.If more than one person has been working from home in your family, each person is entitled to the shortcut deduction.If you use the shortcut method, you are not able to claim any additional work from home expenses.If you do not use this shortcut method, please refer to this blog which it sets out an alternate method for calculating deductions.When to make additional personal super contributionsAnyone that is 65 years or younger is able to contribute up to $25,000 into super and claim a personal income tax deduction. Included in this concessional contribution cap is any contributions made by your employer on your behalf. This is referred to as Superannuation Guarantee Charge or SGC i.e. the mandatory 9.5% p.a.If you earn less than $250,000 per year, all contributions are taxed at a flat rate of 15%. This means you pay less tax overall. If you are on the top marginal tax rate, contributing into super saves 35% (47% versus 15%).However, if you earn over $250,000 per year, contributions are taxed at a flat 30%. This is called Division 293 tax. In this situation, you are still able to reduce your tax by making super contributions, just to a lesser extent.Finally, if your taxable income is expected to materially exceed $90,000 this financial year and you have sufficient savings, then making an additional contribution into super may be tax effective. The marginal tax rate on income between $90,001 and $180,000 is 39% so contributing into super saves you 24%.If you expect that your taxable income is unusually high this yearIf you anticipate that your taxable income this financial year is likely to be higher than next financial year (e.g. due to receiving a bonus or crystallising a capital gain), then you might consider whether you are able to use the carry-forward rule.The carry-forward rule allows you to access any unutilised concessional caps in previous financial years. This rule commenced on 1 July 2018. Therefore, if you did not fully utilise the $25,000 concessional cap last financial year (i.e. 2018/19), and your super balance was less than $500,000 as at 1 July 2019, then you can access the unused portion of the cap this financial year.If you have a Self Managed Super Fund, you may also be able to contribute an additional year’s worth of contributions this year too. This is called ‘contribution reserving’ and whether you can or should avail yourself of this strategy is something you should discuss with your accountant and financial advisor.Another strategy to reduce the amount of tax you pay this year is to consider paying interest in advance. This is only applicable if you have investment loans (e.g. you have borrowed to invest in shares or property). This strategy involves paying the next 12 months of interest in June and claiming a tax deduction for it this year. Given interest rates are historically low, particularly fixed rates, it is important to ascertain whether any potential tax savings are worthwhile.If you expect your taxable income next year to be substantially higher than this yearIf you expect that your income next financial year (2020/21) will be materially higher than this year i.e. push you into a higher tax bracket, then it might be advantageous for you to not make any additional contributions this financial year. Instead, you can use the carry-forward rule and make the additional contributions next year (so that you maximise your tax deductions in that year).Spousal and government co-contributionsIf your spouse’s income is relatively low, you may be able to save some tax and boost their super balance.Government co-contributions – if your income is below $38,564 this financial year and you contribute $1,000 (as a non-concessional contribution) the government will make a co-contribution of $500. See here for all eligibility criteria.Spousal contributions – if your spouse’s income will be less than $37,000 this financial year, and you make a non-concessional contribution into their super account of $3,000, you will be entitled to a tax offset of $540. See here for all eligibility criteria.Sell any dud investmentsIf you have crystallised a capital gain this year then it might be wise to consider selling any dud investments that will crystallise a capital loss, which you can use to reduce the capital gain.Capital gains are added to your taxable income in the year that the Capital Gains Tax event occurred. Capital losses can only be offset against capital gains and not other taxable income. Therefore, if you do not have any gains to offset a capital loss, you may be able to carry it forward to future tax years.Don’t let tax saving measures come at the cost of building wealthQuite often you have to spend money in order to save tax. However, it’s important that you are spending on things that ultimately help you build wealth and achieve lifestyle goals. There is little benefit gained from spending money just to chase a tax deduction.If you are confident that you are taking advantage of all opportunities to reduce your tax but are still unhappy, perhaps the best thing to do is focus your energy on ensuring pre and post-tax dollars are wisely invested. Maybe you’d feel less concerned about the taxes you pay if your financial position was advancing at a faster rate each year.
Global ratings agency, Fitch estimates that the value of Quantitative Easing (QE) implemented this year could reach $9 trillion! To put that in context, that is equal to more than half the cumulative total global QE that occurred between 2009 and 2018! The Federal Reserve in the US has alone pumped $4 trillion into the market over the past 11 weeks. This is absolutely unprecedented.Should investors be worried about the long-term impact of all this money printing (QE)? What are the risks that we need to be aware of?The role of central banksCentral banks around the world are in charge of monetary policy. The aim of monetary policy is to ensure a healthy economy and an inflation rate that is within the stated goal.When the economic activity increases and the economy approaches fully capacity, inflation can begin to increase. In this situation, the central bank would normally increase interest rates (to reduce corporate profits and consumer spending) to cool economic demand. If the economy slows down, the central bank can cut rates to stimulate demand again.Interest rates is a central bank’s primary tool.But what can a central bank do when rates are at or close to zero? Of course, they can contemplate negative interest rates (e.g. in Germany, banks are paying borrowers to take out loans), but that is largely ineffective.What is QE?When interest rates stop being an effective monetary policy tool, central banks start to consider more unconventional mechanisms such as QE. QE is the process of a central bank buying assets such as bonds. They do that by issuing new currency i.e. increasing money supply (often referred to as money printing). The aim is to stimulate the economy as a whole through injecting more money into the economy.The US Federal Reserve started buying Mortgage Backed Securities (MBS) in 2009 to help the US recover from the impact of the GFC. The idea is that lenders could sell MBS to the Fed Reserve to raise funds. In doing so, banks would then have more funds to lend to property investors and homeowners. In turn this should stimulate demand for housing and aid in the property market’s recovery. To a large degree, it worked.QE is not limited to MBS, however. Central banks can buy other assets including corporate bonds and even equities, which Bank of Japan has done. Central banks can target certain sectors of the economy if they so choose.What has happened this year?Most central banks around the globe have participated in QE, including Australia’s RBA, the US Fed Reserve, Bank of England, European Central Bank and Bank of Japan. For the most part, the QE programs have been much wider than what they were during the GFC. Central banks have been buying corporate bonds (the aim is to increase lending to the SME sector) and Exchange Traded Funds (some of which invest in non-investment-grade corporate bonds, which is seen as aggressive).As noted in my opening paragraph, Fitch estimates that the total value of global QE in 2020 to be circa $9 trillion (AUD)!The RBA has been providing money to Australian banks at a fixed rate of 0.25% for 3 years to promote lending to home owners and businesses. That is why fixed rates have been so attractive lately.What impact will QE have on our investments?A study conducted by Wharton Business School indicated one of the possible impacts of QE is that it can crowd out other types of lending. For example, during the GFC the Fed Reserve focused on buying MBS which are used to fund residential property. As such, the banks focused on this market to the detriment of business/corporate lending.Such a focus on one type of lending could be problematic because the housing market doesn’t generate economic activity to the same extent that lending to businesses does. Also, it could create asset price bubbles.Main criticisms of QEThere are two main criticisms of QE.The first criticism is that central banks are interfering with a free market and artificially influencing asset prices. In a free market, the market participants set the prices of assets (investments).What happened when Covid hit for example, was that no one wanted to buy bonds, even seemingly ‘safe’, investment-grade bonds. This created a liquidity crisis for investors as they weren’t able to sell. Also, bond issuers were unable to renegotiate facilities. Such a crisis could have greatly exacerbated the impact of the Covid event. As such, central banks intervened and provided this much needed liquidity.However, free market supporters would argue that such intervention results in artificial prices and alters an investors risk premium i.e. it may be seen that some investments won’t be allowed to fail. The government can’t jump in and rescue investors every time something goes wrong.The second main criticism is that QE could cause inflation. Inflation can occur because as the volume of printed money in circulation increases, money becomes more abundant and the value of $1 falls. For example, as a result, a loaf of bread now costs you $3 instead of $2.QE has been used in the US since 2009 but has not yet led to higher inflation. There are a few reasons cited for this including the idea that the additional money is hoarded (saved, not spent) by individuals and corporations. Secondly, wage inflation has been below trend which has offset the effect of an increase in money supply. If QE did start to create inflation, central banks could curtail it by increasing interest rates.The future of monetary policyIt will be very interesting to see what happens to interest rates over the next few decades. The big question is whether economies and markets will be able to support higher interest rates sometime in the future. For example, Japan has been stuck on near zero interest rates for about 25 years.If interest rates remain persistently low for a number of years, then QE is almost certainly likely to remain in place. The Fed Reserve tried to reduce its balance sheet (i.e. unwind QE) over 2018 and most of 2019 but only very gradually, as depicted by the chart. However, every time the Fed Reserve talks about reducing is asset purchases, share markets get the jitters.Long term impact of QE is unknownIt is difficult to assess whether QE has had a long-term impact on investment markets including the stock market, as so many factors have changed over time. Isolating the impact of just one factor (such as QE) is near on impossible.Endlessly printing money and buying assets when investors desert a market doesn’t seem like very wise practices to me. If we agree that these activities can result in artificially inflated prices for assets, then I guess the key is to avoid such potentially overinflated assets. For example, is car manufacture Tesla really worth nearly $230 billion? This is twice the value of CBA. It has never recorded a profit. Its debt has increased by 500% over the past 5 years. And its net assets are worth less than $10 billion.Gold is a natural inflationary hedgeInvesting in gold can provide a natural hedge against inflation (if you think that is a risk). There are a number of gold EFT’s available on the ASX. Of course, most investors already have a small amount of indirect exposure to gold if they invest in index funds (e.g. via companies such as Newcrest Mining).But given gold prices are approaching all-time highs, and QE hasn’t caused inflationary pressure over the past decade, I don’t think this is a very attractive investment.The best response to QE is to avoid overvalued marketsIt’s impossible to know what the long-term impact of QE will be. Inflation certainly doesn’t appear to be a major risk at this point. It is possible that QE has artificially influenced prices of some assets (US stocks?), but it’s impossible to tell for sure.The best way to manage the potential risks of QE is to avoid investing in markets, sectors and companies that are trading at unjustifiably high valuation multiples. For example, Warren Buffett didn’t invest in any tech companies in the early 2000’s because he didn’t understand their valuations. In the end, the dot-com bubble proved it was a very wise decision.Remember, your starting valuation is perhaps the best indicator of future expected returns (as long as your investment methodology is sound and robust).
There have been a number of economists and commentators who have predicted that property values will fall anywhere between 10% and 32% this year. It seems like it’s almost become a competition for who can be the most bearish.However, my view is a lot less bearish. I believe property values won’t fall by more than 10% and it’s quite possible that they might not fall at all.You could be excused for thinking that I’m an unrealistic property optimist, but I promise that is not the case. Of course, all assets can fall in value and I have written about the four key drivers to watch out before here.What is needed for property prices to fall by more than 10%The predictions of property value declines are usually premised on the assumption that there will be more sellers than buyers. And perhaps some of those sellers are financially distressed, need to sell quickly and as such will drop their price to secure the sale. The occurrence of forced selling tends to weigh on property sentiment and the negative spiral begins.However, the fact is that people will fight hard to avoid having to sell their home. It is their ‘castle’ and it’s that last thing they want to do. At the moment, banks are allowing borrowers to pause their repayments for up to six months. This avoids the need to sell a property of you are in financial strife. However, these repayment pauses will expire around September. This is also when JobKeeper payments are expected to cease and many people are worried about the impact.What happens after September?Firstly, we have to remind ourselves that most people haven’t been materially adversely impacted by the Covid shutdown. Our research (survey size of 451 people from various employment arrangements and ages) suggests that two thirds of people have experienced an income reduction of less than 15% - many haven’t been impacted at all.WOf the people that have been impacted by Covid-19, almost two thirds of them expect to recover their income back to pre-Covid levels within the next 12 months.hSome people will need more supportNotably, 8% of respondents said that they were not confident that they could successfully service their loan repayments after September 2020. It is this group of people that may need additional support from the government and banking sector.yIf a borrower is unable to resume making normal loan repayments the bank will have to assess how long it may take the borrower to recover their income. If the bank believes it will take less than say a year, then I expect it would be very willing to agree to alternative repayment terms, which may include a second (full or partial) repayment pause period. In fact, the banks might formulate policies targeting specifically industries e.g. additional support for people that work in hospitality and tourism.Westpac recently announced last week that it will allow borrowers impacted by Covid to switch from principal and interest repayments to interest only repayments for up to 12 months – avoiding the normal credit approval processes. I expect other banks will follow suit.Banks will only force a borrower to sell their property if they believe it’s the only way it can get its money back. Foreclosing is usually a banks last resort, particularly in a post Royal Commission environment.And it is very likely that there will be more targeted stimulusThe government closed down the economy to curb the spread of the virus. Most of the people that find themselves in financial hardship are in that situation as a result of circumstances beyond their control. As such, the government’s approach has been to help them through this, and I think that approach will continue beyond September.Now that the government has “found” an extra $60 billion as a result of their JobKeeper bungle, I feel it is very likely that the federal governments will provide further targeted stimulus (i.e. targeted to specific industries or demographics). This will be aimed at the sectors that have been hardest hit thereby further minimising mortgage defaults.There is still enough underlying demand for propertyInterestingly, 6 out of 10 people that intended to purchase a property during 2020 still plan to do so this or next year, which suggests there should be an adequate level of buyer demand to support sales volumes. Reports from clients and my own personal experience suggests that in some segments demand is almost just as robust as it was at the beginning of the year. Quality assets are still attracting a lot of interest.Many of the people that have been heavily impacted probably aren’t homeownersObviously, some industries have been impacted by the lockdown more than others. These include recreation, travel, retail, accommodation and food services.According to ABS data, people employed by these sectors earn between one third to one half of Average Weekly Earnings. That is, they are some of the lowest paid workers in the economy. Lower income earners tend to have lower rates of home ownership. That stands to reason because their financial capacity to save a deposit and qualify for a mortgage is below average.Therefore, people employed by these sectors are more likely to be renters than homeowners and therefore are less likely to contribute to property buying and selling selling activities.When will consumer spending return to normal?Consumer spending accounts for almost 60% of Australia’s GDP, so it’s important component of our economic recovery. The big question is will consumer spending bound back after the shutdown restrictions are lifted?We must remind ourselves that this economic slowdown was caused by a contraction of supply, not consumer demand. Of course, unfortunately, some people and businesses have suffered serve financial loss as a result. And their consumer demand will be lower. However, there is also a large cohort that have avoided any negative impact and their spending power remains intact or, in some situations, enhanced.This is reflected in the fact that 45% of survey respondents indicating that their spending levels will return to pre-Covid-19 levels once restrictions have been lifted. And 40% of people indicated that they will spend a little less.But there is little in the way of pent up demandI thought there might also be an amount of pent-up demand resulting from people being locked in their homes unable to spend on their usual entertainment and leisure activities. However, somewhat surprisingly, only 5.5% of respondents indicated they will initially spend more than they usually do.However, on the whole, this data suggests consumer demand should bounce back relatively quickly and the flow on effect to the economy and consumer sentiment will be positive. The Westpac-Melbourne Institute Index of Consumer Sentiment enjoyed it biggest monthly gain in May since the survey began nearly 50 years ago (see here).Of course, there are downside risksThere are two main housing-related downside risks in my view. The first one is a second wave of infection that results in lockdown measures being reinstated. That would have severe economic repercussions and definitely weigh on housing values to a material extent. However, that risk seems to have abated over the past few weeks. Australia’s virus control is the envy of many countries and in the long run, will make Australia an even more attractive immigration destination.The second risk is money supply, specifically, the lending volumes. As I have cited previously (see chart in this blog), there is a direct link between lending volumes and property price growth. At the moment, banks are experiencing operational bottlenecks caused by significant increase in workflow and the fragmentation of Australian and offshore staff. For example, ANZ recently confirmed that it takes it more than 3 weeks before it even looks at a new application. It might take the banks a few months (at best) to resolve these operational issues. In the meantime, lending volumes will be negatively impacted.The news is not all badCurrently, there is a lot of negative sentiment about the property market and Australian economy generally.No one really knows what will happen over the next few months, including me, of course.However, in the long run, investment-grade property market fundamentals are largely intact, which I think is my most important point.
If many employees continue to work from home, then perhaps demand for property in close proximity to capital city CBD’s will fall. And conversely, perhaps demand for property in regional centres that are well serviced by pubic transport (trains) will increase. This encourages us to consider whether the work-from-home movement will change the way we invest in property.Covid forced us to work from homeMost employees have been required to work from home over the past few months due to the COVID shutdown. Of course, for most businesses, mobilising their entire workforce at short notice created a number of teething issues. But most businesses have adjusted to the ‘new normal’. They have resolved most operational issues and staff, in the main, are enjoying the flexibility that working from home provides.Of course, this is not true for all businesses and employees. Working from home suits some roles, employees and industries better than others.Some of the benefits of working from home include improved productivity due to fewer distractions. The elimination of travel time means employees can spend more time with family and/or complete more work. Therefore, it seems to provide benefits for both the employer and the employee.In fact, Twitter is the first global businesses to confirm it will now allow employees to work from home permanently. Senior public service leaders in Canberra and many states and territories around Australia are also contemplating more permanent work-from-home policies too.But it has its downsidesOf course, it’s not all positive. There are some downsides to working from home. These include not having a suitable workspace and limited face-to-face contact with clients and co-workers.Research conducted by Dutch social psychologist, Geert Hofstede highlighted that human connection and relationships in the workplace are big contributors to job satisfaction. We have all come across people that dislike their job/employer but stay because they enjoy the people they work with. The reverse is also true i.e. people have left a role because they disliked the people, they worked with even though they make have loved the job.Impact on demand resulting from working from homeOf course, if more employees work from home permanently – either on a full-time or part-time basis, demand for office space will fall, which will likely have negative consequences for commercial real estate. But what about the residential property market?If people choose to work from home, then they no longer have to commute to their workplace. This gives them more options in terms of where to buy a home. For example, a greater share of the population may be more attracted to regional cities and towns, particularly as housing is more affordable in these locations. If that is the case, demand for housing in capital cities might fall, creating downward pressure on prices.There are many important factors that determine where we want to liveIt is important to remind ourselves that our choice of where to live is influenced by many factors, and proximity to one’s workplace is only one of those factors.Perhaps the most compelling consideration for families with children is education. Living in a regional town might otherwise be attractive but if that means kids have a 1.5 hour each-way commute to school, it’s probably not going to work.Proximity to family is also a persuasive factor when determining your home’s location. This is particularly the case if you need to look after your unwell parents or if parents provide pro bono babysitting services.Other considerations can include proximity to health services such as hospitals and amenities such as entertainment, shops, restaurants and so on.You must invest in a location that benefits from diversified demandWhen investing in property, selecting the right asset is paramount. You must only invest in locations and properties that benefit from a sustainable and diversified level of demand.I explain this concept to my clients by using the following theoretical example: we want to invest in a property and location that notionally has 20 potential buyers for ever one seller i.e. demand outstrips supply. Those 20 buyers will be from various demographic and socioeconomic segments such as investors, first home buyers, upgraders, empty-nesters, retirees and so on. These buyers could include executives on above-average incomes, self-employed persons, young professionals, self-funded retirees and so on – essentially you want a diverse array of financial circumstances.Therefore, in this situation, if working from home becomes more common and fewer people desire to live in a capital city, then notionally, the pool of potential buyers might reduce from 20 to say 17. Irrespective, as long as demand is perpetually higher than supply (supply is fixed in blue-chip suburbs), it is likely you will experience price appreciation.Of course, the work from home tend could have some implicationsNaturally, there will be some geographical locations that will be adversely impacted to a greater extent as result of an increase in work-from-home activity. For example, families with limited earning potential and financial resources will probably benefit to a greater extent by moving to a regional centre because their purchasing power is greatly improved.Future proof your investment methodologyThere are a few possible changes on the horizon that could have a material impact on how and where we work and live, working from home is one. Another is self-driving cars as they may lessen the burden of commuting to work. Property investors must incorporate the risk of these factors changing the future demand for property in their investment decisions.The best way to mitigate many of these risks is to level up on quality. That is, invest in the highest quality asset and location your budget will permit. Just like with any asset class, your investment’s quality will directly determine its investment returns. That is, you cannot expect above average returns if you invest in a below-average quality property.Do not compromise on asset selectionTo use an analogy, when it comes to property selection, we are not just searching for a diamond, we want a pink diamond. Something that is in such short supply (scarcity) and perpetually high demand. Remember the three factors being scarcity in terms of location and property type, high land value component and a history of strong growth (see here). Do that, and your investment portfolio will weather most storms.
With interest rates at all-time lows, in some situations, it is now a lot cheaper to be an owner-occupier than a renter. And with the prospect of interest rates not rising anytime soon, it could stay that way for a few years, unless the market changes.I thought it would be interesting to analyse the potential impact of this phenomenon. Obviously, there are some practical implications for people contemplating renting versus buying. But also, there will no doubt be broader consequences for the property market as a whole.How much cheaper and for who?Our analysis is summarised in the table below. Essentially, we compared the current value and rental cost of five property types and locations. The five scenarios were as follows:1. Luxury, high-end, boutique apartment for $2.2 million;2. Entry level 2-bedroom apartment that is considered investment-grade for $580,000;3. Investment-grade, 2-bedroom house in a blue-chip suburb for $1.2 million;4. A 3-bedroom family home in a desirable suburb for $2.5 million; and5. A 3-bedroom home in an outer suburb for $660,000.see table at https://www.prosolution.com.au/cheaper-to-own/The interest cost was based on an interest rate of 2.2% p.a., which is the current 3 -year fixed rate for owner-occupier mortgages. It assumes that the owner has borrowed 100% of the purchase price plus stamp duty, which isn’t practical unless they have additional security to offer the bank. But we had to make this assumption to ensure it was a fair comparison, even though consequently it becomes more of an academic comparison than a practical one.I’m sure you agree that it defies logic that it is less expensive to own your home than rent it. If this continued to be true, renting becomes far less attractive. As such, it is reasonable to assume that market forces will eventually conspire to reverse this i.e. make it more expensive to own. More on this later.Comparing interest and rental is not the full pictureThe above table compared the mortgage interest cost with the rental cost. However, as a homeowner, there might be additional cash flow implications associated with owning your home.Firstly, there’s the cost of maintenance to consider. This will depend on the type and age of the of property. It’s important to distinguish between maintenance and improvements. It is often very tempting to make improvements to your home, but these tend to be discretionary in nature, and probably should be excluded from this analysis.Secondly, there are also running costs that are exclusive to owners including owners’ corporation fees if you live in an apartment, council rates, water rates, insurance and so on.Finally, if your loan repayments are structured as ‘principal and interest’, the dollar value of your monthly loan repayments will be higher than that interest costs included in the table above. This is not a sunk cost however, as it reduces your liability and helps you accumulate equity in your home. So, it should be excluded from a financial comparison, but taken into account from a cash flow affordability perspective.Including owners’ costsThe table below includes an estimate of the above owning costs including maintenance, owners’ corporation fees, council rates, water rates, insurance and so on.see table at https://www.prosolution.com.au/cheaper-to-own/Tax free capital growthOf course, one of the benefits of being a homeowner is that you are able to benefit from the capital appreciation of your home and that gain is tax free (due to the main residence capital gains tax exemption). I discussed this a few weeks ago and concluded that “investing in your home” can be a very rewarding strategy.Owning provides certaintyOne of the problems with renting is that tenancy agreements are typically only 12 months long. This doesn’t provide renters with any long-term certainty. This is particularly an issue for family’s with school-aged children. As such, particularly in this circumstance, owning your home does provide more certainty.A higher demand from owner-occupiers could put downward pressure on rentsIf demand for rental properties falls because demand from owner-occupiers increases, then that is likely to have a negative impact on rent incomes. That is, existing investors may find it harder to rent their properties for the same amount. If this is the case investors will have to consider dropping their rent or making improvements to the property to improve its appeal. And, of course, if rents fall, it might once again, be cheaper to rent than own.It will likely provide a temporary stimulusClearly, due to a fall in interest rates, housing is more affordable than it used to be. That fact has to eventually result in an increase in property demand which will ultimately push property prices higher.However, interest rates will only have a temporary impact on demand as they won’t stay low forever. As I wrote in this blog last year, there are typically only four macro factors that persistently influence the level of demand for property on a long term basis. These include population growth, money supply, employment diversification and infrastructure.The Morrison government has already affirmed its commitment to return to previous levels of overseas migration once the Coronavirus passes. Given all monetary policy initiatives have already been employed (i.e. rates can’t fall any further), the government will have to turn to fiscal policy, which inevitably will include increased infrastructure expenditure, to stimulate the economy. And finally, the RBA expects the unemployment rate to recover to 7.5% by the end of 2021.Most of these factors, in the long run, are likely to stimulate property price growth.Need a deposit to buy a homeOf course, to be able to purchase a home, you need to qualify for a loan. This means you need to have enough income and low financial commitments to demonstrate you have surplus financial capacity to make loan repayments. Also, you need to have either a cash deposit or equity in another property. If you are weak on the deposit front, then a family guarantee can be a good solution.Owning eats into your borrowing capacityIf you have plans to borrow to invest in assets other than your home, you must consider how owning your home will impact this. Renting is better for your borrowing capacity i.e. generally you can borrow more for investment than if you own your home with a large mortgage.Renting allows you to ‘try before you buy’One of the advantages of renting is that allows you to experience living in a location without needing to make a large financial commitment. You may be better off renting in various locations in order to identify the one that suits you best.Also, if you are unsure which school you would like your children to attend, renting may (initially) provides you with more flexibility.What should you do?Of course, everyone’s situation and goals are different so it’s impossible to provide blanket advice. However, it would seem to me that if you want to live in a location that is regarded as investment-grade, then buying in that location might not only be more cost effective in the short run, but financial better in the long run.
Due to the impact of coronavirus, many people are having to navigate unexpected changes in income and expenses for the first time in their life. This is something I have been talking about over the past few weeks with clients, during presentations and podcast interviews.Cash flow management is the cornerstone of successful wealth accumulation. It doesn’t matter how much you earn, if you don’t manage cash flow effectively, it’s unlikely that you will be successful with building wealth. I have seen clients with 7-figure incomes that have little wealth to show for it. Conversely, other people with relatively modest incomes but very good cash flow management practices, have successfully accumulated a lot of wealth.Managing cash flow does not have to be painfulThe topic of cash flow management feels painful to many people. It tends to create connotations of curtailing expenditure on all the fun things in life. However, in the main, that is not the case.The main aim of best-practice cash flow management is to eliminate unconscious expenditure.Conscious versus unconscious expenditureMost people do not consciously make bad financial decisions. Therefore, the insidious consequence of not tracking cash flow means that money ‘disappears’ on items that add very little enjoyment to your life. As such, eliminating this unconscious expenditure not only saves you money, but is likely to have very little impact on your standard of living.You cannot manage what you do not measureThe best way to eliminate unconscious expenditure is to measure how much you spend in total on all discretionary items. You do not need to track every single expense, just a monthly or fortnightly total.I typically like to allocate expenses into seven categories.Non-discretionary expenses1. financial commitments, such as rent, mortgages, car leases and child support.2. utilities, including costs for gas, electricity, rates, phone, water, internet and contents insurance.3. health and education, such as school fees, health insurance, medical expenses and child care.Discretionary expenses4. shopping and transport, like food, clothing, beauty, petrol, car maintenance and public transport expenses.5. entertainment, including spending on annual holidays, gifts, eating out, movies and coffees.6. cash, which is all withdrawals from ATMs – if this figure is high, stop using cash and start using EFTPOS or credit cards more often, as this makes tracking your spending much easier. Remember, you can’t manage what you can’t measure.7. other, which is anything that doesn’t fit in the preceding categories.Use two separate bank accountsYour salary income should be directed into one account, typically the (offset) account that is linked to your home loan. We will call this a ‘savings’ account. Pay all non-discretionary expenses from this account (categories 1 to 3 above).Then transfer a set amount each week, fortnight or month into the ‘spending’ account and pay all expenses in categories 4 to 7 (above) from the ‘spending’ account. This is depicted in the diagram below (taken from my new book, Rule of the Lending Game).The mere existence will save you moneyIn our experience, merely setting up this banking structure will almost certainly result in a fall in expenditure, probably without any negative lifestyle consequences. But most importantly, it will allow you to track your cash flow at a high level so that you can ‘course correct’ if it gets out of control.Use the lockdown to reset spending habitsUnconscious behaviour tends to be habitual. Breaking the habit, tends to break the unconscious activity. An unexpected positive from the pandemic shutdown might help achieve this for some.What if you run out of money?If you run out of money (spending account balance hits zero) part way through the period, then you know you have been overspending. In this case, you need to have a closer look at your spending habits. This involves allocates each expense into category 4, 5, 6 or 7.If your overspending is conscious i.e. you are spending too much on deliberate items, try to reduce either the amount per transaction or regularity. For example, if you enjoy eating out, keep doing so but go to cheaper venues. Or if you like fine dining, eat out once per month, instead of once per week.The temptation is to try and eliminate these types of expenditure in totality e.g. “we’re not going to eat out for 6 months”. But that approach is rarely sustainable. Remember, the aim is to adopt good cash flow management practices permanently, not just for a few months.Tech you can useThere are a number of apps you can use to track your expenditure at a more granular level. The most popular is Pocketbook. It allows you to link your bank account so that it downloads your transactions from your bank and automatically allocates it to predetermined categories. You can set a budget for each category and automatically track your compliance.The second biggest advantage is it aids financial decision makingOf course, the biggest advantage of improved cash flow management is that you spend less which allows you to invest more.The second biggest advantage is that you will have more reliable data to base financial decision on. That is, for example, if a client is contemplating a home upgrade and we are determining a budget, we can confidently base our financial projections on their actual expenditure amounts.Baby stepsIn my experience, 90% of people do not track their cash flow. Not doing so almost certainly means that they are ‘wasting’ money on items that give them zero enjoyment, and that is a shame. Hopefully, this blog demonstrates how easy it is to get this under control. Doing so will greatly enhance your ability to successfully build wealth.Once you’ve mastered your cash flow, if want to have a chat about how to invest your newfound savings, feel free to reach out to us. Good luck.
A few months ago, a reader of this blog asked me to analyse two options. Option one is to borrow more money to fund an upgrade of your family home and consequently enjoy tax-free capital gains. The second option is to invest in property. The reader wanted to know which is the best option, net of all taxes such as capital gains and land tax?Widen the scope of the questionI’d like to widen the scope of this question and add one more option – investing in shares. I have concerns with investing large amounts of borrowed funds in the share market, which I will discuss below. However, as an independent financial advisory firm, it is important that we always provide a balanced view – even if some of the options we are comparing are more of an academic comparison, than a practical one.Interest rate assumptionOne of the key assumptions in my financial modelling is interest rates. Normally, I like to adopt a conservative long-term interest rate assumption of 6.5% p.a. However, I realise that this might be less appropriate when interest rates around the world are making their way to zero (or are already there) and central banks are pursuing quantitively easing. It is very likely that interest rates will remain persistently low for an extended period of time. That said, it’s also not impossible that interest rates will rise sometime in the future too.As such, in this analysis I have assumed that the variable interest rate is 3.7% for investment loans and 2.9% p.a. for home loans and will remain at this level for the next 3 years. I have then assumed rates will rise by 3% p.a. over the following decade (on a straight-line basis) and remain at that level.What is most important is that I have used the exact same assumptions when comparing all options.The quantitative analysisI financially modelled three scenarios:Option 1: Borrowing $1 million to fund a home upgrade from $1 million to $2 million. This allows you to move to a superior location thereby enjoying a superior capital growth rate.Option 2: Borrow $1 million to invest in a property that generates gross income of 2% (rental yield before expenses) and capital growth of 7% p.a.Option 3: Borrow $1 million and invest in shares which generate 4.0% p.a. in dividends (40% franked) and 5.0% p.a. in growth rate (so that the overall return is the same as the property option i.e. 9% p.a. – to ensure the comparison is fair).As you will see from the chart below, option one is superior as it results in a higher net worth in today’s dollars. Options 2 and 3 are broadly similar.AIt is interesting to observe that the higher expenses associated with property (e.g. maintenance, land tax, etc.) do not have a material impact. One might expect that the higher expenses associated with property investing compared to the higher income from share investing (particularly franking credits) would result in the shares option being superior. But the higher (compounding) capital growth from property more than offsets its lower income and higher expenses. The key here is investing in the right property i.e. investment-grade.Home loan debt is less of a problem whilst rates are lowOne of the problems with a strategy that gives rise to high amount of non-tax-deductible debt (i.e. home loan) is that it can be very experience. That’s because the interest is not tax deductible – so repayments are made from after tax dollars. In a high interest rate environment, this can absorb all cash flow thereby retarding your ability to make material loan principal repayments or invest in other assets.For example, a $1 million loan at 7% p.a. will cost you $70,000 in annual interest. You need to generate approximately $150,000 of additional pre-tax income to fund this interest cost (i.e. $150,000 pre-tax amounts to $70,000 after-tax). That is expensive.However, in a lower interest rate environment, non-tax-deductible debt becomes less of a cash flow burden. This allows borrowers to (1) repay this debt at a faster rate and/or (2) divert a portion of their cash flow towards other wealth accumulating activities.I would almost never recommend investing $1 million in the share market in one hitFrom a practical perspective, I would not recommend anyone invest a large lump in the share market in one tranche, particularly borrowed funds. Instead, I would prefer to invest the money in smaller tranches over a period of many years. This spreads your timing risk as the share market is twice has volatile as the property market.I only assumed the $1 million was invested in one lump sum for academic purposes – to make sure I’m comparing like for like strategies.Home strategy will only work if you downsizeWhilst the ‘home upgrade’ strategy produces the best result, it is will only help you fund retirement if you sell your home in the future (i.e. downsize) to crystallise the additional equity.I caution people about relying on crystallising home equity as a primary strategy. It is okay as a ‘plan b or c’ but typically not as a primary strategy. The reason is that often people become attached to a certain location due to its amenity and community connections. They might like to downsize in accommodation size but stay in the same area. That does not always translate to a commensurate downsize in value. That is, selling a family home and buying a new, low-maintenance townhouse in the same location may not generate as much “cash” (to fund retirement) as you may initially anticipate.Tax benefits associated with property are far less compellingIn the past, one of the benefits of investing in property is that it would reduce the amount of tax the investor paid i.e. due to negative gearing. This was true in a higher interest rate environment, but in a low interest rate environment, tax benefits are far less compelling.For example, the rate for a 3-year fixed investment loan is currently only 2.70% p.a. Rental yields tend to range between 2% and 4.5% i.e. often higher than current interest rates. Therefore, it is possible a property’s rental income will be enough to pay for all its expenses including interest – thereby not providing an investor any tax savings.Your home can be a good investmentThe key message I would like to convey is that your home can be one of your best investments. For some people, it is practical and possible to purchase a home in a location that possess investment fundamentals. I always counsel my clients to do this, where possible.Of course, the primary reason to purchase a home is for lifestyle purposes, and I understand that. But sometimes it is also possible to do both i.e. buy an investment-grade property and occupy it. And doing so can materially aid wealth accumulation efforts.Therefore, don’t be too quick to discount a potential home upgrade purely as a lifestyle decision. There can be some important financial considerations too, which may or may not aid your wealth accumulation efforts.
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 other banks’ forecasts are consistent with this view.In summary, the duration of unemployment will likely be relatively short for most people. Furthermore, there are many support mechanisms that homeowners can draw upon to ‘survive’ a period of unemployment (e.g. JobKeeper and mortgage repayment pauses).Some people will fare worse than othersThe impact of COVID will be patchy. There will be some people that will be financially stronger at the end of the lockdown period because their income has not changed and their spending has reduced. Of course, I acknowledge that some people will be worse off too.My point is that if you haven’t been financially impacted by COVID and don’t expect to be impacted in the future, then practically, your property purchasing plans do not need to be altered. It is possible therefore that there may continue to be a reasonable volume of active, willing and enthusiastic purchasers in some geographic and demographic segments which may be supportive of prices.What about the other factors cited by CBA?CBA has made reference to falling rents, economic activity and mortgage volumes as additional factors that may weigh on property prices. In my view rents and economic activity will have little impact on prices in investment grade locations. However, the supply of credit (mortgage approvals) can have an impact on property growth – see the chart in this blog.I expect that mortgage volumes will fall this quarter, partly because of lower demand but mostly due to operational issues (banks have a large backlog of work due to the disruption of offshore personnel). However, I expect volumes will recover relatively quickly when the lockdown restrictions are lifted.Sales data might be impacted by motivated vendorsMost people would not decide to sell a property today unless they had to do so (for financial or other reasons). If the choice was yours, you would probably wait for the COVID situation to pass before you contemplated selling your property.Therefore, it is reasonable to assume that most people that are currently selling property have to do so i.e. it’s not solely their choice. In this case, they may be motivated to drop their price in order to secure a sale. As such, sales data for this quarter and perhaps this year might not be “representative’ of intrinsic value.I’m not suggesting that the data is flawed or incorrect. It is what it is. I’m just saying that if the only people that are selling are ‘motivated vendors’, then of course we should expect the median price to fall.Why is this discussion less meaningful for investors?I admit that I find economics interesting. It was my favourite subject at university. But the reality is, on this occasion, it shouldn’t inform your personal investment decisions.Whether the median house price will rise or fall this year doesn’t necessarily indicate whether you should hold off purchasing a certain property type in a certain location. Most people understand that property doesn’t behave uniformly. Property can behave differently depending on location and type. Capital city median house prices is such a broad measure and as such has limited application.Don’t forget, this blog demonstrates that “timing” the market has very little impact on investment returns.Consider the future impact on borrowable equityWhen a valuer completes a property valuation, they will review past sales of comparable properties – normally the past 6 to 12 months of data. At the moment, that data presents well, as the end of 2019 and start of 2020 were relatively strong markets. However, depending on the property’s location, that data may not support a higher valuation post March 2020.This is something to keep in mind. Getting your bank to revalue your properties today, to lock in access to equity might be wise to do. If you wait to do this later this year, the risk is that comparable sales data won’t be favourable.Expect ‘noise’ about property prices to get louderIn the 18 years since starting ProSolution, I have only ever read one article that was positive about property i.e. now is a good time to buy. The rest of the time, the theme of property media ebbs and flows between ‘property being overvalued’ and ‘property is about to crash’. I anticipate we’ll probably see more negative stories this year. But remember, these are written to sell clicks/views, not inform investment decisions.
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, unemployment is projected to rise from 5.2% to 9.3% in the third quarter of 2020 and then back down to 6% by the end of 2021, according to Westpac’s Bill Evans. This could have a negative impact on property demand and therefore price growth. As such, if I was contemplating a property acquisition today, I would reflect this risk in the price that I offered. That is, I would be seeking to acquire the property for a price less than its intrinsic value to compensate me for the risk of buying today.Global uncertaintyGlobal uncertainty refers to international risks and their potential impact on your investment performance. An example is the risk of the USA falling into a deep recession and the resultant impact on global consumption and growth. Or China reducing its appetite for our natural resources (e.g. iron ore, gas and coal).These factors will have limited (or potentially no) impact on some asset classes, such as residential property, for example. This is why diversifying across asset classes is so important.Of course, global risks (uncertainty) will have a greater impact on things like super and share portfolios. There are two things you can do to accommodate these risks.How to deal with global uncertaintyFirstly, you need to have enough control and transparency over your super and/or share portfolio so that you can ‘underweight’ exposures to certain geographical markets. I’m not suggesting you take large bets. Instead, you can strategically tilt your allocations away from perceived risks.Secondly, at the risk of sounding repetitive, diversification is the common thread underpinning successful investment methodologies. This not only includes geographical diversification but also industry/sector diversification, single company limits and filters to avoid over-valued segments of the market – traditional indexing doesn’t always achieve this.Applying this approach to COVID-19Depending on your situation, coronavirus can give rise to all three risks/uncertainties.If your job security and/or income has or will be impacted by the coronavirus, then you may be best served by putting all financial decisions on hold and focusing all your efforts on recovering your income. For many people, there may be little they can do other than wait for the shutdown restrictions to be lifted.If you are one of the lucky people that have not been personally impacted by the coronavirus, then your only risks are domestic and international ones, which can be easier to navigate, as described above.Success lies in your decision makingNow more than ever you must only employ evidenced-based strategies and focus on the long term. Instead of asking “what should I invest in”, a much better question to ask is “how should I invest”. This forces you to focus on your strategy, not just the underlying investment. A well-thought-out strategy and methodology should go a long way towards accommodating many of the present risks and uncertainties.Of course, if you need help, do not hesitate to reach out to us.
We provide answers to a number of frequently asked questions below. We will continue to add new questions and update our answers as events and government announcements unfold.Questions about pausing loan repaymentsHow does the loan repayment pause work?Banks are offering customers the ability to pause residential loan repayments for up to 6 months if they have been impacted financially by coronavirus. I provided links to each lender’s relevant webpage at the bottom of this blog post.It is important to note that banks are not offering an interest-free period. Interest in respect to your loan will continue to accrue and be added onto your loan balance.For example, if your interest only loan is $100,000 and your interest rate is 3% p.a. then your monthly interest bill is $250. If you request the bank to pause repayments for 6 months then at the end of this period, your loan balance will be $101,500 (being the original balance plus 6 monthly payments of $250).Most lenders have confirmed that they will not charge interest on the unpaid interest amount (e.g. the $250 per month) during the loan repayment pause period.Should I pause my loan repayments?If you are unable to continue to make your loan repayments on time due to financial hardship, then pausing your loan repayments is a good solution.However, if you do have alternative means of making repayments e.g. from cash savings, redraw, etc. then my advice would be to utilise those other mechanisms first, before you pause your loan repayments.Should I pause my repayments if I’m concerned about losing your job in the future?No. If your income has not yet been impacted by the coronavirus then our advice would be to continue making normal loan repayments. If your financial situation is adversely impacted in the future, then you may consider pausing repayments at that time. We anticipate that lenders will allow borrowers to do this at any time over the next six months.Will pausing repayments affect my credit rating?No. The Australian Banking Association has confirmed that borrowers that take advantage of the repayment pause option will have any impact on their credit rating – see here.Should I pause repayments on all loans?If you have suffered financial hardship, our advice is typically to put investment loan repayments on pause first and attempt to continue to make normal repayments towards your (non-tax-deductible) home loan, if possible. However, if you are not in a position to continue making home loan repayments, then pausing all loans might be your only option.Will the accumulated unpaid interest still be tax deductible?If you put an investment loan’s repayments on pause, the interest will be added to the loan’s balance at the end of the pause period. Therefore, when normal repayments recommence, the bank will charge interest on this higher loan balance (so more interest will be payable). This should not have any adverse impact on your tax deductions. That is, all interest charged in respect to this investment loan will continue to be fully tax deductible.Also, you will be able to claim a tax deduction for the interest incurred (and subsequently added to the loan’s balance) during the loan repayment pause period.Can I reduce principal and interest (P&I) repayments to interest only?Normally, changing repayments from P&I to interest only would require a lender to re-contract the loan and that would normally trigger the full loan assessment process. However, we understand that some lenders are working on their ability to do this without requiring the borrower to submit a full application. We will update this page if any new information comes to hand.Landlords and tenantsHow does the ban on evictions work?Government has enforced a 6-month moratorium on evictions of commercial and residential tenants who are unable to meet their commitments due to the impact of the coronavirus.Therefore, if your tenant is unable to pay their rent due to coronavirus, you cannot evict them for at least 6 months.What should I do if you tenant says they cannot pay their rent?The first step is to ascertain to what extend the tenant’s financial position has been impacted by coronavirus. This might include obtaining documentation from the tenant’s employer/s or accountant (if they are self-employed) to confirm any changes to their income levels.This information will help inform your response. Essentially, you need to form a view on two matters:§ To what extent the coronavirus situation has reduced the tenant’s income; and§ The likelihood of the tenant recovering their income once the shutdown restrictions have been lifted. This includes how long that recovery period might take.Once you have all the information, what agreement should you make with the tenant?The government released its Code of Conduct in respect to commercial tenancies on 7 April 2020 (see here). Whilst this Code does not apply to residential tenancies, it perhaps provides some hints for residential landlords.The Code talks about the concept of proportionality. So, if a tenant’s income has fallen by 50%, then landlords are expected to agree to a rent reduction of 50%.The Code also states that rent reductions can be offered in the form of (1) waivers and (2) deferrals. At least 50% of the total rent reduction must be in the form of a waiver. Landlord must offer a commercial tenant a period of at least 2 years to repay any deferred rent.Can you provide an example of what a residential tenant agreement might look like?Example: Tenants have been temporality stood down by their employer but expect to return to full employment when the when shutdown restrictions are lifted. The tenants were paying you $300 per week in rent.You agree with the tenant to reduce the rent to nil for 3 months (saving the tenant $3,600). Half of this reduction is a waiver i.e. you do not seek to recover it. The remaining half is a deferral. As such, you ask the tenant to sign a new 1-year tenancy agreement which commences at the end of the rent reduction period at a rate of $335 per week (being the original $300 plus 50% of $3,500 over 52 weeks).I have used the abovementioned Code as a basis for framing this agreement with the tenant. However, it is important to note that the government has not yet indicated what it expects residential landlords to offer their tenants. Therefore, our advice is to hold off on making any agreement with the tenant until the government provide further guidance (we will update this page when that happens).What if my tenant cannot pay any rent for 6 months and then leaves?Unfortunately, there is not much you can do. You may be able to claim against the tenant’s bond. You also may be able to claim on your landlord insurance policy (see more below).And finally, I expect that the government may come out with a package to compensate landlords that have suffered financial loss as a result of its moratorium on evictions. Watch this space.Will landlord insurance cover me for loss of rent?The answer to this question will depend on the term of your cover so you should consult the insurance company and/or read its Product Disclosure Statement (normally found on its website).Many insurance providers have ceased issuing new policies due to coronavirus.Most policies exclude your ability to successfully claim if you have agreed to a tenant paying a lower or no rent. Therefore, this cover is unlikely to be of any benefit during the coronavirus period.Do you have any other questions?If you have any questions that are not covered above, you can email us. If we feel that it is likely other people would benefit from the answer, we will post your question and answer here.
With most people being required by their employer to work from home, I thought it would be timely to update you on what deductions you can claim and what evidence you need as substantiation.Start keeping record nowRemember, the onus of proof is on the taxpayer to substantiate any deductions they claim. If you use a tax agent, you probably won’t have to lodge this year’s income tax return until March 2021. How likely is it that you will remember everything you did and all the purchases you made in March 2020, one year from now? Unlikely right. Therefore, its best to start keeping records now.Expenses you may be entitled to claimHere’s a list of expenses you can typically claim.Running costsThese expenses include heating, cooling, lighting, cleaning, and so on. There are two methods you can use to calculate this deduction:1. Fixed rate - You can claim a deduction of 52 cents for each hour you work from home instead of recording all of your actual expenses for heating, cooling, lighting, cleaning and the decline in value of furniture. You can either keep a record of the number of hours you have worked from home during the coronavirus period. Or, if you regularly work from home, you can keep a diary for a representative 4 weeks; or2. Actual costs – You can use this method if you have a dedicated workspace and you can accurately apportion costs such as power, heating, cleaning and depreciation. You still need to keep a 4-week diary or actual record of hours worked to support your calculations.Obviously, for most people, the fixed rate option is the simplest. More information is available on the ATO’s website here.ConsumablesItems such as software subscriptions, stationery, paper for your printer and printer ink can be tax deductible. You must retain receipts as evidence.Mobile phone & internet expensesThere are two methods available to use to determine your tax deduction for mobile phone usage:1. A total deduction of $50 with limited documentation required. This method is appropriate when your device usage is incidental; or2. Claim a proportion of actual expenses. To work out the actual work-related proportion, you need to consider the amount of usage solely for work compared to the overall usage. Usage could include functions such as voice calls, text messages, data and app usage. You need to keep a diary for a representative four-week period to support your claim.Computer and office equipmentIf the cost of the equipment is less than $300, then you can claim a full deduction in the financial year the purchase was made. If the equipment costs more than $300, you must depreciate the item over its useful life. Note, if any equipment purchased is partially used for private use purposes, you will need to apportion the depreciation for its work use percentage.Expenses you may not be entitled to claimHere is a list of expenses that you are not able to claim.Rental expense or mortgage interest (occupancy expenses)Generally, you cannot claim a deduction for interest cost or rent paid in respect to a home office. However, if dedicated portion of your home is your principal workplace, then you can claim a portion of occupancy expenses. Generally, you would apportion the work-related and non-work-related expenses by floor area.Travel between home and workGenerally, you are not entitled to claim a deduction for the cost of travel between work and your home office e.g. if you need to go into the office to collect items.Certain government expensesIf you were to make a claim using the actual method, you cannot claim items such as council rates, land tax and water rates.ReimbursementsIf your expenses are reimbursed by your employer, you will not be able to claim these work-related expenses. However, if your employer has paid you an allowance for work related expenses, you can claim a deduction against this allowance.No capital gains taxIn most cases, there are no Capital Gains Tax (CGT) consequences of running a home office.Generally, if you use your home for an income generating/business purpose, you normally only be entitled to a portion of the main residence CGT exemption. That is, you wouldn’t be entitled to a 100% exemption. This is true if you claim occupancy expenses. However, if you do not claim occupancy expenses, then you would obtain the full main residence CGT relief.The ATO’s Golden RulesThe ATO has provided three rules in determining whether the deduction your claiming is eligible:1. The taxpayer must have incurred the expense themselves – and not have been reimbursed.2. The expense must be incurred in gaining or producing assessable income.3. The claim must comply with the substantiation rules – i.e. all records must be kept.Remember, the onus of proof is on the taxpayer. It is important to know what you’re eligible to claim before lodging your tax return and to make sure you don’t claim more than what you’re entitled to. Don’t be too aggressive just to save a couple of dollars in tax – it’s not worth the risk of attracting an audit. The risk of deductions falls on the taxpayer, not their accountant. It is imperative to get the right advice before claiming your deduction.Home office expense calculatorThe ATO has a home office expense calculator here.I hope you and your family are safe and keeping well. If we can be of any assistance, don’t hesitate to reach out to us.
Author and property investor, Michal Yardney says “real estate investing is a game of finance with some houses thrown in the middle”.People think that the scarce resource is investment-grade property. But the scarce resource is actually borrowing capacity – as everyone has a limit to how much they can and should borrow.In a normal market, investors that seek professional advice from a buyers’ agent will eventually be able to identify and acquire a quality asset. And if you had an unlimited borrowing capacity, theoretically, you could keep buying property. However, the reality is that everyone has a limit to what they can borrow. Safely maximising that limit allows you to invest more and build personal wealth. That’s why investing is a game of lending, not investing.My recent experience is case in pointMy wife and I recently refinanced some loans from Westpac to ANZ. Most of these loans were established at Westpac in the past 3 to 5 years. One loan was established as a result of an unexpected, but advantageous, property acquisition in late 2016. To get the loan approved, we had to agree to making accelerated (additional) loan repayments to reduce debt.However, over the past 3 years, our loan to value ratio has reduce significantly and our overall financial position has materially strengthened. Plus, we have been making substantial loan repayments thereby reducing our debt.As such, I approached Westpac to (1) restructure our loans and (2) access some equity. In short, they said no! Whilst this was frustrating (and frankly nonsensical), it reminded me how important it is to know the rules of the lending game. You need to know when to push and when to walk. And most importantly, whether a ‘no’ is really a ‘no’ – maybe you are either talking to the wrong person at your existing bank or need to go to a different bank.The short story is that we refinanced to ANZ, obtained a lower interest rate, almost all debt on interest only repayments (only one loan on P&I because we requested it, not the bank) and we obtained access to a large amount of equity.To win at the game of investing, you need to first win the game of lendingI have always counselled my clients to do two things. Firstly, always borrow more money than you think you need (large buffer). Secondly, the best time to borrow is when you don’t need it.When I started talking to Westpac back in September 2019 (yes, nearly 6 months ago!) in regard to restructuring our lending and accessing equity, I had no immediate plans for the further borrowings. However, as it has turned out, as a result of this refinance, I now have access to additional monies I can invest in the property and/or share markets if I want to i.e. there are much better buying opportunities now, compared to 6 months ago.My point is that your ability to successfully invest to build wealth will be severely hindered if you are not able to proactively and efficiently maximise your borrowable equity.The banks and government set the rulesIn order to win the boardgame Monopoly, you firstly need to learn the rules of the game and secondly work out how to play them to your advantage. Winning the game of lending is no different.It is important to understand that there are two types of rules.The first category of rules is prudential lending standards – let’s call these ‘normal rules’. An example of this rule is that most lenders allow you to borrow up to 80% of a property’s value (without charging mortgage insurance). This is a hard and fast rule that cannot be bent. Some normal rules can be bent a little, assuming you can demonstrate to the lender that there are mitigating factors.The unwritten rules of lendingThe second category of rules are unwritten, which are typically only learnt by experience. For example, referring back to my Westpac refinance story above, a credit manager approved our loans back in 2016 on the condition that we were to make accelerated principal repayments. Therefore, for a credit manager to decide in 2019 that this is no longer required, would to some extent, be sticking their neck out. We know that the banks have really clamped down on credit managers and no employee wants to risk their bonus (or worse, their job) by approving a loan unless it appears to be very low risk. Overturning a past credit decision, albeit one that was made over 3 years ago, feels like a risky thing to do. Therefore, for a credit manager, its best to say no, even if it results in lost business.Another example is challenging a bank valuation. It is near on impossible to get a valuer to change their valuation report, even if you present new evidence. No professional wants to admit they are wrong or initially did a poor job.That is why you need to know the rules and when you can bend them and when you can’t. Sometimes, the best thing is to go to a different lender, even if you find a bank’s answer completely illogical.3 ways to win the game of lendingUsing the banks money to build your personal wealth is a powerful strategy if implemented correctly. This is even more true in the current low interest rate environment. To maximise the power of this strategy, you need to do three things successfully. I list these below in order of importance.1. Maximise your borrowable equity – in practice this usually means proactively restructuring lending every 1 to 5 years (depending on your circumstances) to ensure you can maximise your safe borrowing limits. The more money you can borrow safely and invest in quality assets, the more wealth you can build in the long run. The vital adjective here is “safely”.2. Make borrowings tax effective – borrowing for investment purposes is tax-effective, as you can claim the interest cost as a tax deduction. This is a substantial tax deduction over the life of an investment, and it should not be compromised. Actions such as ensuring loans are structured correctly, using offsets, not mixing loan purposes for example are all important steps to achieving this goal.3. Minimise interest and fees – this is an obvious one. However, most investors tend to unduly focus solely on this step at the expense of the other two above, which costs them dearly in the long run.The rules have changed a lot of the past few yearsWhen I started this business in 2002, lending was so easy. We could simply approach a bank, nominate a loan amount, receive the loan documents and the loan would be set up. Sometimes, a few days later, the bank might even ask the client to sign an application form just to “fulfill their compliance obligations”. Of course, that way of doing business was absolutely irresponsible and things definitely needed to be tightened up.However, things have probably gone too far the other way. My recent refinance experience demonstrated this. I’m very organised and I know what’s required. But the amount of questions and paperwork that the bank requested was ridiculous. But there’s no point complaining about it. You just have to play the game.Download a comprehensive chapter summary of my new bookThis is why I have written my new book: Rules of the Lending Game. This book will help investors learn the rules of the lending game and how to play them to their advantage. This will help them avoid being locked out of the lending market which will ultimately put the brakes on their investment plans.You can download this chapter summary (here) of the key points I address in this book. It will give you a good sense of what the book covers and how it will help you. Feel free to share this document with friends and family.Since we have all been told to stay home for the next few weeks, it could be a wonderful opportunity to upskill yourself on this very important subject.Click on the banner now to purchase your copy today.
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 GFC.Don’t look at your super balanceThe best thing to do is not look at your super balance. The balance of your super is completely irrelevant assuming you don’t plan to retire in the next few months. If you weren’t checking your super balance regularly when markets were booming, why start now?Superannuation investors cannot control markets. No one can. As a superannuation investor, you can control three things (1) the type of fund you use (2) the investment option and methodology and (3) the fees you pay. Assuming you have optimised each of these three decisions for the long run, then all you need to do is close your eyes and know that it will work out.Looking at your balance regularly only create anxiety. Worrying about your balance won’t make it increase.The importance of having a cash bufferI typically like my clients to have cash savings equal to at least 6 to 12 months of living expenses, but often more depending on their financial position.Life has a habit of throwing curveballs at us. Therefore, it is important to ensure that you have adequate financial buffers in place to ride out any temporary changes in income and expenses. Similarly, it is also important to have appropriate personal risk protection insurances in place too.Hopefully coronavirus won’t have any impact on your cash flow. However, my suggestion it to use this situation as a learning experience. Unpredictable events can occur and if you don’t have the right financial strategies in place to mitigate these risks, they can cause irreparable financial consequences.What if your super or investments have fallen by more than the market?I was looking at new client’s portfolio that was managed by a reputable international stockbroker over the past 5 years. Some of his holdings have fallen by 50% in value – which is way more than the market. This is the problem with direct share investing – there is too much ‘concentration risk’ which is a drag on portfolio performance (BTW, his portfolio overall hasn’t performed well over the past 5 years and now it’s doing even worse).If you are in a similar situation you can use this experience as a bit of a wake-up call. If your portfolio has fallen more than the market, then its typically an indication that your investment approach or methodology is flawed. Whilst you might not want to fix that now (i.e. sell investments if we agreed they are undervalued), it’s something that might go onto your list to fix at some time later this year.What if you plan to sell property this year?Some of my clients are currently in the process of selling a property, or plan to do so this year, and have asked me if they should change their plans. It is still early days, but so far, the impact of coronavirus is patchy. That is, some higher value properties seem to be impacted more than properties at or below the median value. The heightened general level of uncertainly tends to dissuade people from making large financial decisions, even though it probably shouldn’t, since purchasing a property is a long-term commitment.That said, in times of high uncertainty, buyers and vendors typically withdraw form the market and transaction volumes fall. The big question is how long the coronavirus issue will restrict people’s usual activities? The answer to that question will inform you about its likely impact on the property market.If you can list your property without too much cost (e.g. adverting expenses and/or tenant vacancy), then there is no harm trying to sell it, since you will probably be competing with fewer properties. But don’t adjust your price expectation too much, unless you have to. If you don’t get a fair price, pull it off the market and try again in 6 to 12 months.What if you are planning to buy property?Of course, if vendors withdraw from the market, then there will be fewer properties for sale and less to chose from. That could make it difficult for you to find the right one.However, that definitely doesn’t mean you should stop looking. Sometimes other people’s fear works in your favour.In 2008, I was contemplating purchasing a house in the Melbourne blue-chip suburb of Prahran. They were asking $1.6 million, which was above my budget. On the morning of the auction (which I clearly remember was on 1 October 2008, only two weeks after US investment bank Lehman Brothers collapsed), I was contemplating not even bothering attending the auction. This was a time if high uncertainty, volatility and worry – right in the middle of the GFC. But I did end up attending the auction and I purchased the property for $1.21 million. The property is worth well over $3 million today.Sometimes that best time to buy property is when everyone else is frightened to do so.Should you invest more? If so, when?If you do have some spare cash which you earmarked for investment, now might be a perfect time to begin.However, I do not recommend you try and “find” some cash (including borrowing it) or completely change your predetermined investment strategy. I would regard that as short-term thinking (or speculation), and that is not advisable.However, if you are sitting on some cash, the best approach is to invest it in small and regular traches to take advantage of a falling and volatile market. That is exactly what I have been doing with my money over the past few weeks.You must approach any investment decision with a long-term lens. My advice is to seek diversification (don’t take large sector bets – as we don’t know what the economic impact will be) and skew towards markets with the lowest valuations. Stick to low cost index funds and use various rules-based, value methodologies.Toilet paper and a major change by the banksWe predict that banks will soon require applicants to disclose how much toilet paper they own in the asset section of the loan application. The banks feel that a reasonable level of stock indicates financial prudence and good planning. But too much stock suggests that the applicant might be completely irrational.Of course, I’m kidding in respect to the above! In times like these, we all must keep our sense of humour. Despite regular and loud protests by my sons to the contrary, I still think my jokes are funny. 😊 Understand that human behaviour can be completely irrational at times. Markets will rise and fall. It’s not the end of the world. Stay safe and stay calm.
Borrowing to invest, particularly in property, has been a very popular investment strategy in Australia. A mortgage is a wonderful servant but a terrible master. If you use mortgages properly, in a risk adverse way, it can be a very powerful wealth accumulation tool. However, if used poorly, it has the power to destroy more wealth than it creates. After almost 18 years since establishing this firm, I thought it was timely to share some insights and observations about borrowing to invest.Inflation will eventually eat away at the value of debt over time.Interest rates reflect inflationary expectations. That is, when inflation expectations are high, so are interest rates. As such, borrowers are paying for the inflationary cost of debt each year. This is evidenced by the fact that a loan’s amount does not change from year to year. If you borrow $200,000 today and don’t make any principal repayments, in 20 years’ time you will still owe $200,000.But we know that over time, due to the impact of inflation, our purchasing power reduces. A $200,000 loan in the mid-1980’s was a big deal. Today, it is considered a small loan. Whereas a loan for $1 million today is regarded as a big loan. However, in 20 years, a $1 million loan will be equivalent to $670,000 in today’s dollars (assuming an inflation rate of 2% p.a.). And only $550,000 in 30 years.Because interest rates include the cost of inflation, and investors pay for that each year, in real terms, the value of their debt reduces over time.It magnifies your return on equityUsing some borrowings to fund the acquisition of an investment means you can contribute less of your own cash. For example, assuming interest rates are 5% p.a., if you contribute 60% of a property’s price in cash (and borrow the remaining 40%), I estimate the investment will be break-even from a cash flow perspective. That is, the rental income should be enough to pay for the property’s expenses and interest costs.If you retain this $750,000 property for 20 years and it appreciates in value by an average of say 7% p.a., it will be worth circa $2.9 million. I estimate that the investor would crystallise approximately $2.05 million of cash after selling the property (net of costs, repaying the loan and CGT) after 20 years. So, the initial cash contribution of $450k (60% of the purchase price) has grown to $2.05 million after 20 years. That equates to a compounding annual growth rate of 7.9%. Without any gearing, the net return would have been only 5.9% p.a. So, the existence of a modest gearing rate (40%) has increased the investors return on equity by 2% p.a. This is the power of gearing.Return on cash is even more impressiveWhat if you don’t contribute any of your own cash savings when you purchase the property? That is, you borrow the total cost. In this situation, your only cash contribution will be to fund the holding costs. That’s because if you borrow 100% of the acquisition costs, the property’s income will probably not be enough to pay for its expenses and loan interest. As such, you will have to contribute some of your salary income towards meeting these expenses.I estimate the cash flow holding cost of a $750,000 property to be conservatively circa $175,000 after-tax over 20 years. If you sell the property after 20 years, you will walk away with $1.58 million in cash after repaying the loan, selling costs and CGT. Therefore, your cash contribution of $175,000 over 20 years has generated net cash gain of $1.58 million. That equates to an annual compounding rate of return of 11.6%. That is referred to your return on cash, since you didn’t contribute any equity (cash) at the beginning.Gearing allows you to invest your future income todayWhat do you think is a better strategy? Option one is to invest $20,000 each year for the next 30 years i.e. $900,000 in total. Option two is to borrow $900,000 and invest it all today and then repay $20,000 of the loan each year for the next 30 years. You don’t need to be a mathematician to realise that investing the lump sum today will likely yield much better results.This is the power of a gearing strategy; borrowing your future expected surplus income and investing it today. This allows you to enjoy the benefits of compounding capital growth.An alternative way to look at a gearing strategyThe traditional way to look at a gearing strategy is that you borrow money to buy an investment and then, over time, you gradually repay the loan. One day, you plan to own the asset and be debt free.An alternative way to view borrowing is that it allows you to own an asset for a finite period of time and enjoy the investment returns over that period. Then, one day, you will eventually sell the asset and repay the loan. This strategy doesn’t assume that you will ever make any repayments towards the loan. The loan is merely a financial facility that allows you to hold an asset and participate in its appreciation in value over time. Given how expensive property has become in blue-chip locations, I think a growing number of people will adopt this approach.A gearing strategy only works if you do two things successfullyIt is foolish to believe that borrowing to invest is a guaranteed way to build wealth. In fact, the reverse is true. In my experience, the majority of investors achieve very poor results.I have said many times that investing successfully is not difficult. It is routed in simple logic and evidenced based strategies. This is simple to understand but now always easy to implement correctly.If you are going to borrow to invest, you must do two things very well:Step 1: Borrow safelyInvesting is a marathon, not a race. Building wealth safely takes time, often many decades. The aim is to enjoy the process i.e. spend a little today and save a little for tomorrow. This means its critical to borrow within your safe limits. Be prudent. And always consider possible changes.But most importantly, it is prudent to prepare for unexpected changes. No one could have predicted the coronavirus a year ago. Or the oil price shocks that occurred a few days ago. The point is that you have to be careful and to some degree, expect the unexpected. It is the unpredictable events that cause the biggest shocks to markets and volatility. That is not to say that you should be controlled by fear - quite the opposite. My point is that borrowing conservatively is typically the most sensible approach.Step 2: Quality assets + low volatility + patienceThe second thing you need to do is invest in the right assets and have patience.Assets that have lower levels of volatility are better suited to gearing strategies. Lower volatility means values/prices are more stable. The share market has a historic volatility rate of about 20% whereas residential property has a volatility rate of 10% (see page 80 of Investopoly). This is why people typically feel more comfortable borrowing to invest in property compared to shares.It stands to reason that you cannot expect above average investment returns from average quality investments. The quality of your investments will determine your investment returns. So, if you are going to borrow to invest, make sure you invest in the highest quality assets your budget will allow.The last element is patience. Few people get rich overnight. It typically takes many decades of astute decision making and the fortitude to ride out any challenging times (which share market investors are currently experiencing).Low rates and higher growthA few weeks ago I wrote a blog that highlighted how cheap money is at the moment. For example, a $800,000 investment property costs only $6,000 p.a. to hold. Because of that, borrowing to invest has never been a more powerful and affective strategy.Of course, if you need help working out your personal borrowing strategy, don’t hesitate to reach out to our Associate Director, Jodi McKeown.
Coronavirus’ impact on share markets is a hot topic at the moment. We’ve seen global markets fall by over 10% between 21 February and 2 March 2020. It seems that the market’s sentiment shifted literally overnight from a state of being arguably ‘over-optimistic’ to being ‘very fearful’. Some of my clients have voiced their concerns about the impact that coronavirus might have on their investments. I wanted to share my thoughts on this and what actions, if any, you might take.The share market can be a wild ride, you just need close your eyes and hang onWhen the market is running hot, most investors overestimate their tolerance for risk (volatility). Often people say, “I understand that share markets can be volatile, and I’m prepared for it, let’s invest”. However, when the volatility does eventually occur, that is when you really learn about one’s appetite for risk.We must realise that volatility is often short lived. Share markets have a volatility rate of circa 20% p.a. This means, annual returns can vary from the mean (average) return by +/- 20% from year to year. However, in the long run, there’s a strong trend of mean revision – which means investment returns in the long run are more predictable. The chart below provided by global fund manager, Dimensional demonstrates this. Market returns 5 years after a major event (e.g. crashes, terrorist attack, CGF) are positive.And realise that you have to be in it to win itIn the face of uncertainty (i.e. higher volatility), some investors consider selling. The problems with selling is that you will likely miss the recovery. The chart below (again courtesy of Dimensional) demonstrates that your investment return between 2001 and 2018 (more than 4,300 trading days) would reduce from 7.66% p.a. to 1.76% p.a. if you missed the best 25 days over that period. In this case, you would have been better off investing in bonds, not equities.This proves that you need to remain invested throughout good times and bad. The first rule of investing in my bookInvestopoly, is to ‘play the long game’. If you applied this approach when you first invested in the share market (i.e. a diversified portfolio of low-cost, rules-based investments contructed to maximise long term returns), then you must have faith that it will work. And it will, if you’ve done it correctly.The practical impact of the coronavirusIt would appear that the coronavirus is essentially a highly contagious form of influenza. Therefore, as long as you are in good health, its unlikely to be life threatening and mortality rates will remain contained. As such, I think the biggest impact that the virus will have is that it will adversely impact the mobility of people. For example, people will reduce or eliminate discretionary travel, they may curtail shopping and social activities and, in some circumstances (e.g. in China), businesses may cease trading because workers cannot (or are unwilling) travel to work.This will most likely have a negative impact on economic growth in at least the first half of 2020, although growth is likely to still be positive. China has a much bigger economic footprint than it did in 2003 during the SARS outbreak, as depicted in the chart below (provided by Fidelity). Australia exports a large amount of natural resources to China. Demand for these might reduce temporarily. However, the good news is that stockpiles (inventories) are relatively low and the Chinese government may have to deploy fiscal stimulus (increase government spending) which should underpin the demand for Australian resources in the medium term.Company earnings growth has recently been relatively robust, but no doubt will be negatively impacted. Obviously, some industries will be impacted to a greater extent than others such as manufacturing and international travel (especially cruise line operators for example). But some sectors such as healthcare and domestic tourism may actually be benefactors.Vested interest in the US share market continuing to do wellThe US share market accounts for approximately 63% of global developed markets (MSCI Index) and is typically the leading indicator for other markets. That is, if the US falls by 3%, most markets will follow. This is true in the short term, but less so in the long run (long term performance eventually decouples from the US).President Trump has taken full credit for the state of the US economy and its share market being at record highs (prior to the recent dip). I believe that if the economy and share market continue to remain healthy, the chances of him getting re-elected for a second term in November 2020 are high. However, if the share market or economy were to falter, re-election is less certain. Therefore, I think Trump will do whatever he can to ensure the market remains buoyant and the Federal Reserve is certainly helping him through quantitative easing (it has injected $77 billion per month – way more than it did during the GFC!!). And over the weekend, Trump was bullying the Fed on Twitter to cut rates.The average US share market return during an election year is 11.3% p.a. since 1928.Government fiscal stimulus to offset economic impactANZ Research is predicting that the Australian government will need to provide fiscal stimulus to offset the economic impact that the coronavirus might have. This could include providing loans or grants to business, to avoid them laying off workers. This can be targeted towards the most affected sectors/industries. State governments can also play a role through easing taxation burdens (e.g. Queensland is allowing small business to defer payroll tax obligations for 6 months).The market bounce and future volatilityThe US market recovered sharply on Monday 2 March by rising approximately 4.5%. As I write this blog, our market is up by nearly 2%.The market has been relatively blind to risk over the past few years. Share market valuation have irrationally continued to climb irrespective of economic or geopolitical risks. I disbelieve that markets have materially changed this approach. I don’t think that the market has suddenly decided to become rational about risk. The best example of this is that most brokers haven’t made any changes to forward earnings estimates to account for the coronavirus impact. Therefore, I think the falls over the past week have been the result of momentum selling rather than a rational response to risk. As such, its very possible that the market will fully recover over the next few weeks or months.Could be a good investment opportunityIf you have already invested monies in the share market, then my advice is to hang in there and ride out the volatility.However, if you have surplus monies that you planned to invest at some stage then you may be able use this recent volatility to your advantage. The problem is that no one knows what markets will do in the short term. No one on this planet has developed a consistently accurate methodology for predicting short term share market movements. As such, we will never know the “best” time to buy i.e. the bottom of the market. Therefore, the most prudent approach is to regularly invest in small tranches e.g. every few weeks or months. This will diversify your timing risk. If the market continues to fall, you will reduce your average entry price. If the market recovers from here, you’ll make money. Whilst this approach might seem unsophisticated, I’m not aware of a superior (lower risk) approach.There’s safety in methodologyOne of the common themes from hundreds of share market performance studies is the simple concept of diversification. That is, if you have a large amount of diversification (in terms of holdings, geography, sector/industry, investment style and so on), you will generate good investment returns in the long run.Therefore, if you have adopted the right approach, you have absolutely nothing to worry about. All you need to do is put your faith in the evidenced-based methodology that you have adopted. However, if you aren’t confident with your chosen investment approach/methodology, then this could be a good wakeup call. And if you need our assistance with working out a way forward, don’t hesitate to reach out to me for a confidential chat.
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 & 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&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&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 = $100,000§ Value uplift in today’s dollars after 20 years = over $1.3 millionBut interest rates will surely rise one dayOf course, the above calculation is academic and as such could be misleading. Lots of things could change, which would change the above calculation. Capital growth rates could be lower, interest rates could rise, the property might require capital improvements and so on.I freely acknowledge all these factors. The point I’m trying to make is that if capital growth rates remain the same, which I think is likely given population growth and lower interest rates, then the lower holding costs will lead to better overall investment returns. How much “better” will those returns be? Only time will tell. No one really knows.Low rates can encourage mistakesAsset mispricing is more likely to occur in lower interest rate markets as a result of the inefficient allocation of capital. Put simply, people, businesses and institutions take higher and maybe less diligent risks because the cost of money is so low. This can include overpaying for assets. Relating this to the property market, it is possible that most property prices will rise i.e. good and bad properties alike.And, if lower rates lead to higher values, the reverse can be true also. When rates eventually rise, values can fall, particularly for lower-quality assets that don’t have strong fundamentals.The best way to mitigate these risks (i.e. being caught in an overinflated market) is to level up on quality. This means investing in the highest quality property that your budget will allow. Focusing on quality is vital in all markets, but arguably even more important in a lower interest rate market.What to do nextAs I said above, you should not take this blog as an indicator that I believe everyone should rush out and invest in property. No. I think you should develop your own investment strategy that suits your personal circumstances and risk profile. Then implement that strategy without being too distracted by market conditions.The point of this blog is to point out that maybe the stars have aligned for property investors due to: (1) all-time low property holding costs (2) low interest rates will which likely lead to higher asset values and (3) improved sentiment in the property market will further stimulate price growth. And if your personal strategy includes investing in property, now could be the time to do it. As always, if you have any questions or need any assistance, we are here to help.
I wrote a blog in December last year about how difficult personal risk insurance (e.g. income protection, Life and TPD) is becoming to obtain. Also, in December, the government directed Australian insurers to make some very significant changes to their products. I have been waiting to measure the insurers response to these directives. These changes will have a significant impact on your future insurance options.What is currently offeredBefore I discuss the changes that the government has asked for, it’s important to appreciate the status quo. Most income protection policies have four main variables:1. Benefit amountThis is the amount of income you are insured for. Most insurers allow you to insure up to 75% of your current gross income (not 100%, otherwise there’s little financial incentive to return to work). Benefit amounts are typically expressed as a monthly amount. This monthly benefit is taxed at your marginal tax rates – so a $10,000 benefit will result in an income of circa $7,140 per month after tax.2. Waiting periodThis is the period of time you must be incapacitated for before you are able to claim a benefit from the insurer. Typically, the options include 30 days, 60 days, 90 days, 6 months or 2 years. Often, the most economical wait period is 90 days. Benefits are paid one month in arrears. So, a 90 day wait period means you won’t receive any income for 4 months.3. Agreed or indemnityIf a policy is agreed value, it means that if you become fully incapacitated, you will receive the benefit irrespective of the level of your income prior to you becoming incapacitated. Therefore, someone could have an agreed value policy for $10,000, subsequently become unemployed and then have an accident and they will be paid the full benefit.Alternatively, an indemnity policy requires the insurer to measure your level of income in the period prior to you becoming incapacitated and pay the lesser of up to 75% of that amount or your insured benefit. This means, if your income was nil, you would not receive a benefit, despite paying the premiums for insurance cover (I elaborate on this further below).4. Benefit periodThe benefit period is how long you will receive a benefit for whilst you are still fully or partially incapacitated. Given we want protection against long term incapacity, we typically advise clients to obtain a benefit period to age 65. This means if you become incapacitated, the insurer will keep paying you until you attain age 65.This blog discusses income protection insurance in more detail.Why has the government stepped in?According to the Australian Prudential Regulatory Authority (APRA), over the past 5 years, Australian insurance companies have lost $3.4 billion in respect to income protection policies. In the 9 months to September 2019, they lost $1 billion alone. This means that insurers paid out a lot more money in benefits (to insured persons) than they received in premiums (and investment returns).APRA is worried that insurers may start withdrawing from the Australian market. If they did, income protection insurance would no longer be available, which would be to the detriment of Australians. However, none of the insurance companies have been brave enough to be the first one to make changes to their products or pricing (to make them more sustainable) – for fear of losing too much business. So, the government has stepped in and forced the changes upon the whole industry.APRA has request two main changes be made. These are discussed below.Key change # 1: you may not receive the benefit you have insuredAPRA wants all insurers to cease offering agreed value income protection policies from 31 March 2020. In addition, they want insurers to ensure your total income (which could include compensation payments, annual leave, sick leave, etc.) does not exceed 100% of your pre-disability income in the first 6 months of a claim. This means if you receive other income, it may reduce your insurance benefit (possibly to nil).Key change # 2: Maximum 5 year contract terms and tighter rules for long term benefitsAPRA wants insurers to reduce contract terms to no more than 5 years. Currently, contract terms can be very long (e.g. until you are aged 65). This means insures cannot change the terms of coverage over this period. However, APRA wants contracts to be renewed every 5 years (without requiring medical underwriting). For example, you may have a great quality policy today but in 5 years’ time, the insurer might reduce the comprehensiveness (and therefore quality) of the cover. This gives you two options (1) accept the lower quality product or (2) move to a different insurance company (with the requirement of medical underwriting).Also, APRA wants to make it more difficult to continue to receive a long-term benefit (e.g. have stricter disability definitions for long benefit periods).Problems with indemnity value policiesAs discussed above, indemnity value policies require the insurer to determine your pre-disability income at the time of claim. Most insurance companies will measure this as the best consecutive 12 months period over a period of between 2 and 3 years prior to becoming incapacitated.Therefore, if your income reduces after you have established your income protection policy, it is possible that you are paying an insurance premium for a benefit that you will never fully receive. This will more likely impact people that can experience variability in income such as contractors and people that are self-employed. Employees that have a career change could also be affected.Of course, if your income does permanently reduce after you have established an insurance policy, you could reduce the benefit amount to minimise the premium cost. However, the risk of doing this is that if you want to increase the benefit again in the future, you will be subject to full medical underwriting (testing). If you are in perfect health, this might not be much of a concern. However, perfect health in an insurer’s eyes can be different to ours – which I’ve explained here. As such, you might find it difficult (impossible) to increase the benefit at a later stage.Can you lock-in a higher agreed value benefit prior to 31 March 2020?No. Insurers are not offering agreed value contracts to existing customers. If you apply to increase your benefit on an existing policy, you will be offered indemnity value only. That said, most insurers are still offering agreed value on new policies until 31 March 2020.Cover insider super is unaffectedIncome protection cover inside your super fund has always been indemnity value (no agreed value was ever available). It had to be indemnity value in order to comply with the super release rules. Therefore, the changes discussed above only affect policies held in your personal name. As I have explained further in this blog, income protection insurance inside super often does not provide an adequate level of cover.What action should you take as a result of this change?If you don’t have any income protection insurance and need it, you should arrange it now whilst agreed value policies are still available.If you have existing income protection insurance cover and you want to cancel the cover or switch providers, be very careful with this decision. It is likely that you will never get a replacement policy that is agreed value, and this might expose you to higher risk.Do you need our advice?If you would like us to review your insurance cover, we would be happy to do so. We charge a professional fee to complete this review and document our advice. Simply email Kristy Dishon directly to find out more.
With share markets at an all-time high and sentiment in the property market recovering, it is a great opportunity to divest of any underperforming (dud) investments.Not all investments perform as expected. Therefore, it’s important you regularly review them. This review should be completed without any influence of emotion – it’s all about the numbers.Let’s first discuss why now might be a good time to do this.The US share market is high, very highOver the past 11 years, the US share market has increased by an annual compounding rate of over 14.5% and is now trading at an all-time high. To put that in context, $50,000 invested in 2009 (in the S&P 500 index) would be worth over $220,000 today!The chart below which has been produced by Advisor Perspective records four commonly used valuation metrics for the US share market since 1900. This chart doesn’t need any commentary from me – it is obvious valuations are high! Probably, too high! In fact, the last time they were this high was in the early 2000’s during the dot-com bubble. Most of us know how that turned out – the market fell by around 40% between 2001 and 2003.The Australian market is high tooThe Australian market hasn’t risen anywhere near as much as the US market. It has increased by a compounding average of 6.9% p.a. since 2009 (compared to 14.5% p.a. for the US market). Looking at the CAPE Ratio valuation measure, the Australian market looks slightly overvalued (CAPE is currently 19.3 compared to presumed fair value of 17.6), but certainly to a much less extent than the US market.In a rising tide, all ships riseThe rising domestic and international share markets tend to drag all stocks with them, good and bad ones alike. Irrationally exuberant markets tend to ignore investment fundamentals.US electronic car manufacture, Tesla is a case in point. Its share price has risen from $450 per share to over $1,150 per share in the past year. Its market capitalisation is now nearly $200 billion yet it has never recorded a profit. In fact, it burns through more than $1 billion of cash per year! But, despite that, themarket suggests Tesla is worth 1.6 times more than Ford and General Motors combined! Ford and GM sell approximately 13 million cars per year. Tesla sells circa 370,000. Where is the common sense?Property market sentiment is strengtheningWe have certainly noticed an improvement in sentiment towards investing in property over the past year. This has also been reflected in auction clearance rates – which are now in the mid-70’s – which is a signal that there are more buyers than there are sellers. According to CBA Economics, lending to owner-occupiers has lifted by 26% from its low point in May 2019 and by 15.5% for investors.That said, there isn’t a lot of stock around, as the market doesn’t really return to ‘normal’ until late February.Probably a good time to dispose of a dud propertyIf you have an investment property that is less-than-perfect, then competition is not your friend. That is, it is best to sell an impaired asset when stock levels are lower, and buyers have fewer options. If we agree that demand for property is increasing, and stock levels are definitely well below normal, then now might be a perfect time to sell.Considerations before you disposeThere are a few important matters to consider before you dispose of any underperforming assets. I have listed these below in no particular order.Minimise capital gains taxIf you expect to make a capital gain, then it is best to consider if there are any other assets you can (or should) sell that will crystallise a capital loss to offset some or all of the gain. Or sell assets that will create a capital loss first, before you sell ones that create capital gains.If you are selling a property and you have previously claimed a deduction for depreciation, then the amount of your deduction will reduce its cost base. For example, James purchased a property for $200,000 and owned it for 5 years. Each year James claimed $2,000 of depreciation. James eventually sold the property for $198,000. In this situation, James will record a gross capital gain of $8,000 (because the cost base is $200,000 less $2,000 for 5 years = $190,000).Be careful to avoid a “wash sale”. This involves selling investments solely to crystallise a capital loss (to offset a gain) and then buying back those same assets.Consider selling in tranches, not all at once (with shares)The challenging thing is that no one can predict what the share market will do this year. It could rise by another 20%. Or it could crash. Therefore, I typically advise my clients to spread their timing risk. This means if they own a stock that they want to sell, I usually suggest they sell it in 2 to 4 equal tranches, three to four months apart, rather than selling it all at once.Borrowing capacity is just as important as cash flowA common mistake that people make when assessing an investment property is that they assume that just because the property’s income covers all of its expenses, that holding onto the property is a costless exercise. They say “well, it’s not costing me anything cash flow wise, so I may as well hang onto it”.However, that is incorrect. There is an opportunity cost – both with respect to borrowing capacity and equity.Everyone has a limit to the amount they can or should borrow. Borrowing capacity is a scarce resource and should be allocated in the most efficient manner. If a property is using some of your borrowing capacity, you must ensure its working hard for you. How you allocate your borrowing capacity is just as an important decision as to how you allocate your cash flow.The same is true with respect to equity. If you have a certain amount of equity tied up in a property that is not performing, you must ask yourself what else you can do with that equity. That is your opportunity cost.If it hasn’t performed in this market… wellAs I said above, in a rising tide, all ships rise. Therefore, if most of your investments within your portfolio haven’t performed over the past few years, then you are probably doing something wrong.Sell to reduce concentration riskIf you have too much of your portfolio invested in one stock, sector or fund manager, now might be a good time to sell some of your investment and reinvest these monies in a more diversified, lower-risk manner.Good reasons not to sellBe careful to not be too hasty with your decision to dispose of an investment. There are a few reasons why you might decide to retain an asset, even if its performance hasn’t met your expectations:§ You haven’t held the asset long enough so it’s too soon to make a reliable decision.§ Investment returns have been driven by market-wide phenomena, not something specific with your asset. Investment-grade apartments are a good example, which I discussed last week.§ The methodology hasn’t had a chance to work yet. For example, a valued-based share methodology won’t work as well in a bull market. So, if you adopted a valued-based methodology, its unreasonable to expect it to have worked (yet).Spring cleaning is an important activityReviewing performance and taking appropriate action is a very important investment activity. It must be completed regularly with discipline and free of any emotional influences – that is, focus only on the data and stick to sound fundamentals. If done properly, over time you will reduce your portfolio risk and maximise your investment returns. Of course, if you need help, don’t hesitate to reach out.
Over the past few years I have observed a strong trend of investment-grade house prices growing stronger than apartments. It is true that all markets move in cycles and all cycles come to an end, eventually. It’s my thesis that several factors (such as the fall in the volume of new apartments, contraction of borrowing capacity and high population growth) are conspiring to create a growth cycle for older-style, investment-grade apartments.Supply of new build apartments drying up, fastDevelopment approvals for new apartments has been falling dramatically over the past few years. In Sydney, the volume of new apartments approved for construction has more than halved since its peak in 2016. In Melbourne, approvals have fallen nearly 40% in the last 18 months. The Brisbane apartment market is almost non-existing with less than a quarter of the volume compared to the peak in 2016.Major residential developments typically have a lead time of at least 18 to 24 months (i.e. planning through to construction). Therefore, if this trend continues, there will be a massive supply-shortage of apartments within the next few years. There is still some pipeline stock to come onto the market, however, once those properties are completed, supply is expected to fall.New-build apartments aren’t constructed with the secondary market in mindPurchasing a new build apartment and an establish apartment are materially different things.Typically, a brand-new apartment purchaser is influenced by things such as apartment finish and building amenities such as theatre rooms, pools and gyms. In the beginning, these buildings are all shiny and new and present very well. However, they tend to wear and tear quickly and these largely superficial attributes become far less persuasive (and costly to maintain).Conversely, established apartment buyers rarely focus on these factors – mainly because older style apartments rarely offer such amenities. Instead, these buyers tend to focus on factors such as location, privacy, soundproofing, natural light, smaller blocks (fewer tenants) and so on.Understandably, when you compare a brand-new apartment to an established apartment, the shiny new object gets all the attention. However, because a newer apartment is no longer shiny after 3 to 5 years of wear and tear, an older-style apartment starts to look comparatively more attractive.Borrowing capacity is diminishedIt has been very well documented that borrowing capacity has contracted significantly over the past few years. This means a property buyer’s purchasing power is less which forces them choose between two options. First, an apartment in a nice, blue-chip suburb close to everything. Or, second, a house in the outer suburbs. Many people will choose the first option. Consequently, I predict the reduction of borrowing capacity will force more property buyers into the apartment market.Houses are too expensive for many peopleApproximately ten years ago it was possible to purchase an investment-grade house in Melbourne for around $800,000. However, today, you need over $1 million. Therefore, if your budget is $800,000 you have two options. You can purchase an apartment, not a house. Or you can find a house in an adjoining, non-investment-grade suburb (i.e. compromise on the investment’s quality).With house prices continuing to increase, an increasing number of property buyers will be forced into the apartment market.Cladding and building quality issues make new apartments harder to sellBuilding quality issues in a few Sydney apartment complexes (e.g. Opal Tower and Mascot Tower) were well publicised during 2019. It is unclear how much of the restoration liability rests with the owners, but it’s safe to say that they will likely suffer some loss.In addition, many buildings are investigating the type of cladding used to ensure its adequately fire retardant, to avoid a repeat of the Grenfell Tower fire in London in 2017.These issues will impair the marketability of new-build apartment complexes. Consequently, developers will need to spend more money on marketing as well as improve the quality of their construction (higher cost). Both of these factors make constructing new residential towers less attractive to developers – and less attractive to property purchasers too.Population growth marches onAccording to the ABS, over the past 8 years, Victoria’s population has increased at a rate of between 100,000 and 150,000 people per year (rolling 12 months average) and NSW by between 75,000 and 130,000 people. Population growth in both states is driven heavily by overseas migration. Interstate migration is negative in NSW (minus 15,000 - 20,000 people per year) whereas its positive in Victoria (plus 12,000 - 15,000 people per year).If this growth continues, and supply of new apartments fall as indicated above, this imbalance in supply and demand will inevitably translate to property price growth.In the last 10 years, we have constructed too many apartmentsThe chart below compares Victoria’s population growth with Melbourne apartment approvals. In 2011 approximately 24,000 apartments were approved when Victoria’s annual population growth was only 75,000 – but 32% of people probably don’t want to live in an apartment! It appears that current construction volumes are now at a more sustainable level.Steer clear of Brisbane apartmentsI do not advise any of my clients invest in apartments in Brisbane (at the moment). Brisbane’s population growth is mainly driven by overseas migration as interstate migrants go to the Gold and Sunshine coasts e.g. retirees. Overseas migrants tend to be skilled workers and Brisbane has the best job opportunities in Queensland. These migrants tend to be young families and need a house, not an apartment. In addition, the apartment market is still in over-supply and it will take many years until this surplus stock is absorbed by demand (natural population growth).But not all apartments are good investmentsYou are probably sick of reading this, but it must be said: “not all apartments will make good investments”. In fact, I would say that very few apartments can be regarded as investment-grade. Therefore, I always recommend that people engage a reputable and experienced buyers’ agent to assist them with selecting the right property to invest in. This blog will remind you of the three attributes needed for a property to be deemed investment-grade i.e. strong land value component, scarcity and proven performance.Markets move in cyclesIt is my observation that apartments have dramatically underperformed houses over the past five to ten years i.e. house prices have increased at a much higher rate. As I illustrated in this blog (using historical data), most property markets move in cycles. A high growth period of 7 to 10 years is typically followed by a low-growth period. If we agree that the established (investment-grade) apartment market has recently been in a low-growth phase, that should mean a higher growth phase will follow. I predict this growth phase will begin in the next five years, for the reasons discussed above.If you need assistance with your property investment plans, including a referral to a reputable buyers’ agent, please don’t hesitate to reach out.
With term deposit rates currently ranging between 1% and 2% p.a., and the prospect of further rate cuts by the RBA, many investors are contemplating where to invest their cash. Most commentators and economists agree that it looks like the interest rate environment will be lower for longer. If that turns out to be true, term deposit returns won’t even keep up with inflation. Therefore, most people will need to consider alternative investments. However, there is one potentially costly mistake that people commonly make when doing this. That is the topic of this blog.By the way, even if this doesn’t apply to you, it’s important to check that your parents aren’t making this potentially costly mistake. So, perhaps share this blog with them.You cannot talk about returns without also talking about riskBenjamin Graham, the father of value investing (and Warren Buffett’s teacher) said “The essence of investment management is the management of risks, not the management of returns.” This quote highlights the biggest mistake that investors make when considering alternative investments (to term deposits). They fail to consider risk.Often, people may be tempted to invest in high-yielding Australian shares. As I highlighted in last week’s blog, Westpac (for example) currently offers a grossed up yield of nearly 10% p.a. That is hard to resist when you compare that to term deposit rates.However, term deposits are almost risk free, especially if the amount is less than $250,000 and with a bank (ADI), as its guaranteed by the government. However, shares are one of the highest risk asset classes because they have a volatility rate in the range of 18% and 25%. This means that statistically, you should expect your investment returns to vary by this amount from year to year. For example, one year you might experience a 15% loss and the next year a 35% gain. Of course, it could be worse, and the market could crash. Share market and term deposits are at opposite ends of the risk spectrum.Don’t put all your assets in a risky basketThe common mistake that people make is not considering their risk allocation. For example, Keith has been retired for 5 years and historically he had $350k invested in term deposits and $650k invested in shares. This asset allocation (35% in safe assets and 65% in risky assets) felt very comfortable to him. However, now his pool of “safe” monies isn’t generating enough income. So, if he invests this amount in high yielding shares, he’s making a big mistake (because typically, that asset allocation is too aggressive for a retiree.At some point in our life (particularly in retirement), capital preservation becomes more important than investment returns. That is, avoiding losing money is justifiably more important than making money.Telstra is a good exampleHistorically, investing in Telstra primarily for its high dividend yield was very popular trend. Over the past 10 years its grossed-up dividend yield has ranged between 5% and 10% p.a. However, spare a thought for the investors that chased high dividends in 2015 when Telstra shares were trading at $6 per share and the grossed-up yield was over 7% p.a. These investors have lost over 35% of the original value of their investment (which they may never recover)! Chasing yield, without any consideration of risk, is a recipe for disaster.So, what are the alternatives?There are a few alternatives to term deposits that warrant consideration (I list five below). Before I get into the list, I have a few important points to make:§ I have discussed them in order of risk (from lower risk to higher risk);§ It is likely that the best solution will be to use a combination of some or all of these alternatives (rather than picking one);§ This is not an exhaustive list. There may be other alternative investments that might suit your circumstances better; and§ Please do not act on the information contained in this blog alone. Its important that you receive independent, personalised advice before making any investment decisions.1. Investment grade corporate bonds (3.5% to 4% p.a.)With central banks cutting official rates all over the world, government and treasury bond yields (interest rates) have been falling over recent months and years. Currently, government and treasury bonds do not offer materially higher interest rates than term deposits. Therefore, we have to look to the corporate sector to receive a higher income.An investment-grade rated corporate bond is relatively low risk, especially if the investor holds the bond to maturity (click here for a description of what a bond is). There are many Australian corporate bond index funds provided by managers such as Russell, BetaShares and Vanguard. These funds are yielding in the range of 3.5% and 4.0% p.a. and funds usually pay this income monthly or quarterly. Bond interest (coupon) rates typically move in line with the RBA’s cash rate, so if it cuts rates by 0.25% p.a. this year, it’s likely that these rates will also fall by 0.25% p.a.You must be very careful picking which index funds to use. Things to watch out for include (1) concentration risk (indexing methodology) and (2) understand whether the bonds held are fixed or floating coupons and their duration as that could have an impact on capital values in certain market conditions.2. Hybrid securities (≈ 4% p.a.)Hybrid securities are typically issued by Australian banks. They are essentially a cross between an equity and a bond. Each security will have its own unique terms and conditions, and as such, two hybrid securities are rarely identical. As such, hybrid securities can vary significantly in terms of risks and returns.To accommodate these risks, I prefer to use active investment management when investing in these securities (i.e. not indexing, which I usually advocate). The reason is that each security needs to be assessed and valued in order to work out if its worth investing in. Historically, hybrid securities have one third of the volatility as shares, much like bonds, so they are a lower risk investment. I mainly use a fund operated by BetaShares and Coolabah Capital Investments to make these investments.3. Global infrastructure (≈ 3.5% p.a. + growth)Infrastructure involves investing in businesses that own and operate high-cost assets such as toll roads, communication assets, electrical systems and so on. These investments usually generate predictable and stable incomes, particularly in a low interest rate environment.As many countries have exhausted monetary policy initiatives (such as cutting rates and quantitative easing), in order to stimulate the global economy, governments will need to start (or continue) to loosen fiscal policy, which usually involves spending money on infrastructure. I highlight that Australia has started to do this too.Infrastructure investments have historically paid a stable income yield of 3.5% p.a. with low volatility. Total returns over the past 10 years (i.e. income + growth) have been over 13% p.a. Things to consider include the level of diversification (industry and geographical) and currency hedging.4. Global real estate (≈ 4.0% p.a. + growth)Real Estate Investment Trusts and companies (REIT) are entities that derive most or all of their profit (EBITDA) from rental income. These tend to be listed companies in developed markets. As these types of entities tend to hold debt, REIT’s work well in a lower interest rate environment.I tend to avoid investing in Australian REIT’s because they typically have too much exposure to retail property, and we all know what’s happening in retail!International REIT’s have historically paid a stable income yield of 4.0% p.a. with low volatility. Total returns over the past 10 years (i.e. income + growth) have been over 12% p.a. Things to consider are very similar to infrastructure i.e. diversification and currency hedging.5. High yielding sharesOf course, I have discussed the perils of moving money from term deposits into high-yielding shares above. However, one way to reduce the risk slightly is to buy a diversified basket of shares, rather than picking the shares yourself.Many fund managers offer high-yielding products including Vanguard, BetaShares and iShares. These funds tend to hold between 20 and 60 companies. Grossed up dividend yields range from 5% to over 10% p.a., depending on the product.Beware of solely focusing on incomeAs I discussed in this blog, it is often erroneous to invest purely just for income. It can result in a higher risk asset allocation. Instead, aiming for a combination of growth and income is often the most appropriate (i.e. safe) approach.Different times require different allocationsIf interest rates remain at historical lows for an extended period of time, then an increasing number of investors will need to look for alternative investments (to term deposits). There are many good alternatives. However, you cannot talk about returns without also talking about risk. Remember what Ben Graham said; “The essence of investment management is the management of risks, not the management of returns.” If you need help with this, do not hesitate to reach out to us.
Investing in shares can produce tax benefits. But it can also result in tax liabilities too. Terms such as “franking credits” and “imputation credits” (same thing) were frequently used during last year’s federal election (the Labor Party proposed to ban franking credit refunds). However, many people do not understand these concepts. So, this blog seeks to provide a simple overview of the possible taxation consequences resulting from investing in shares.There are two types of taxes that could result from making an investment (including share market investments) being income tax and Capital Gains Tax (CGT).Income tax and franking creditsSome shares pay investors an income which is called a dividend. This is typically paid twice per year (interim plus final dividend). The amount of the dividend can vary significantly (this is called the dividend yield – refer to this blog for a basic overview of investing in shares).A company can declare and pay a dividend from profit after it has paid tax. The dividend imputation system was introduced in Australia in 1987 by the Hawke-Keating Labor Government. Essentially, it sought to avoid the double taxing of corporate profits. This is best explained as an example.Assume listed company XYZ Ltd recorded a profit of $100. It would pay $30 in tax because the corporate tax rate is 30% for companies with turnover of greater than $50 million. So, its after tax profit is $70. If it paid the dividend to shareholders who are individuals on the highest margin income tax rate of 47%, they would pay $32.90 of tax (being 47% of $70). The amount of the dividend left after paying all taxes is only $37.10 meaning the effective tax rate is 62.9%! In this instance, company profits have been taxed twice – once in the hands of the company and then again in the hand of the shareholder. Hawke-Keating believed this double taxation was unfair. So, how does dividend imputation work?To avoid the double-taxing of dividends, shareholders obtain a credit for the amount of tax the company has previously paid. Using the example above, the company has already paid $30 in tax so the shareholders will obtain a credit for this amount.The formula is: cash amount of dividend plus franking credit multiplied by the marginal tax rate minus the franking credits.Therefore, using the example above, the cash dividend is $70 + $30 of franking credits X 47% - $30 franking credit = $17. So, the shareholder will pay an additional amount of tax of $17 when they lodge their tax return. This means the net dividend retained after all taxes is $53 ($100 - $30 - $17).Imputation credit refundsIf the shareholder has an effective tax rate lower than the corporate tax rate, then they will receive a tax refund. A good example of this is superannuation funds. A super fund’s tax rate is 15%.Therefore, a super fund will receive the dividend of $70 plus a refund of $15 (i.e. using the formula above; $70 + $30 X 15% - $30 = refund of $15). If the super fund is in pension phase, its tax rate is zero so it will receive a full refund of all imputation credits i.e. $70 + $30. This is what the Labor Party was arguing against last year i.e. that self-managed super funds shouldn’t be entitled to a refund.International shares offer limited tax creditsMost foreign countries do not have an imputation system except for New Zealand. That said, you may be entitled to foreign tax credits resulting from receiving dividends. However, any credits will typically be relatively immaterial, and certainly not as generous as the Australian system.How does capital gains tax work?If you sell shares and for a profit, you may have to pay capital gains tax. If you have owned the shares for more than 12 months, you are entitled to discount your capital gain by 50%. The net capital gain is then taxed at your marginal tax rate.Example: Karen purchased Afterpay Ltd shares in January 2018 for $6.50 per share. She sold these shares in January 2020 for $34 making a very healthy profit of $27.50 per share. Because she owned them for more than 12 months, she can discount the gain by 50% to $13.75. This gain is taxed at her marginal rate of 47%. So, she will pay approximately $6.46 per share in tax.Different owners will produce different tax outcomesThe dividend imputation system means that the amount of tax you pay will be dictated by the shareholder’s tax rate:§ Superannuation fund (either in a SMSF or wrap product) – this is the most tax effective environment because it has a flat tax rate of 15% in accumulation phase (i.e. while you are still working) and zero in retirement (pension phase). This means that the amount of dividend will consist of a cash amount plus a tax refund. For example, over the past 12 months, Westpac paid a cash dividend of $1.74 per share and this was fully franked. This means there were $0.75 of franking credits attached to these dividends. Therefore, if a super fund that is in pension phase owned these shares, the total income that would receive is $2.49 per share ($1.74 + $0.75) or 9.9% p.a. If a super fund was still in accumulation phase, the after-tax dividend would be $2.11 or 8.4% p.a.§ Family Trust – if a family trusts owns shares it can distribute dividends and capital gains to the beneficiaries that would enjoy the best tax outcomes. For example, dividends can be distributed to persons on low incomes to receive full benefit of the imputation credits. Capital gains can be distributed to beneficiaries that have carried forward capital losses.§ Personal name – if you own shares in your personal name then obviously dividends will be taxed at your marginal rate.A plan will find the most optimal structureThis demonstrates that depending on how you own shares, dividend imputation credits can significantly increase your after-tax income returns. When I develop a financial strategy for my clients, I take this into account.For example, if a client has share investments in super and a family trust, then I might recommend that we invest in Australian shares in the super fund and international shares in the trust, to achieve the best tax outcomes. Of course, I’m not going to develop an asset allocation solely to maximise tax benefits. The asset allocation is developed without considering taxation. However, how that pre-determined asset allocation is implemented is often heavily influenced by taxation considerations.Don’t rush out and buy sharesI don’t believe in investing in direct shares because there is overwhelming evidence that very few people or businesses (less than 1%) can pick which shares to buy and when to sell them consistently well to generate materially higher returns than the market.Instead, I believe that investors are better off using a diversified portfolio of low-cost, rules-based, index funds that utilise various methodologies. Here are two blogs that explain this in more detail (here and here). Investors will still enjoy the tax benefits explained above if they adopt this approach.
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 that you lose both time and money.Probably the most insidious mistake (in addition to the abovementioned ones) is procrastination. Sometimes, not making a decision is worse than making the wrong decision. That’s because at least if you make the wrong decision you can course-correct as soon as you realise it. However, procrastination can persist for many years and may cost you hundreds of thousands (even millions) of dollars (opportunity cost)!An advisor’s role is to keep you on the straight and narrow. To make sure you only make smart, fundamentally sound financial decisions on a timely basis.Help you manage your cash flow effectivelyIt is near on impossible to build wealth if you spend all (or more) of your income. Therefore, astute cash flow management is absolute key, and its often not difficult or painful to achieve.In the most part, astute cash flow management is really about making conscious decisions. That is, unconscious spending is the enemy of successful wealth accumulation. The good news is that you can typically eliminate unconscious spending without it having a noticeable impact on your standard of living. A good advisor will help you achieve this, and this alone could be an incredibly valuable benefit.Take responsibility for making financial decisionsYou don’t have to feel burdened with the full responsibility for making your family’s financial decisions. You can get help. Much like a business will hire a CFO (Chief Financial Officer) and hold them accountable for the results they produce, you can hire your personal CFO.Of course, it is your money so it’s your responsibility to look after it. You cannot delegate that responsibility to someone else. This means you must take an active interest in how your money is spent, invested and how its performing. However, it doesn’t mean that you have to make all the decisions. Many clients that I work with used to do this and they didn’t enjoy the responsibility. Now they know it’s my job to worry about their money and agonise over their financial decisions. I’m on the hook. All they have to do is ensure that I’m doing a good job and the longer we work together, the easier that is. It gives them a lot of peace of mind and allows them to sleep peacefully at night.Review performance and consider whether changes are requiredA very important task is to review investment performance. You may not expect to beat the market each and every year, for a variety of reasons. However, you definitely want to know if your investments have performed as you have expected them to.This is important for two reasons. Firstly, if they haven’t performed as expected, then you may need to make some changes. And secondly, you need to hold your advisor accountable for the results they are producing. It is important to benchmark results too. I typically use two benchmarks; Australia’s largest industry super fund, AustralianSuper and the relevant index. This provides a context for assessing performance.In my firm, we undertake a combination of formal and informal reviews. A formal review will be when we engage with our client and discuss our findings. An informal review involves me reviewing the client’s portfolio to identify if I’m comfortable with everything or whether I want to make some changes.Remember, longer term returns are the most important. You don’t want to reward ‘return chasing’ as short term profit does not generate long term value.Be on hand to answer questions, navigate any changes and assist with financial decisionsMost clients find great comfort in the fact that they are able to seek counsel from someone that is totally independent that they trust and that understands their personal circumstances and long-term strategy. This helps people navigate the challenges and opportunities that life inevitably throws at us with confidences and with a whole lot less stress.Help you protect you and your familyAn advisor doesn’t only help you build wealth but also protect your wealth. There are two situations where this is important.Firstly, most people need to protect their assets from known and unknown risks. This includes you having the right level of personal insurance cover (including, Life, TPD, income protection and trauma) and if you are self-employed, business insurances (e.g. professional indemnity). You must ensure your estate planning documents are structured correctly (wills, power of attorney, letter of wishes, binding financial agreements and so on). This also includes any expected inherence receipts – so that any money received from an inherence is protected in a tax-effective environment. If asset protection is particularly important then it may be best to use entities such as discretionary trusts and self managed super funds to hold some or all of your wealth.Secondly, at some point in life (mostly in retirement), capital preservation becomes more important that investment returns. That is, it is more important to avoid losing money than it is to make money. In this instance, it is important the client has the right asset allocation and understands the risks.Its more than just investment advice…As you can see from the above, a financial planner’s role involves more than simply telling you where to invest your money. Hopefully, this knowledge will help you assess whether you could benefit from engaging a financial planner. If you already have one, you now know what they should be doing to help you. Of course, if you have any questions, please do not hesitate to reach out to me.
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 proactively attended counselling and, as a result, the insurer included an exclusion in their insurance policy. Surely the act of seeking proactive counselling demonstrates good mental health practices! And taking these proactive steps would surely reduce the likelihood that a mental health condition would prevent you from being able to attend work.Be aware that if you have discussed mental health issues with your GP, attend counselling or undertaken treatment for depression or anxiety, that it may negatively impact your future insurability.A lot of the insurers publish information to say that they are not heavy-handed when assessing an application with a history of mental health conditions. For example, they will make statements such as “seeing a councillor won’t necessarily negatively impact the assessment”. However, the reality is a lot different to the glossy brochures. In our recent experience, the mere appearance of possible mental health issues will attract an exclusion at a minimum. Given that almost half of the total population (45.5%) experience a mental health condition at some point in their lifetime, the insurance companies approach is worrying. It could discourage people from proactively seeking treatment or professional help and that would be a very poor outcome (side-effect).If you have existing insurance coverIf you have existing cover that you are considering cancelling or reducing, think about this very carefully. You should assume that you may not be able to replace this cover in the future, especially if you have suffered any heath conditions since the policy was established.Its best to get cover in your 30’sThe upshot of this is that it is best to arrange cover when you are younger, when you have a clean bill of health. That is a better approach than waiting until you are closer to, or in your 40’s (or even 50’s), as it’s more likely an insurer will find a reason to add exclusions to your policy.Some exclusions don’t have a big impact on policy coverageNot all excursions are equally bad. For example, an exclusion in relation to a known medical issue is less of a concern as you can proactively manage that condition and reduce the probability it will impair your ability to work.However, for example, a back (lumber) exclusion can materially reduce policy’s coverage. For example, if you injure yourself in a car accident the insurer might use the back exclusion to avoid or limit the benefit payable.Think about default cover in an industry super fundLarge industry super funds have group policies which means they arrange one insurance policy that covers all the members of the super fund. As such, they can typically have automatic acceptance limits. This means that you only need to complete a very simple medical questionnaire if the amount of cover you are seeking is under a predetermined limit (e.g. around $800k for Life & TPD and less than $10k per month for income protection cover).Make sure you seek professional adviceDetermining the right amount of cover to take out, making sure your policies are structured tax-effectively, understanding the quality of the policy and then navigating the underwriting process are all things we do every day. If you are going to take out insurance, you must ensure you are getting value for money meaning if you need to make a claim, you want to be as certain as possibly that they will pay it! There’s no point having insurance if you are never going to be able to make a successful claim. Most people do not have the experience and knowledge to do this without getting professional advice. So, do not hesitate to reach out if we can be of any assistance in this regard.
The bushfires in NSW and Queensland recently reinvigorated the conversation about global warming and whether the Australian government is doing enough to combat it. I’ll refrain from sharing my thoughts on this topic (I’m sure no one cares what I think about this anyway), but I thought it was timely to write a blog about sustainable investing. If you are concerned for the environment, this is a way of ‘putting your money where your mouth is’.Sustainable investing grew by 35% between 2016 and 2018. It now accounts for over $70 trillion of assets globally.What is sustainable investing?Substantiable investing means that you only invest in companies that are combating climate change, are socially responsible and have good governance practices. In simple terms, its investing in businesses that are doing the right thing. And, maybe more importantly, not investing in the businesses that are doing the wrong thing.Sustainable investing is often referred to as ESG investing. ESG stands for Environmental, Social and Governance:§ Environmental relates mainly to climate change (greenhouse gas emissions) but also includes, resource depletion, waste disposal, pollution and deforestation.§ Social relates to matters such as human rights, modern slavery, child labour, working conditions, and employee relations. It includes avoiding investing in companies that are involved in tobacco, adult entertainment, weapons, gambling and so on.§ Governance relates to matters such as bribery and corruption, executive pay, board diversity and structure, political lobbying and donations, tax strategy.The organisation Principals for Responsible Investment (PRI) was established in 2006 under auspices of United Nations to help its signatories (investment managers) better understand and effectively implement sustainable investing principals.What impact can this have?An ESG fund can have a massive impact by avoiding companies with high carbon dioxide (CO2) emissions, for example. There are two types of omissions to consider: (1) actual omissions and (2) potential omissions. Potential omissions mainly relate to mining companies. It is the reserve of raw materials (minerals or whatever they are mining) that they have identified that still is yet to be mined.By eliminating high CO2 omitting companies, your portfolio can reduce actual omissions by over 70% globally (and over 60% in Australia). That is, an ESG portfolio omits over 70% less CO2 than its comparable index does (i.e. the whole market). And better still, it reduces potential omissions by over 99% (both globally and in Australia)!An ESG portfolio means that you are not investing in companies that are doing the most harm to the environment.Does ESG investing reduce diversification or increase investment risks?A common concern is that if we filter out the companies that do not meet the EGS screens, does that mean we lack diversification or are under/over exposed to various sectors? The answer is no.The table below compares the portfolio sector weightings (top 6 sectors only) for standard global investment fund versus an ESG product. As you can see, there are small differences, but the allocation has not been materially skewed away from or towards any sectors.See table at https://www.prosolution.com.au/sustainable-investing/ The standard global fund invests in 6,058 companies, so it’s very well diversified. The EGS fund invests in 1,562 companies which is substantially fewer than the standard product, but still very well diversified.The ESG option has a slightly higher amount of portfolio concentration. In the standard product, the top 10 companies account for 9% of the overall fund. Whereas with the ESG option, the top 10 companies account for 15% of the total fund. Again, this does not substantially alter investment risks in my opinion.What is the impact on investment returns?Sustainable investing products are relatively new and not many have a long history of returns yet, particularly index style products. However, a ruled-based fund manager that we use, Dimensional established its product in 2016. Its investment return in the 3 years to October 2019 was 12.64% p.a. this compares favourably with its standard (non-EGS) product which has returned 10.27% over the same period. So, in this case, ESG returns have been higher.In another example, Australia’s’ largest industry super fund (AustralianSuper) has had a mixed investment option called “Socially Aware” and it has returned 9.67% p.a. in the 10 years ended 30 June 2019. This is reasonable comparable to its Balanced option which returned 9.76% p.a. over the same period and its asset allocation is comparable. Unfortunately, AustralianSuper does not publish any information on diversification or concentration so it’s impossible to assess the portfolio’s risk.In summary, it is my view that it is reasonable to assume that you may not forgo any material investment returns by choosing to invest sustainably. That said, it is important to maintain a diverse and considered asset allocation and used a broad spectrum of investment methodologies whilst, at the same time, maintain ESG compliance. Doing both of these things at the same time is very important.How can you invest sustainably?Just like with most things in life, whether you invest sustainable or not doesn’t have to be an all-or-nothing decision. You can gradually start to tilt your investments (including your superannuation) towards sustainable investments. Or, of course, you can switch to 100% sustainability tomorrow. If this is of interest, you should speak with your independent financial advisor and/or superannuation fund to find out more.Or, of course, speak to us as we can combine our evidenced-based, low-cost investment strategies with a sustainability overlay. This will ensure you adopt the most successful investment methodologies and structure whilst still ensuring your investments reflect your personal values.
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 and high commodity prices means the government has plenty of fuel in the tank.Property marketI shared my thoughts on the property market in this blog in September here. I said that I believe price growth would be good but is unlikely to get out of control due to the relatively tight credit (borrowing) market. However, the market has certainly improved over recent weeks and months and Vendors are starting to gain confidence (resulting in increased listings and sales). I expect this to continue into 2020 and we should enjoy some relatively good growth, particularly in blue-chip locations.Equity marketsOver the past decade, equity markets have benefited greatly from low interest rates and loose monetary policy (quantitative easing), as well as some economic expansion in the US in particular. However, valuations seem high, particularly in the US and to a much lesser extent here in Australia. Two markets/asset-classes that represent the best value at the moment are the UK and emerging markets, which I discussed last week. I posted the below table last week on social media. It sets out predicted returns over the next decade using various measures including the CAPE ratio.I don’t know what equity markets will do next year and I’m not even going to try and guess. But I do know that studies have shown that starting market valuations is a reliable predictor of long-term returns. Invest when markets represent value and you will likely enjoy good returns. Invest when they are expensive, and you won’t.Alternative investmentsEquity markets have their headwinds including economic slowdown and high valuations, as discussed above. Government and treasury bond yields are sub 1% and corporate bond yields are circa 3.5%. So, where do you find growth and income (other than direct residential property)?The answer could be in commercial real estate (listed and/or unlisted real estate investment trust or REIT) or infrastructure. Although, be careful (i.e. chose investments wisely), as everyone is thinking the same thing and the demand for these investments are driving up prices. For example, the real estate (S&P/ASX 300 A-REIT) and infrastructure (FTSE Developed Core Infrastructure Index) indexes have both returned over 12% p.a. over the past 5 years.What to do?So, what do you do with this information? In simple terms my advice is to play the long game. Stick to your investment strategy and keep investing (i.e. invest regularly and spend what’s left over). However, don’t be blind to the risks and opportunities discussed above.If you’re investing in a market or asset class that seems overvalued or risky, consider underweighting your allocation and use valued-based investment strategies to protect yourself. Otherwise, look for markets that appear to represent the best value. Stick to time-tested, rules-based, well-diversified, evidenced-based investments strategies – no throwing darts at a dartboard! In the long run, this approach will pay handsome dividends. And if you need help, don’t hesitate to reach out to us.
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&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&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. You cannot rely on the market to accurately help you identify a poor-quality business, like you can in a developed markets. Therefore, you must be very selective with what you invest in. That is why active investing can produce better outcomes when investing in emerging markets.In my view, you should employ a high-conviction active manager that is very selective and disciplined with what they invest in. You only want them to invest in very high-quality businesses that are fairly priced.The “President Trump effect”Emerging market valuations are currently low by historical measures. Stock markets dislike uncertainty and tend to price in worst case scenarios. The USA/China trade tensions have had a negative impact on emerging market valuations. This indicates that it’s probably a good time to buy now or, put differently, your downside risks are relatively limited.Expected returnsAccording to modelling produced by US research house Research Affiliates, there is a 90% probability that, over the next decade, emerging market investment returns will be in the range of 4.3% and 11.1% p.a. This modelling is prepared using the CAPE ratio which has been a very accurate predictor of subsequent returns.Over the past 5 years, my preferred investment managers (including Martin Currie and Fidelity), have produced double-digit investment returns (10.9%-12.3% p.a.). This compares favourably to Vanguard for example (the largest index manager in the world) at 7.62% p.a.It is also possible to be more focused with emerging market investments through targeting specific growth industries such as technology. For example, BetaShares has a product this invests in the top 50 tech companies in Asia such as Alibaba, Samsung, Taiwan Semiconductor, gaming company Tencent. These are currently valued on lower multiples than their USA counterparts but arguably have better long-term growth prospects.Please don’t invest in these funds without first obtaining independent advice. I only share these names with you to give you some examples of emerging market funds.Please be cautious with your approach Emerging markets are higher risk investments because they typically have a higher volatility rate. Volatility means that prices can change quickly, and movements can be large. As such, typically, I would not recommend investing more than 5% of a portfolio in emerging markets, if anything at all. Emerging market investments should form part of a diversified portfolio of shares and bonds.Indirect benefits Over the past century, global wealth has centred in the USA and Europe. However, by year 2030 the Chinese and Indian economies are projected to be significantly larger than the USA. All of these countries are in close proximity to Australia and relatively similar time zones. As such, Australia is well-positioned (excuse the pun!) to benefit from this tremendous growth.Perhaps it’s a good time to start thinking about whether your investments are also well positioned to capture these possible investments returns.
Not more than 7 months ago, according to the media, investing in property was no longer a smart way to build wealth. Labor wanted to ban negative gearing, increase Capital Gains Tax (CGT), commentators were predicting that the market would crash by more than 20%, banks were tightening lending standards and so on. Since then, the world has returned back to ‘normal’ and most of these concerns have abated. According to the media, property is now a good investment again.But what if Labor had won?Of course, Labor losing the federal election in May 2019 did help the property market because it meant any changes to negative gearing and CGT were off the table. However, if it had won the election, I doubt Labor would have been able to get these proposed changes legislated. And even if they did get them legislated, I stand by my view that whilst these changes would have materially reduced after-tax returns, it would not have rendered property investment uneconomical. In the long run, investing in the right property still would have been a viable investment.Construction of new housing, recession, interest rates…I was reading an article by an investment manager that I respect greatly a few weeks ago. His thesis was that it was too early to call a recovery on the property market because of the fall in construction volume (of new dwellings). He went on to explain that a depressed construction market will create negative consequences for economic growth, unemployment and therefore property.Whilst I don’t disagree with this author’s economic reasoning, I was left pondering what use this information had to an investor. That is, if I’m contemplating an investment in a blue-chip, investment-grade location, do I care about the fall in new construction (which inevitably occurs in locations far removed from investment-grade locations)?So, what information is relevant then?In reality, much of the content produced by the media is relatively useless for making property investment decisions. The media tend to only run stories that they consider newsworthy. Newsworthy often means that the information is time-sensitive e.g. what happened yesterday or what will happen tomorrow. This short-term information does not help if you intend to own a property for many decades.Remember what drives property valuesA good and bad property cost the same to hold. You will pay the same amount of interest in respect to the mortgages. And the income and expenses will be relatively similar. The biggest difference between a good and bad property is capital growth. That is, what will the property be worth in 10, 20 or 30 years? In this regard, when selecting a property, there are three things you must consider:1. Land valueLand appreciates whereas buildings depreciate. Therefore, it stands to reason that you should invest in properties that are mostly land value which typically includes houses and older-style apartments. Whereas, if you invest in a newly built property, it is likely most of the purchase price will represent building value and only a small land value component. The appreciation in land value needs to more than offset the depreciation in building value for the property’s overall value to increase. But this is unlikely if say, 80% of the value is building (and depreciating) and only 20% land (and appreciating).2. ScarcityThe property must be scarce both in terms of location and property type.A scarce location is one where there is a finite amount of vacant land (often no vacant land) plus the location is highly desirable to a broad spectrum of demographics (e.g. young people, families, retirees, etc.).A scarce property type is one that has limited (even falling) supply and wide appeal. An example is Victorian cottages – no one is building them anymore and they have wide appeal. An example of a property type that has little scarcity is a high-rise apartment – there’s literally thousands of them and they all look the same and supply of new ones is almost never-ending.3. Past performanceThe best evidence of a good property is past performance. That is, how has the property’s value changed over the past 30 years? Past performance is a good indicator because value drivers tend to be static (i.e. rarely change) and factual, not open to subjectivity. For example, positive amenities (attributes) such as shopping strips, schools and hospitals rarely change.There’s only a handful of important macro considerationsOf course, when contemplating an investment, it’s important to consider the aforementioned factors – but these are all property-specific. In terms of macro-level factors, there really are only a handful of important considerations, namely:Population growthLong term population growth is a very important factor. There’s only a limited number of investment-grade locations (so the supply-side is fixed) and if population is growing, this will translate to an increase in demand. This translates into upward price growth pressure. Natural changes in population (births and deaths) are relatively stable. The main changes will be driven by overseas and interstate migration. Some capital cities are projected to benefit from higher levels of migration than others. For example, the ABS (here) predicts Melbourne will be Australia’s largest capital city surpassing Sydney in year 2031.Money supplyThe flow of money into the property market will have an impact on growth rates. Money can flow into the market mainly through borrowings and from overseas sources (i.e. non-resident investors). It has been well documented that the government has restricted supply from both these sources in recent times. Arguably, the government has been too aggressive with its approach and I predict that bank lending policies will continue to gradually loosen over the next few years. However, if money supply remained constricted for an extended period of time, this would likely have a negative impact on growth.Diversified employment opportunitiesYou must invest in a location that has diversified employment opportunities. Doing so means no one industry can manipulate the demand for property and therefore demand is sustainable and stable. It has been well documented how the mining industry has impacted property prices in Perth for example.InfrastructureInfrastructure is important to the extent that it can reduce the impact of living further away from the CBD (i.e. in the outer suburbs). That includes reduced travel times, better access to employment prospects, recreational resources and so forth. As I discussed in this blog, Australia is unlikely to make any material advancements in this regards, and that’s why inner-city, blue-chip suburbs will continue to outperform.Ignore the rest!Apart from the considerations discussed above (population, money supply, employment opportunities and infrastructure), ignore all other media ‘noise’ when making property investment decisions. A lot of quality media is thought-provoking and interesting. Its just that most of it isn’t very helpful to property investors. If anything, it can encourage you to make mistakes such as promoting short-term thinking and/or procrastination.
Most investors and some homeowners have interest only loans. However, the option to repay interest only doesn’t last forever. Most mortgages have a term of 30 years. Typically, the first 5 years is interest only. After that term has expired, repayments automatically convert to principal plus interest.If you have an interest only loan that is approaching the maturity of its term, what are your options?The government forced banks to curb interest only loansThe volume of interest only mortgages peaked in early 2017 when they accounted for approximately 40% of all new mortgages. The government (APRA) then stepped in and introduced a new benchmark which stipulated that the proportion of new interest only loans provided by banks must be less than 30% of all new loans. Most banks achieved this target by mid-2018 and currently only 20% of all new loans are structured with interest only repayments. As such, APRA subsequently removed this benchmark in December 2018.The banks dissuaded borrowers away from interest only loans by doing four things:1. They increased variable interest rates. Until recently, variable interest rates for interest only loans were 0.42% higher than their principal and interest counterparts. That gap has only recently reduced to 0.34% because most of the banks passed the full 0.25% October RBA rate cut. I predict that this cap will continue to reduce over time.2. Banks made it more difficult to roll-over to a new interest only term by requiring borrowers to go through a full application process.3. Almost all banks reduced the maximum interest only term to 5 years. Previously banks would offer interest only terms of up to 10 years – and a few banks even offered 15 years.4. Lenders tightened credit parameters e.g. they have become very reluctant to allow interest only repayments for owner-occupier loans.The banks are starting to loosen up on interest onlyOver the past few months, we have noticed that some lenders have marginally loosened credit policies in respect to interest only loans. Some lenders no longer require borrowers to go through a full application process if they request a second interest only term. Also, some banks will now offer interest only terms of up to 10 years to investors only.Do interest only loans still make sense?Interest only loans increase your flexibility. Whilst the minimum payment is limited to just the interest, it does not mean that you are not allowed to make principal repayments. In fact, you can make principal repayments at any time. Better still, attach an offset account to your mortgage and your cash savings will reduce the interest cost too.Investors are particularly attracted to interest only loans for two primary reasons. Firstly, if they have a (non-tax-deductible) home loan, they can direct all their cash flow towards repaying it first, before they repay any investment debt. Secondly, it reduces the monthly cash flow cost of their investment. This means that have more cash to invest in other assets (or service higher levels of borrowings).The additional benefit of an interest only loan is that your monthly repayment amount is directly linked to your net balance. Therefore, if you have repaid a portion of your loan principal or have monies in offset, your repayment will reduce accordingly. However, the dollar value of principal and interest loan repayments are fixed as they are calculated using the loan amount, not the actual balance. Most people prefer the flexibility that interest only loans provide.So, are you suggesting that we never repay an investment loan?No, not necessarily. Of course, you must consider debt repayment/management when formulating your investment strategy as I have discussed here.One factor you might like to consider is that inflation will naturally eat away at your loan balance over time. Most people would consider a $1 million mortgage as a big loan. However, based on inflation data, a $1 million loan is equivalent to a $205,000 loan 40 years ago (in the late 70’s, $205,000 was a lot of money!). So, a $1 million loan in 40 years probably won’t seem as a big a deal as it does today.Now, I’m not saying this to suggest you don’t need to worry about debt levels. Of course, you must be prudent with debt exposure. But my point is that inflation expectations is a component of the loan’s interest rate (high inflation equals high interest rates). This means you are essentially paying for the “inflation” cost each year and the real value of your debt is therefore reducing.If your interest only term has expired, what are your options?You typically have three options.(1) Rollover onto another interest only termWe can ask your bank to roll your loan over onto another interest only term. Typically, this is possible as long as your loan was established less than 10 years ago. If your loan is more than 10 years old, it is unlikely the bank will allow another interest only term.(2) Refinance your loan to a new lenderIf your current lender is not willing to offer another interest only term, we can refinance your loans with another lender. Of course, this will require you to go through an application process, which is quite an arduous and time-consuming task these days. If you have not done this for many years, you will need to consider whether you are able to satisfy currently tight credit criteria – see here.(3) Start repaying principal and interestYou could do nothing and let the loan’s repayments convert to principal and interest. One of the advantages of the current low interest rate environment is that principal and interest repayments are relatively low.For example, on a $500,000 loan, principal and interest repayments would be approximately $2,640 per month. Interest only repayments would be approximately 30 per cent lower at $1,875 per month. However, only 5 years ago, interest rates were circa 6% and as such, interest only repayments would have been approximately $2,500 per month. Therefore, the reduction in rates over the past 5 years has absorbed much of the cash flow impact of principal and interest repayments. That said, you must consider whether principal and interest repayments are still affordable when interest rates do eventually rise.Avoid expiry with a line of creditA line of credit (LOC) is a type of mortgage product that does not have a loan term. As such, it does not have interest only period i.e. principal and interest repayments are never required. However, interest rates for LOC’s are around 0.50-0.70% p.a. higher than standard interest only investment loans.Debt repayment is less attractive whilst rates are lowOne consequence of a low interest rate environment is that debt repayment is not as attractive as it once was. If your investment loan’s interest rate is 4% p.a. today, the after-tax cost of that debt is probably less than 2.5% p.a. So, by repaying debt, that is all you are saving (2.5% p.a.)! I would suggest that your money could be invested elsewhere, and it wouldn’t be difficult to earn an after-tax return well in excess of 2.5% p.a. Of course, interest rates will eventually rise so the long-term benefits of debt reduction will still be present. However, today, the opportunity cost is higher than usual.Please reach out to us if you need helpOf course, we are ready to help should you need it. If you have interest only terms that are coming up for maturity, we would welcome the opportunity to help you find a satisfactory resolution. Click here to find out more.
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&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 selecting your investments. If you are investing in equities, arguably it would be better to adopt a valued-based approach if you share my belief that the equity bull-market is approaching its end. If you are investing in property, focus on the basics of supply and demand e.g. strong land value component in an area that has scarcity and therefore benefits from sustainable, excessive demand. Historic performance is an excellent guide.§ Valuation – the best way to protect future share investment returns is to skew your investments away from over-priced markets. Your starting valuation will tend to have a big impact on future investment returns. It stands to reason that if you invest in markets that are “cheap”, your downside risk is low whereas if you invest in markets that appear overpriced and the bubble bursts, you will probably lose money!When investing in property, unlike with shares, the current valuation has little impact on future returns because the property market is less volatile, so intrinsic and market values tend not to differ substantially. Property has always seemed expensive unless you take a long-term view. Of course, that doesn’t mean you shouldn’t take steps to avoid over-paying for a property, so make sure you get professional advice!The short-term hysteria sometimes creates opportunitiesAnother thing you can do is use some of this short-term noise to your advantage. For example, the US/China trade tensions have weighed on emerging market valuations. Emerging markets include countries such as China, Taiwan and India.The price-earnings ratio (see this blog for what this means) for emerging markets (FTSE Emerging Markets All Cap) is currently 12.8 times. Compare that to the US market (S&P 500) which has a price-earnings ratio of over 21 times – 64% higher! This and other measures (such as book value/price) make ‘emerging markets’ look cheap, by comparison.As Warren Buffett suggests, the share market is a popularity contest in the short run. However, in the long run, it is a weighing machine in that it’s the fundamentals of markets that will determine long term returns, not popularity. Emerging markets are not popular at the moment because of President Trump’s actions. Perhaps you can take advantage of this in your portfolio?A word of warning: this is an example only. Emerging market are high risk investments. Typically, less than 5% of your portfolio should be invested in emerging markets. Also, indexing (passive strategies) don’t work as well as they do in developed markets, so it is best to use active management. Just be careful.It’s times like these you must block your ears, close your eyes and play the long game.I started this blog with a statement that “it feels like there is more uncertainty at the moment”. The most important word in that statement is; feels. Feelings are often shaped by two emotions; fear and greed. Neither of these emotions are particularly helpful when it comes to making financial decision.Avoid allowing the news of the day to shape your financial decision including the temptation to delay making a decision i.e. procrastinate. Instead, put your feelings aside and look at the facts. Make an evidenced-based decision. Get astute and independent advice. And most of all, focus on the long run i.e. the best investment you can make today that will maximise your wealth in 20 years’ time. What happens over the next 2 years (for example) is completely irrelevant, so don’t waste any time thinking about it.
According to the Australian Bureau of Statistics, first homeowner activity has increased by 51% since March 2016. First home buyers now account for just short of 20% of all new home loans.Whilst housing affordability has improved slightly recently, it is still tough for first home buyers to get onto the property ladder. However, the current low interest rate environment and the recent dip in prices is clearly encouraging more first home buyers.So, what is the best way to help your kids get into the property market? And is there anything you need to do now?Challenge has and will always be saving a sufficient depositThere are two factors that will determine whether a person is ready to purchase their first property:(1) Cash flowDo they have a stable and reliable amount of surplus cash flow that they can contribute towards repaying a loan? There are usually two mainconsiderations. Firstly, how stable and consistent their income is expected to be in the short to medium term? This normally requires permanent full-time employment or an established self-employed business. Secondly, do they have good cash flow management and consistently spend less than they earn i.e. are they good savers?(2) DepositDo they have enough deposit to contribute towards the acquisition? Most banks will lend up to 95% of a property’s value. Therefore, first home buyers need to contribute:(1) a 5% deposit;(2) pay for the mortgage insurance premium. This is an expense that is charged by the bank if you borrow more than 80-85% of a property’s value. The cost of mortgage insurance is typically in the range of 3% and 4% of the loan amount (at a 95% LVR). A few lenders permit borrowers to add a portion (up to 2%) of the mortgage insurance premium onto the loan. The rest must be paid from cash savings; and(3) any acquisition costs which could include stamp duty (which may be nil depending on the first home buyer incentive), buyers’ agent fees if you choose to use one and legal fees.Therefore, typically, first time buyers need to accumulate a sizeable deposit, and this can unfortunately take many years to save (over which time property prices will probably continue to climb).Having enough deposit is often the primary hurdle to overcome for first time property buyers.Best way to help is to help yourself firstOften my clients request that their financial plan include the goal that they would like to help their kids buy a property. Sometimes clients think that buying one property per child (for example) now is a good idea. There are a few flaws with this approach, including:§ The best way to help your children is to help yourself first. Build your own asset base. If you have a very strong asset base in the future, you will have the latitude to help your children in lots of ways. However, if you don’t have a strong asset base, you risk being in a situation where you are relying on your kids for help, not the other way around.§ Buying assets now, ultimately for your children’s use, has many challenges. Firstly, if you eventually gift or sell the property to your child you will have to pay stamp duty and capital gains tax. Secondly, how do you know what property type and location will best suit your children in the future?§ You may want to help your children in different ways and at different times. Some young adults can be very astute with money from a very young age. However, others can take many years to learn basic cash flow management. Forcing a person into property ownership before they are ready won’t produce positive outcomes.Start with teaching good cash flow managementWe all know that kids learn a lot (often subconsciously) from their parents through observation and experience. Therefore, it’s good to openly discuss the principals of money management, without having to disclose personal details. Discussing topics such as how to budget, focusing on getting value for money, that most financial goals typically take some sacrifice to achieve, not everything is “easy” or “simple”, that patience and delayed gratification are critical and so on, is a good idea.I don’t mean for this tip to sound too preachy. The point I am trying to make is that you can teach a lot of these important lessons many years before your child is ready to buy their first home.How do you know when your child is ready to buy a home?A core tenet of astute financial management is to never borrow more than you can afford to repay. And teaching a person to compromise this tenet is not a good idea in my opinion. Therefore, it stands to reason that your child must be in a good cash flow position before contemplating a property acquisition. As discussed above, they must have a stable income and proven ability to save money regularly. Once they reach this position and if they show a genuine interest in property, then they are probably ready.Best way you can help is to provide a family guarantee – here’s how it worksA family guarantee is a way of providing the bank with additional security for your child’s loan. This has two benefits. Firstly, they don’t need to save as much deposit (as referred to above). This means that once they have a satisfactory cash flow position, they can get into the property market without further delay. Secondly, reducing the child’s loan to value ratio to 80% or lower means they no longer must pay for mortgage insurance, saving a significant amount of money (approximately 3% to 4% of the loan amount).A family guarantee is provided by using equity in your property (either home or investment). It is usually limited to a dollar value. For example, let’s assume your child want to buy a property for $600,000 and they only have $10,000 in savings. For the sake of this example, we will ignore any costs (legal fees, stamp duty, etc.). We could structure a family guarantee loan as follows. We would apply for a loan for $590,000, or in fact probably $600,000 so the child could retain their savings as a buffer. This loan would be secured by the new property ($600,000) and a limited guarantee of $150,000 provided by you. Therefore, the bank holds security worth $750,000 for a loan of $600,000 which is a loan to value ratio of 80%.Then, in time, when the child’s property increases in value and its worth more than $750,000, we would approach the bank and request they release the guarantee (if they decline this request we could simply refinance to a new lender).This arrangement has the following pros and cons:Pros§ It doesn’t cost you anything except some legal fees (the bank will want guarantors to obtain independent legal advice). That is, you do not have to dip into your own nest egg to help your children.§ It still puts the onus of responsibility on your child to qualify for the loan using their income only.§ The property will be in your child’s name only therefore avoiding any need to change the ownership in the future.§ These arrangements are typically short-term. In my 17 years of experience, no family guarantee arrangement has remained in place for longer than 5 years. However, there are no guarantees (excuse the pun!). If the property’s value remains stagnant and the loan balance doesn’t reduce, the arrangement could be in place for the whole term of the loan.§ You can still downsize or upsize. Sometimes parents are worried about providing a guarantee if they plan to downsize their home in the future. Providing a family guarantee shouldn’t prevent you from doing this but please do get personalised credit advice to confirm this is correct for your situation.Cons§ If your property already secures an existing mortgage, you and your child will need to use the same lender. This means you will either need to refinance or they will need to use your lender. Seek advice from a mortgage broker (i.e. us) in relation to which option is best.§ Providing a guarantee will eat into your equity. Therefore, you will need to take this into account if you have plans to increase your borrowings in the future.§ Whilst the guarantee is limited in dollar terms, practically, a lender can’t sell just a portion of your property. If your child defaults on their loan and the bank sells their property for less than what they own them, the bank will want you to pay for the shortfall. If you cannot do so from your own funds, the bank will sell your property. Whilst the guarantee amount is limited and you will keep the remaining sale funds, it doesn’t change the fact that the property will be sold which could have wider reaching consequences (e.g. CGT).The above list is generic and may not include all pros and cons. Therefore, you must obtain independent financial and legal advice.Make sure they buy wellOne other way to help your child is to counsel them to “buy well”. By this I mean buy an investment-grade asset – or as close to an investment-grade asset as possible. The first property someone buys is arguably the most important. Because if they do it well and enjoy some capital growth, it creates a lot of financial opportunities in the future.Of course, I realise that young adults don’t always listen to their parents, so there’s only so much you can do. If you start this conversation at a young age, perhaps you can indoctrinate them with a sound financial education.Build your own wealth and educate your childrenPerhaps the best summary of this blog is that all you need to do is take steps to build your own wealth to strengthen your financial position. This must be your primary aim. And educate your children as much as possible about money and property. When the time comes, the best way to help them is via a family guarantee.
In my experience, it is common for one spouse to have a greater interest in the family’s finances. In fact, the spouse that is ‘most interested’ typically takes fully responsibility for making the family’s financial decisions. However, there are some fundamental and important flaws with this approach which I’d like to share with you.What happens if one spouse unexpectantly passes away?If the spouse that is the ‘financial decision-maker” passes away, particularly if it’s unexpected, it does cause the surviving spouse a lot of stress and worry. Not only do they (probably) have little knowledge of their financial affairs, but they also typically have a low level of confidence and experience with making financial decisions. This all compounds to create a lot of stress and worry, at the worst possible time.To avoid this occurrence, each spouse must understand their financial position and strategy, even if its only at a basic level. They also must know who to seek advice from and who to trust, so they are able to share the burden of making ongoing financial decisions.If the relationship breaks down beware of skeletonsThere have been some horrible situations of spouses finding out about how dire their family’s financial situation is after their relationship has broken down. This includes massive tax debts, liabilities and so on. Of course, a strong relationship is founded on mutual trust and respect which includes discussing and disclosing all material financial decisions with your spouse before any transactions are made. Unfortunately, this does not always occur.One spouse, often men, may feel a strong sense of responsibility to “provide” for their family. Sometimes, this responsibility can unfortunately drive them to make unsound and inappropriate financial decisions. And to compound this, they might avoid discussing these decisions with their spouse, so they don’t ‘burden’ them.Of course, this is a foolish approach. That said, I believe it is the responsibility of each spouse to ask questions and seek to understand their own financial position. Nothing is too complex to explain in simple, easy-to-understand terms. It is something you can share together.It’s your money, so it’s your responsibilityThere is one thing you cannot delegate and that is the obligation to take responsibility for your money. It is your money and its your job to be responsible for it, not anyone else’s. That is not to say that you cannot trust anyone else or take their advice. But you must make sure that know what’s going on i.e. where its invested, what risk you are taking, how much you spend and so on.If you don’t take responsibility and you end up losing money one day, you only have one person to blame.Therefore, be engaged in the topic of money. Ask questions. You don’t need to have to understand the nitty-gritty or feign competency, but you must take responsibility. If you have a financial advisor, attend at least one meeting every couple of years. If you don’t have a financial advisor, ask your spouse to explain what’s going on and what your family’s financial plans involve.You have to be on the same pageOne of the important advantages of ensuring that both partners are engaged in understanding their finances is that you will be more likely to stick to the plan.For example, if your financial plan requires you to contribute say $20,000 per year into a share portfolio, and both spouses understand why this is important to maintain, then it is likely that you will hold each-other accountable for achieving it. However, if one spouse doesn’t understand the strategy and therefore the importance of sticking to the $20,000 budget, then it can be more difficult to encourage them to curtail other expenditure. Therefore, there is merit in making sure each spouse “buys into” the plan and commits to it.What if you’re the only interested party?If you are reading this blog, then its likely that you are the person in charge of your family’s finances. You might be thinking: how do I get my spouse interested in our finances? Here are a few suggestions:§ Ask them to join you when you next meet your financial advisor and/or accountant.§ Ask them if they know what financial steps they must take if you pass away?§ Ask them for help. You can say that the burden of making the families financial decisions is best shared amongst both of you.§ Ask them to read this blog.§ If you are still having trouble, engage a third party, such as a counsellor in the conversation. They may have tools and strategies to help you address this.Beware of financial abuseThe Australian Banking Association’s (ABA) new Banking Code of Practice was implemented on 1 July 2019 and it requires lenders to “take extra care with customers who may be vulnerable”. That includes victims of financial abuse and/or domestic violence. If you don’t have access to bank accounts or other assets that are in your name, asked to sign forms you don’t understand or anything you are uncomfortable with, you may need to take action.To learn more about what this includes and how to get help, visit the government’s SmartMoney website here.Your executors may also need helpExecutors occupy a very important role. They carry out your wishes as set out in your will. However, it can also be a very time consuming and onerous job. And sometimes your executors may not have the experience, understanding or time to execute their duties in an accurate and timely fashion.One solution is to instruct them (via your will, verbally or in a letter-of-wishes) to engage the services of your trusted advisors (financial advisor or accountant). If you would like to do this, you need to discuss this with your advisor(s) to ensure they are willing and able to take on this work. This is a good way to ensure your finances will be looked after correctly whilst not over burdening your spouse, family or friends (i.e. executors).A responsibility shared is a responsibility halvedIt is okay for one spouse to take responsibility for organising your finances. However, the responsibility to make decisions and understand your income, assets, liabilities and cash flow is something that must be shared equally. This will ultimately empower each spouse and have them feel more in confident.
The media loves to talk about the property market; will prices rise or fall over the next year? It’s really not that important. “Timing” the market is virtually valueless, as I concluded in this analysis last year. That said, I understand the psychology behind it. People want to buy at the bottom of the market, just before it takes off and only experience the upside.There has been a lot of commentary recently about improvements in auction clearance rates, uptick in lending volume in July and so on. So, I thought I’d weigh into the commentary and share my views.Looks like I called the bottom correctlyLet me begin this blog with some shameless self-promotion! In December 2018, I wrote a piece for The Australian in which I said “I believe that price growth next year will be neutral or positive”. At the time, I was only one of two people in Australia to make this public prediction (AMP Capital’s chief economist, Shane Oliver was the other).As the chart provided by CoreLogic below illustrates, national auction clearance rates reached their lowest point in December 2018 at around 40%. Over the past nine months they recovered dramatically to be circa 70% (and mid-to high 70%’s in Melbourne and Sydney).https://www.prosolution.com.au/wp-content/uploads/2019/09/Clearance-rates.png?6bfec1&6bfec1According to CoreLogic, national capital city house prices grew by 1% in the quarter ending August 2019, with Melbourne and Sydney leading the way at close to 2%. Therefore, it looks like the bottom of the market was in fact December 2018 when I wrote my article.All happening with very low volumesProperty market sentiment began improving after 10pm on 18 May when the Coalition won the election. We definitely witnessed a temporary improvement in our business in terms of enquiry levels from both investors and homeowners.This is also evident in the chart below which begins on 11 May, the week before the federal election. It sets out Melbourne’s auction clearance rate and the volume of property sold in dollar terms (data from Domain). I have selected Melbourne as auctions are more commonplace compared to other capital cities (so data is more representative).Please take note of the very low volumes. Up until mid-July only $175 million of property was being sold each weekend, on average. It has increased to $350 million over the past two weeks. But this is still well below the peak of a booming spring market in which over $1 billion of property would sell over one weekend in Melbourne.https://www.prosolution.com.au/wp-content/uploads/2019/09/Chart-ppty-predictions.png?6bfec1&6bfec1Property market activity (volume) is well down both in terms of the number of properties selling but even more so in dollar terms, which suggests the higher end of the market is very thin. Therefore, whilst an improvement in clearance rates is a positive signal, we need more vendors to put their properties on the market. Until that happens, it’s difficult to ascertain what is driving clearance rates higher. Is it very low volumes or an actual improvement in sentiment? I suspect both are relatively equal contributors at the moment.Don’t get over-excited by lending volumesThe media jumped all over the improvement in lending volumes (as announced by theABS) last week. In case you missed it, the value of new loans increased by around 5% in July 2019. Some commentators interpreted this as a signal that lending has loosened a little. It’s hasn’t!For a loan to settle in July, the application must have been lodged in at least June, but probably before that given how arduous the application process has become. Credit was slightly tighter in May/June than it is now. It will be interesting to see what loan volume are like in August and subsequent months, but I suspect that won’t show dramatic increases. Borrowing capacity has improved but it’s still very difficult to convince a credit manager to approve an application. I suspect the improvement in July is merely a reflection of the temporary positive effect the election had.Important: ASIC vs WestpacThe government (ASIC) took Westpac to court last year alleging that it had breached responsible lending laws on up to 262,000 home loan approvals. Westpac used a benchmark measure called Household Expenditure Measure (HEM) as a proxy for an applicant’s living expenses instead of making its own investigations, like it does today. ASIC lost this case in August 2019. The Court said that Westpac didn’t beach the law and using HEM was okay. Last week, ASIC filed an appeal against this decision.This case is very important. If the appeal is unsuccessful, it will give the banks some confidence that they can lighten up their forensic investigation into an applicant’s expenditure (and yet still comply with the law). However, if the appeal is successful, I don’t think credit will loosen up at all anytime soon.Sentiment may be greatly improved but the banks continue to be party poopersThe prospect of some very onerous taxation changes by the ALP together with dramatic tightening in credit policy certainly spooked the property market. Of course, the tax changes are now off the table and I think we have all made friends with the new lending environment. On the whole, people are more optimistic and confident with the property market.The biggest drag on future buyer demand will be access to credit (loans). I suspect more vendors will choose to sell their properties next year, especially with the backdrop of improved prices. Credit might gradually loosen (if ASIC isn’t successful with its appeal), but I doubt any bank will make substantial wholesale changes, as they won’t want to attract this sort of publicity. As such, I think credit will very gradually loosen over the next 12 to 24 months. This should lead to positive housing price appreciation, but a runaway market is less likely. Therefore, as a generalisation, I think capital city property markets might see price increases of in the range of 5% and 10% over the next 12 or so months.Based on the information known today, I certainly don’t expect that property prices will depreciate any further.Geographical considerationsOf course, the national property market is made up of literally thousands of different, smaller sub-markets. These sub-markets are all influenced by their own geographical and micro-economic factors. As such, the macro-economic factors discussed above will have varying degrees of influence. It is important to take this into account when considering your own property plans.Finally, and most importantly, as discussed at the beginning, whilst this topic might make interesting discussion, its application is limited. I believe that there’s never a bad time to buy in an investment-grade property, if it’s appropriate for your circumstances.
Many people feel investing in the share market is a complex and scary concept. This is often due to a lack of understanding.I have written a number of blogs about the advantages of index investing. However, I thought it might be useful to take a step back and take a look at the basics of share market investing.How does the stock market work?The share market is merely a place where people come to buy and sell shares. Some people will be buyers, and some will be sellers. They will each bid what price they are willing to buy or sell a particular stock. A deal will be done when they meet in the middle and agree on price. This is all done electronically (although, in Australia, prior to 1990, it was done on chalk boards).You can see an example of this in the screen-print below (for CBA). As you can see, there are 9 people that would like to buy 455 shares in CBA shares for a price of $79.77. There are also 16 people that are prepared to sell 519 shares for $79.79. Seconds after taking this screen shot, the shares traded or $79.78 (i.e. the mid-point). These transactions happen all the time and this is how shares are valued by the market.By the way, this is called market depth. That is, the number of buyers and sellers (and number of units) interested in trading a particular stock. It is important to invest in a stock with good depth to ensure your investment is liquid and fairly priced. More on this soon.What is a company worth?Obviously, the ‘market’ determines the value of a stock. As stated above, the market is made up of many buyers and sellers (most of them professionals).There is a concept in financial theory called the Efficient Market Hypothesis (EFH) which states that the price of a stock reflects all available information about that stock and therefore is an accurate indication of its intrinsic value. Whilst this theory has some merit, I believe that EFM is truer in the long run than it is in the short run. In the short run, popularity can drive stock prices, not fundamentals.Fundamentally, the value of a company is simply the present value of its future cash flows (i.e. profit). That is, what is the total value of say the next 10 years of profit after applying a discount rate (which is like an interest rate) to account for the businesses risk.So, the key factor that investors must focus on is cash flow (profitability). There are only two reason why someone might invest in a business that makes low to no profit. Firstly, they invest in the stock on the expectation that the company’s business model is so compelling that it will generate strong profits in the future. Or, secondly, they are speculating that the stock price will continue to rise (this approach is more like gambling).What are some of the key terms and when to use them?I have listed below some of the key financial measures and terminology that are important to be familiar with if you want to invest in shares. Of course, there are lots of measures to look at, and they might vary between industries, so this isn’t an exhaustive list.Earnings per share (EPS)This is the amount of profit after tax that a company makes divided by the number of shares on issue. It is good if a company’s EPS is consistent (low volatility) and exhibits a good historic growth rate.PE ratioPE ratio stands for price-earnings ratio. This is calculated by dividing a stock’s price by its EPS. This tells you whether the stock is valued conservatively or aggressively. The long-term average PE in the Australian market is circa 15. Most of the top 200 stocks have a PE in the range of 10 and 25.The higher the PE you pay, the longer it will take to generate an investment return (if at all), unless earnings increase significantly in the future.For example, ANZ’s PE is 12.6 which means that in 12.6 years you would have made your money back (in terms of profit which is either paid as a dividend or reinvested). Compare that to accounting software provider, Xero. Its PE is expediential because it doesn’t even make a profit. The only way to make money from investing in Xero is to hold it for the next 20 years and hope they make a lot of money or hope that speculators continue to drive the share price up. Neither of these are great strategies. In the US, Netflix’s PE is 118. Why would you ever pay 118 times profit to by a share of a company? If your local pizza shop makes $100k p.a. in profit, I bet you wouldn’t buy the business for $11.8 million!If you are a genuine, long-term investor, your starting valuation (PE) is a good predictor of long-term returns. If you pay a high price for a stock, it arguably leaves little future upside.Dividend yieldThis is the amount of the dividend you receive compared to the current share price. Dividend yields can sometimes be grossed up to include any imputation tax credits (see here for an explanation).The higher the dividend yield, the less capital growth you need to justify an investment. That is, if you are aiming for a total investment return of say 8% and the stock pays a 5% dividend yield, then you only need 3% of capital growth to achieve your investment return.BetaA stock’s Beta is a measure of its volatility compared to the overall market. If a stock has a Beta of 1, it means that its price will move in line with the overall market. However, a Beta of say 1.5 means that if the market rises by 10%, the stock is expected to increase by 15%. A company’s beta tells you how “risky’ it is compared to the whole market. See more here.Average volumeAverage volume refers to the average number of shares traded per day. This tells you how liquid the stock is. Also, a stock with a higher turnover will likely have a more reliable share price because many different people, with different views and information, are trading the stock each day thereby setting the share price.Historic earnings growth rateThere are two things that effect a stock’s value (because they impact the discount rate) being risk and growth. Risk refers to the stability of a company’s earnings i.e. do they vary much from year-to-year or are they very predictable. Growth refers to the historic growth in a company’s earnings.Investors will typically pay a higher price (PE) for companies with lower risk and/or higher growth.Dividend cover (or payout)The dividend cover ratio (or sometime dividend payout ratio) refers to how much of the profit is paid out in dividends. A 100% payout ratio means they don’t retain any profit to reinvest in the business and that isn’t necessarily desirable.How to achieve a diversified portfolioHow do you construct a portfolio of shares? The short answer is; you don’t. But I will get to this later. Here are a couple of things to consider:Number of stocksThe common theme in all the analysis of share portfolio performance (good and bad) is simply diversification. This means not having more than 5% of your portfolio invested in any one stock. And studies have shown that you must invest in 20 to 25 stocks to achieve a meaningful amount of diversification. Lack of diversification is the biggest killer of investment returns.Sector diversificationCompanies are categorised into 11 different sectors (listed here). You should aim to achieve sector weightings similar to the most appropriate index (e.g. ASX200 below).You may like to make tactical tilts in your allocation depending on your views e.g. if you are worried about an economic slowdown, invest more in consumer staples and health care, as these sectors tend to be less sensitive to economic conditions. However, you do not want too much exposure to any one sector.Pick good quality stocks that have good growth prospects for a fair priceFocus on three things:§ Quality e.g. stable earnings, strong profitability, low debt, etc.§ Growth e.g. an industry or business model that has good future growth prospects.§ Fair price e.g. the lower the PE, the better.What are the common mistakes share investors make?I wrote this blog a couple of years ago which sets out the 4 most common mistake that share investors make. This information is still all relevant today.The only thing I would add to it is that direct share investors never benchmark their investment returns (in my experience). That is, they do not work out how well they have done compared to market indices. This is insane. Why would you make all your own investment decisions and then not check to see whether you have done a good job or not? My guess is they probably don’t want to know because… ignorance is bliss. But ignorance won’t help you build wealth.What is the best way to invest in shares?Do not try and invest in direct shares. It’s too difficult to pick stocks that are likely to perform well in the long run, do it consistently year-after-year and know when to sell. The professionals can’t even do it. Last year, 93.23% of active fund managers in Australia failed to beat the index.Therefore, the best solution is to construct a portfolio of low-cost index funds that utilise various rules-based mythologies and adopt tactical asset allocation tilts, to accommodate risks and opportunities (as explained here). If you have a substantial amount to invest, you should engage an independent financial advisor to help you do this effectively.If you are starting out with small amounts, Vanguard offers diversified ETF’s which give you exposure to domestic and international shares, bonds, emerging markets and smaller companies all in one investment. You can access these via a low-cost, online share broker such as CommSec. It’s a perfect solution for smaller investment amounts.
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. However, it’s not really a meaningful debate. Its tantamount to debating which is your favourite golf club; a putter or a driver. Both clubs are used for two completely different tasks. One isn’t better than the other. That is nonsense. It depends on what you want to achieve with your shot – you select the right club for the right shot. All golfers carry at least one of each type of club in their bag.The same is true for property and shares. They each have their unique pros and cons. However, in a diversified portfolio that includes both property and shares, these pros and cons tend to offset/negate each-other.It’s not about returnsIt is erroneous to assume that property will generate better returns than the share market or vice versa. As I highlighted in my book Investopoly, Over the past 25 years the Australian stock market has generated 9.30% p.a. in returns. The US market did 10.5% p.a. And the Australian property market has produced 12% p.a. over the past 30 years. I think it’s reasonable that either asset class is likely to generate relatively similar investment returns in the long run. Of course, the split between capital growth and income is different, which is important as I’ve explained here.Watch out for vested interestsAs Buffett says; you never ask your barber if you need a haircut! Therefore, don’t asked a property developer whether you should invest in property or a stockbroker whether you should invest in shares. You must ask someone that is independent. Someone that has no investments to sell you, be it property, shares or anything else. I have written a couple of blogs that might help you find the right advisor here and here.Independence is worthless without experienceThere are many firms that advertise that they are independent, but that is only half the challenge. The firm’s depth and breadth of experience across all asset classes is arguably equally important, because it will guide the advice they provide. For example, if an advisor has very little experience with investing in property, they may be reluctant to recommend it (and know when and how to recommend it).I believe the most valuable thing an advisor has to share with you is their experience. Knowledge will tell us what to do, whereas experience tells us how and when to do it. Knowledge without experience is dangerous because you risk doing the right thing at the wrong time or in the wrong way, and completely messing it up. That’s why medical students need to accumulate over 10 years of experience before they become surgeons, because experience cannot be taught. There are no short cuts.An advisor with an equal amount of experience in both property and shares will be able to independently decide which asset class you should invest in with absolute credibility. Conversely, advice from someone with imbalanced experience lacks credibility.In short, here’s what I typically aim forI’m sure you want the answer… to know how much to invest in each asset class. I have tried to explain this previously in this video. However, in short, by the time my clients retire, I typically like to have their wealth invested in:§ One or two investment properties;§ Plenty of cash in loan offset accounts such that their property portfolio is no longer negative cash flow (at least two years of living expenses in cash);§ Substantial super balances that are well invested; and§ And if cash flow allows, a diversified portfolio of low-cost index funds in personal name (or a family trust).All of these assets should comfortably fund retirement without eating into capital.If you would like to discuss your personal investment strategy with us, please do not hesitate to reach out.
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 return greater than the mortgage rate, then you are better off to use borrowings to invest in property or shares, not your own cash.With such low interest rates, why would you use your own money (assuming its safe and prudent for you to borrow)? Of course, if you are already leveraged to a sensible limit, then this comment doesn’t apply.The cash flow ‘cost’ to invest in property is very lowHistorically, one of the downsides to investing in property is the cash flow cost of doing so. That is, borrowing to invest in property would usually eat into your personal cash flow, as the property’s rental income typically would not be enough to pay for all expenses and costs. Whilst this cost is not eliminated in a low interest rate environment, it is greatly reduced.For example, I estimate a $750,000 investment property would cost you a total of $60,000 in today’s dollars to hold for 15-year period compared to $220,000 at an interest rate of 7% p.a. A property investor is in a much better position today, assuming the property produces the same capital growth returns, which it should do, if well selected.According to Real Estate Institute of Australia data, the housing growth rate in Australia’s five largest capital cities ranged from 6.44% and 7.96% p.a. since 1980. Remember, that is the median house price. That doesn’t even account for the impact ‘asset selection’ has on returns (i.e. selecting an investment-grade asset). Therefore, if you can invest in an asset that produces similar capital growth rates in the future, and it costs you one third of cash flow to hold said asset, your net investment returns are greatly improved.Investing in shares can be positive cash flowInvestment mortgage fixed and variable interest rates currently range between say 3.60% and 4.50% p.a. A broad-based Australian share index such as the ASX200 or ASX300 has generated a grossed-up dividend yield of over 5% over the past year. Compared to property, there are fewer direct expenses with investing in shares. Therefore, in a low interest rate environment, and assuming dividend yields don’t change, you can borrow to invest in the share market and the investment income should cover the interest expense. Of course, if you invest in international markets, which you probably should, this will drag on the portfolios income as yields tend to be closer to 2% p.a.Property rents could stagnate or even fallLow interest rates may also create downward pressure on property rents. If interest rates are very low, particularly for owner-occupiers, at some point it will become cheaper to own your home compared to renting. In this case, there will be less demand for rental properties and that may result in the depreciation of rental income for investors. Of course, not every renter will qualify for a mortgage, particularly in this tight credit market.Asset bubbles and mispricingWhen capital (money) is priced so cheaply, investors tend to think less about potential investment returns and risk. This can result in money flowing into inferior investments and this can cause asset price bubbles – in many markets including both shares and property.The best way to mitigate this risk is to level up on quality.Property prices, in the long run, are driven by the laws of supply and demand. A location that is in high demand, but short supply, will usually benefit from price appreciation.Long term returns in the stock market are heavily impacted by your portfolio’s starting valuation. That is, if you invest in share markets/indexes when they are ‘cheap’, your returns in the long run are inevitably good. But the reverse is true too. Therefore, you must skew your asset allocation to markets that are more attractively priced and adopt value-based methodologies for markets that are fairly valued or appear over-valued. In short, get independent financial advice, don’t try and do this yourself, as the way you construct a portfolio will have a big impact on returns.In essence, you must invest in an asset that will perform well in both a low and normalised interest rate environment.Zero interest rates is a new world so be carefulIn some ways, we are entering unchartered waters. Quality is the best refuge for long term investors. A quality investment will produce quality returns in the long run.
We all want to stay on the ATO’s good side. No one wants to invite a tax audit. But, at the same time, it is prudent to investigate all opportunities to minimise the amount of tax we pay.This often requires a balance between minimising taxes wherever possible, but not being too aggressive that you risk getting into trouble with the ATO. My view is that you always stick within the black letter of the law – never transgressing into any grey areas – as it’s never worth it in the long run.The ATO has made some significant changes lately that I want to bring to your attention. These changes might encourage you to review how to manage your finances.ATO: 90% of property investor tax returns have errorsThe ATO announced in April that it will double the number of audits of property investor tax returns to 4,500. It said that its data indicates that 90% of property investor tax returns contained errors. The ATO found four main errors:Interest deductionsErrors included incorrectly claiming interest that was not tax-deductible (i.e. debt was not used to produce taxable income e.g. home loan) and/or loan purpose was not able to be proven by the taxpayer e.g. they mixed purposes in one loan.It is likely that interest is your largest tax deduction, so you must take care in not compromising it. Make sure your loans are correctly structured as I have previously described here. And keep good records i.e. you can demonstrate what investment asset each loan relates to.In short, separate loans by asset i.e. separate loan/s for each property or investment – avoid having one loan for multiple purposes. And if you refinance and/or loan amounts change, keep thorough records.Claiming improvements as repairsIn short, a repair brings an asset back to the same condition it was in when you first acquired the property. An improvement on the other hand is improving the asset beyond its original condition and/or changing the nature of an asset.The cost of repairs can be claimed in full in the year they are incurred whereas an improvement must be depreciated over its useful life.The ATO does provide some guidance in its website here but sometimes its not easy to ascertain whether a cost is a repair or improvement or both, so in that situation you should obtain tax advice.Holiday homesThe ATO’s main concern is making sure that any deductions claimed in respect to holiday homes that are rented out for part of the year are correctly apportioned. Apportionment of expenses must take into account whether the property was rented at a rate below market (to friends or family), whether it was available for rent during peak periods, if the owners unreasonably refused tenants and whether the owners genuinely took steps to find tenants during periods it wasn’t occupied.If you own a holiday house that is partly rented out and partly occupied, ensure you use the services of an experienced registered tax agent.No receiptsThe onus is on the taxpayer to prove a tax deduction is legitimate. In the absences of said proof, the ATO will simply deny the deduction. The ATO found that many taxpayers failed to produce sufficient evidence of expenses claimed e.g. receipts.I always recommend that you ask your managing agent to pay for all expenses from the rental income they collect. To do this, change the delivery of all bills or forward each bill by email. Doing so means you no longer need to take responsibility for the record keeping. At the end of the financial year, the agent can provide you (and your accountant) with a report itemising all income and expenses for the year. This saves you a lot of time, hassle and extra work.The ATO will receive descriptions for the first timeFor the first time, the ATO will receive the line entry data for all deductions, including work-related expenses. Previously, the ATO would only receive the dollar value deduction total for each section in your tax return (e.g. D1 is work-related car expenses, D2 work-related car expenses and so on). From 1 July 2019, the ATO will receive an itemised listing. This will have two consequences.Firstly, the ATO will be able to use artificial intelligence software to crawl through all tax returns to identify the returns that they would like to audit. They will compare your deductions to the average for your occupation, to identify large or unusual claims. Its system will then automatically generate audit letters.Secondly, it is important to use the correct descriptions in the correct section. For example, here are a few suggestions:§ Do not use generic descriptions such as “various receipts” or “general home office expenses” in your returns; and§ Ensure you claim the right expenses under the right labels. For example, parking and tolls should be recorded under “D2 – work related travel expenses” rather than “D1 – work related car expenses”. And work-related education expenses should not be claimed under D5.ATO may ask for a letter from your employerThe ATO has begun writing to taxpayers requesting a letter from their employer verifying any work-related tax deductions. For example, if you have claimed car expenses, it will request you to provide a letter from your employer confirming how you are required to use the vehicle in the course of carrying out your employment duties. This also applies to other common work-related expenses such as mobile telephone and internet expenses.The ATO has increasingly powerful data matching and analysis capabilities which means its even more important that you are especially careful with the deductions that you claim. For example, to claim internet costs you should have a letter from your employer and/or maintain a usage logbook for four weeks of the year. I doubt many taxpayers would currently be doing this. This page on the ATO’s website provided more information about work-related deductions.Remember, the taxpayer carries all the riskYou, the taxpayer, carries all the risk for any errors in your tax return. This means, assuming your tax agent hasn’t been negligent in providing their professional services, if the ATO audits you and denies a tax deduction, you will have to bear the full cost of any interest and penalties.What are the penalties and interest?If the ATO amends a previous assessment, not only will you have to pay more tax, but you may also have to pay penalties and interest.The interest you pay is in respect to the tax that you should have otherwise paid and is called the shortfall interest charge. The current shortfall interest rate is 4.54% p.a. (see here).The amount of penalties that the ATO seeks to charge will depend on your circumstances. If it deems you have ‘failed to take reasonable care’ it will charge 25% of the tax payable as a penalty. If you have been ‘reckless’, the penalty will be 50%. And if you ‘intentionally disregarded the law’ you will pay 75%.If you do receive an audit letterMake sure you consult with your tax agent as soon as you receive a letter from the ATO. It is important that you comply with all information requests on a timely basis. It is also important that an experienced tax agent represents you so that all legitimate tax deductions are correctly verified. And if penalties are payable, the tax agent may be able to negotiate with the ATO on your behalf.You can obtain tax audit insurance to cover the cost of accountancy and legal fees if you are audited by the ATO. This cover is worth considering, especially if you are self-employed or have complex tax affairs. Ask your accountant about this.Start preparing now for the 2019/20 financial yearTalk to your tax agent over the next few months to ensure you will be able to legitimately claim any expenses you think you are entitled to. Your tax agent will be able to stipulate what information the ATO will require. You then have 10 months left in the financial year to organise it. Leaving it until June 2020 might be too late.Astute tax planning advice that doesn’t cause you problemsThe ATO’s digital tools and information are greatly enhanced each year. This means you and your advisors must ensure you keep on top of all your taxation compliance matters. It is equally important that you receive strategically astute advice in respect to income and investments to legally minimise your current and future taxation liabilities. Of course, we’re here to help.
A buyers’ agent is a real estate professional that will help you identify and negotiate the purchase of a property according to your specifications. They typically work for property investors but can also be engaged to purchase owner-occupier homes. This blog discussed whether you should use a buyers’ agent and if they are worth the money?Don’t forget, I’m independent!I have no vested interest in whether my clients engage a buyers’ agent or not. I am completely independent.The advantage I have is that over the past 18 years since starting ProSolution, I have seen the performance of many property purchases resulting from advice provided by many different buyers’ agents. Also, like in many industries, the buyers’ agent industry is small. You quickly learn what types of properties different agents are buying, and what the outcomes have been. In short, I have the perspective of being an “independent umpire” for over nearly the past two decades.These are my musings – hopefully they help you and give you some insight.Mostly used by investorMost buyers’ agents aim their services at investors. There are a few buyers’ agents that will work for home buyers. However, buying a home can be a more difficult brief because there are many considerations to take into account as it tends to be a more of an emotional purchase. For the sake of this blog, I’ll focus on investors only.It’s what you don’t know (or can’t see) that could hurt youSelecting an investment-grade property can appear deceptively easy. You would be excused for thinking that all you need is a checklist of items/characteristics to run each property through. However, as I have written about previously, identifying a quality investment-grade property is part-art and part-science. A good checklist and some financial analysis should satisfy the ‘science’ bit. However, you typically need years of experience to fulfil the ‘art’ component.I recall discussing a property with a reputable buyers’ agent a few years ago. The property seemed (to me) to tick all the boxes. However, the buyers’ agent didn’t like the property because the street was renowned for car break-ins. As such, tenant turnover was higher than usual. No checklist will ever tell you that. Similarly, buyers’ agents have previously told me that sometimes a particular side of the street just won’t work from an investment perspective. Sometimes there’s no logical reason for an anomaly such as this – it comes down to experience.A professional advisors ‘experience’ should never be underestimated. In fact, as an independent financial advisor, I know it’s the most valuable attribute that I have to share with my clients. Of course, technical knowledge such as tax and super laws are important. But experience, such as knowing what strategies work in what situations, how markets behave, when to act and when to sit tight and so on are invaluable.It is far cheaper to learn from people’s experience than learn from your own (i.e. trial and error).You only have to be a little bit wrong to miss out on a lot of the investment returnThe difference in investment returns between an average property and an investment-grade property can be significant, especially over the long run. That is, making a few compromises on a property’s quality/attributes will likely result in a lower capital growth rate. A lot of property in Australia exhibits a growth rate at, or slightly above the inflation rate. So, a $750,000 property today might be worth $1 million to $1.85 million in 30 years’ time as illustrated in the table below. However, an investment-grade property should be worth in the range of $3 million to $4.3 million. That is a growth gap of circa $2 million to today’s dollars! That’s massive.See table hereEven the difference between a 4% and 5% p.a. growth rate is significant. When it comes to investing in property and selecting the right asset, you should never make any compromises!What value do buyers’ agents provide?A buyers’ agent might advertise certain benefits such as negotiation skills, access to off-market properties, time savings because they do all the leg work and so on. Of course, these are all benefits but not the main reason you would engage their services in my opinion.The main reason to engage a buyers’ agent is to reduce your investment risk. That is, reduce the risk of investing in a less-than-perfect property. Of course, it’s an investment so it can never be risk-free. There are no guarantees. However, a reputable buyers’ agent with 20+ years of experience is less likely to make a mistake.Investing is all about obtaining he highest return for the lower risk. It is evident from the table above that a small difference in growth rate will make a big difference to the amount of equity you have. A relatively small investment in professional advice to reduce your investment risk could prove to be one of your best investment decisions.How to select a good buyers’ agentGet a referral from someone that you trust and that knows what they are talking about e.g. have used the buyers’ agents’ services previously. Of course, there is lots of research you can do including reading Google, client testimonials, looking at professional recognition and qualifications, meeting in person and so on. However, this is weak evidence compared to a referral in my opinion.You are putting a lot of faith and trust in a buyers’ agent and paying them a lot of money. You must choose very wisely. You need someone that truly understand what makes an investment property work – not a salesman!How are their fees structured?In the main, buyers’ agents will charge to you a percentage of the property’s purchase price after a successful acquisition is completed. This percentage typically ranges from 2.2% to 2.75%, depending on the purchase price. Some buyers’ agents charge a fixed fee. Often, they will also charge a small “commitment fee” when you first engage them – so they know you are serious.A lower fee might seem like better value but be careful. The reality is, there aren’t that many investment-grade properties on the market – particularly this market where stock levels are very thin. So, if I’m charging a much lower fee than my competitors, I need to buy more properties, in less time. As such, there is commercial pressure to compromise on asset selection i.e. buy an imperfect property. However, if I’m charging a higher fee, there is less to no commercial pressure to compromise – it can be a lot more selective. I would rather pay a fee of $25,000 to get a 10/10 property, than a fee of $10,000 to get a 7/10 property (quality wise). A notional $15,000 saving in fee might end up costing me millions of dollars in missed capital growth – just something to be mindful of.Are fees tax deductible?No, unfortunately. Buyers’ agent fees are considered a capital cost and as such are added onto the cost base (so it reduces your eventual capital gains tax liability). Of course, you can add acquisition costs into the loan and the interest is tax deductible.How to instruct themWhen you appoint a buyers’ agent you need to brief them about what type of investment property you want? Sometimes people include their own personal preferences in terms of locations, architectural style and so forth. I advise against this. I believe you should only set two parameters:1. Your purchase price budget; and2. That you want to invest in a property that has the most compelling fundamentals that will drive the higher capital growth in the long run. Everything else is secondary.These are the only two factors you need to be concerned with. Fall in love with the property’s capital growth prospects, not its location or appearance. Remember, it’s a pure financial decision.Selecting the right property is fundamental to your successIt is tempting to try and select an investment property yourself so that you can avoid paying a buyers’ agent a fee. However, in many situations, it’s a false economy. An experienced and reputable buyers’ agent will pay for themselves in improved investment returns and/or lower investment risk. Quality professional advice (be it tax, property, financial, etc.) often seems expensive in the short-run but very cheap in the long-run.
Borrowing to invest (in property or shares) is typically a good wealth accumulation strategy as long as you do it prudently and adopt a proven methodology to select quality investments. If used wisely, debt can be a very effective tool. However, whilst your investment strategy might require you to get into debt, the strategy must also articulate how you will get out of debt (i.e. repay it). This blog sets out some of these strategies.How much debt is safe to take into retirement?You must think about your interest rate sensitivity in retirement. For example, if you have $2 million of borrowings, an interest rate increase of 1% will cost you an extra $20,000 per year. If your only source of income is from investments and super, that increased amount of interest might have a big impact on your cash flow and standard of living.Generally, you want to aim for a debt level that is far less sensitive to changes in interest rates. Worrying about interest rate changes is the last thing you want to do in retirement.One thing I always aim for when developing a strategy is that I definitely do not want any negative gearing in retirement. That is, your investment property portfolio (if you have one) should at least be paying for itself i.e. rental income covers all expenses including loan repayments. It doesn’t necessarily have to generate a lot of income (depending on the client’s situation of course), but we don’t want to be in a position where your property portfolio is sucking out cash flow.Having zero debt might not be an optimal strategy either. A conservative amount of leverage will allow you to build wealth more aggressively, particularly in the first decade of retirement. I would argue however that you want to aim to have more conservative levels of debt when you are retired (compared to when you are working).Debt repayment tacticsWhen formulating a long-term investment strategy for my clients, there are a number of strategies we can employ in the strategy that allows us to reduce debt to an acceptable level prior to retirement.Buy an asset specifically to sellSelling assets to repay debt solves one problem (i.e. reduces debt) but can create another i.e. it might mean that you have insufficient remaining investments to fund your retirement.However, if you formulate a strategy from the beginning that is premised on the idea that you will sell an asset as a debt reduction mechanism, you can proactively plan around this. Firstly, it would be wise to focus on ways to reduce your Capital Gains Tax (CGT) liability such as owning the asset in a family trust, tenants-in-common or in your super fund. Secondly, you can select the most appropriate asset and location that best suits this strategy. For example, if you are planning to sell the asset in 15 years’ time then I would consider buying a house that you could add value to (e.g. renovate, sub-divide or develop) – so that you were not totally reliant on the market to generate equity in the property.Owning that house in a super fund would mean that you could avoid CGT altogether if you dispose of the property post retirement (in pension phase). For example, if you purchase a house in a blue-chip suburb in Brisbane for $850,000 and it appreciates in value by 7% p.a., I estimate you will net circa $1.4 million in cash after repaying the loan and all costs if you sell it in 15 years’ time. That should be enough to make a significant reduction to your debt.Use surplus cash flowYou can direct some or all of your surplus cash flow into offset accounts to notionally reduce your debt. As discussed in my blog last week, good cash flow management is imperative to build wealth. Directing monies into offset accounts does two things. Firstly, it reduces your net debt exposure and cash flow sensitivity to changes in interest rates. Secondly, it improves your investment portfolio’s liquidity because you have immediate access to cash should you require it. This might help you transition to retirement before you have access to super (which is age 60 if you are born after 30 June 1964), for example.Withdraw some monies from superAfter age 60, you can withdraw your super tax free. Depending on your super balance, debt exposure and other investments, it may be appropriate to withdraw funds from super to repay debt. Of course, in retirement, super is a zero-tax environment (if your balance is less than $1.6 million), so it’s wise to keep as much money in your super account for as long as possible. However, this might be a good ‘plan B’.Reduce debt so investment property/s cash flow is neutralGenerating good returns from investing in property can take many decades. That is because compounding capital growth takes at least 10 to 15 years before it starts to produce significant equity gains, as described in the short video below.https://vimeo.com/352381658 Therefore, one strategy could be to reduce your net debt (through depositing surplus cash flow into offset accounts) to the extent that the rental income is sufficient to pay for the property’s expenses and loan interest i.e. break-even. This means you will be solely reliant on your super to fund say the first 10 to 15 years of retirement after which, the property should have benefited from significant equity growth over that time (assuming it’s an investment-grade asset).Downsize your homeI am very cautious about formulating a strategy that relies upon crystallising equity from downsizing the family home. The reason being is that whilst people might like to downsize in terms of accommodation size, it might not necessarily translate to a downsize in terms of value. For example, if your family home is worth say $2 million, an alternative new-build, luxury townhouse in the same area might cost say $1.5 million. In this case, net of costs, you may not crystallise as much cash as you expect.However, in some limited situations, where appropriate, I will assist clients in formulating a strategy that includes downsizing the family home and using some of the proceeds to reduce debt.You need more than one tacticYou must adopt more than one of the above debt reduction tactics. That way, if one fails, you always have a plan B. For example, you might rely on cash flow to reduce debt. If that doesn’t end up delivering the amount of debt reduction desired or expected, then you can withdraw monies from super or sell a property for instance.What is your plan?Many financial plans require investors to get into debt. However, a plan is not complete if it doesn’t address how the investor will eventually repay their debts at some point. And if you want to retire within the next two decades, debt reduction is something you need to start considering, if you haven’t already done so. Of course, we are here to help, if you need it.
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 unlikely that you will have a comfortable retirement. For most people reading this blog, superannuation will not be sufficient to maintain their current standard of living for the rest of their life.In terms of what you should do with your cash flow surplus, well that depends on your circumstances. There are lots of options including repaying debt (extra repayments or money in offset), additional super contributions, borrowing to invest (i.e. servicing borrowing costs), investing in shares, saving in cash/term deposits and so on. If you are stuck, this video might give you a hint about which of these options might suit you best. Of course, you should seek independent, professional advice.You can’t manage what you don’t measureAs the subheading says, you cannot manage what you do not measure, so that is your first step. If you do not know exactly what you spend (I don’t mean guess), you must work it out. Once you have done that it will reveal three very important numbers:1. How much on average you spend each fortnight or month – this is important, and the figure might surprise (scare) you. It will also then allow you to calculate how much surplus cash flow you have to invest.2. The split of your expenditure between discretionary (shopping, eating out, etc.) and non-discretionary (food, health, insurance, utilities, etc.) items. This will be important in future planning i.e. you know how much cash flow you really need to survive.3. If you are spending money on discretionary items that add very little to your standard of living (enjoyment) – these expenses are wasteful and should be minimised or eliminated – especially if you can’t afford it!These few pages (click here) from my book Investopoly will walk you through the process of quickly ascertaining how much you spend and on what. In summary, you download all your transactions for the past 3 months into a spreadsheet and allocate them into 7 categories and look for trends and savings. Check out our list of financial hacks for saving ideas, especially utilities.In this video I walk you through the process i.e. how to download your transactions from internet banking and sort then in Excel.Once you have completed this exercise, it should be easy for you to calculate the three important numbers referred to above. In this blog, I set out what you should be spending – so check this out to ascertain whether you are “spending too much” or living beyond your means.Two easy steps to rectifying your spending behavioursWhat do you do if you identify you don’t have any surplus cash flow and/or you feel you are spending too much money? Well, there are two steps that you can take that I have found to be very effective, both personally and professionally.One-month spending embargoFor many people, spending habits are very similar to eating habits. That is, unless you consciously exercise regular discipline (i.e. say no to the little voice inside your head that is telling you to say yes… e.g. eat that additional bit of chocolate), your behaviour will slip, little by little, and bad habits form. Before you know it, you’re eating whatever your little voice tells you. Spending is no different – it takes conscious and regular discipline.The best way to recalibrate your spending is to agree to a self-imposed spending embargo for a period of time, such as one month. During this month you avoid any discretionary spending and save as much money as possible. One month is short enough for you to stick to it (because it is unsustainable to not spend any money on discretionary items) but long enough to make you take notice of your spending habits. There are two benefits of doing this. Firstly, it highlights how much you really spend – all the small items do add up! Secondly, once the embargo is over, you will find that you are more conscious about your spending decisions. The one-month embargo should help you break any poor spending habits you may have slipped into.Set up your banking so that your surplus is locked awaySimilar to the method popularised in the book, The Barefoot Investor, you should operate multiple bank accounts. That is, it is probably okay to continue to operate your accounts exactly how you have been doing so except for establishing a new ‘surplus bank account’ (this could be an offset account linked to a loan). If you have worked out what your surplus income is (or should be) $20,000 per year, then set up an automatic transfer of $770 per fortnight into that ‘surplus bank account’ and don’t touch it. You can then spend what is left over. As Mr Buffett says, “Don’t save what is left after spending; spend what is left after saving.”How often should I check my cash flow?Ideally, you should undertake this cash flow analysis (i.e. review past 3 months of transactions) every 12 to 24 months as bad habits can form slowly and go unnoticed. That said, if you are operating a ‘surplus bank account’ as described above, it will be very easy for you to monitor your compliance.And once you have your cash flow under control…If you feel confident that you have control over your cash flow and you have a surplus to invest, it might be time to map out at long term investment strategy to ensure you are investing that surplus as efficiently as possible. In that regard, I would welcome the opportunity to have a chat, click here.
To watch the full presentation, go to https://www.prosolution.com.au/recovering-property-market/
Two weeks ago, APRA told the banks that it no longer expects them to use a benchmark interest rate of 7.25% when testing an applicant’s borrowing capacity. Instead, they must add a buffer of at least 2.50% onto the loan’s interest rate. Given most home loan interest rates are in the 3’s, that could substantially improve your borrowing capacity.The banks are starting to push back on regulatorsUntil now, the banks have remained relatively silent about the government’s crackdown on lending standards which has resulted in a severe reduction in borrowing capacity. Of course, they have wanted to stay out of the limelight given recent bad press from the Royal Commission. However, they have now found their voice and have said the level of tightening is impractical, anti-competitive and potentially damaging to the economy.ASIC will hold public hearings in in August as part of its public consultation process. The banks will have an opportunity to voice their concerns in a more public arena.How banks assess your borrowing capacityThe banks will typically make a number of adjustments to assess your ability to service debt. Whilst all lenders have different rules, the below formula summaries the banks typical approach.See table here: https://www.prosolution.com.au/borrowing-capacity-increased/ The table is a generalisation. Due to differences in policies and your situation, each lender might apply slightly different methods.The impact of the recent benchmark interest rate reductionLast week both ANZ and Westpac announced that they will use a lower benchmark interest rate when calculating borrowing capacity i.e. not 7.25%. They will use the current rate plus 2.50%. This increased their borrowing capacity. I compared the big 4’s borrowing capacity using the same inputs and the table below summarises my findings.See table here - https://www.prosolution.com.au/borrowing-capacity-increased/ ANZ’s borrowing capacity has increase by 20% whereas Westpac’s only increases by 8% because it made some changes to minimum living expenses – they give with one hand and take with the other. It is interesting to note that ANZ and nab’s borrowing capacity vary by almost 17%! This demonstrates that it’s important to compare a number of lenders.Please don’t conclude from this that ANZ’s borrowing capacity is always higher than nab. There are so many variations in policy, calculations and individual client situations that this may not always be the case.Living expenses are the real problemThe more debt you have, the greater the impact the benchmark interest rate will have on your borrowing capacity. However, for most people, the treatment of living expenses is the main thing destroying borrowing capacity at the moment.The problem is the banks do not treat discretionary and non-discretionary expenditure differently. Therefore, if you eat out every week and spend $200 per meal, it is assumed that your ongoing annual commitment is $10,000. And that alone reduces your borrowing capacity by approximately $130,000.But of course, that is nonsensical. If you experienced cash flow pressure, of course you would eat out less often (or maybe not at all). Therefore, maybe the banks should only include a portion of a borrower’s discretionary expenses e.g. say 50% - to make allowance for the fact that you do have the discretion to reduce them in order to meet your financial commitments. Eating out is not a financial commitment!Will this loosening in credit policy stimulate property price growth?The diagram below charts the monthly volume of total new housing finance commitments (excluding refinances) from 2002, when the data set began, and 2019. I have adjusted the amounts for the impact of inflation. I have compared that to the annualised change in median house values over a rolling 3-year period (for Melbourne, Sydney, Brisbane and Perth).It is important to observe that credit flows have been relatively volatile – ranging from $15 billion and $25 billion per month over the period.See chart here - https://www.prosolution.com.au/borrowing-capacity-increased/ There doesn’t appear to be a perfect correlation between credit flows and property prices (except for maybe the past 5 years). For example, you will notice that credit volumes fell by 21% between September 2009 and March 2012. Over this period, the Australian median house growth rate was only 3.3% per annum according to the REIA – although Melbourne and Sydney did better with growth of 4.7% per annum. This period of growth was still well below trend, but not as bad as the last few years.In any case, it is reasonable to conclude the credit flows do have a significant impact on property price growth and the recent easing of credit should contribute to the property market’s recovery.Are auction clearance rates really a good indicator that the market is recovering?The media have cited an improvement in auction clearance rates as an indication that the property market is recovering. Clearance rates at the start of the year were close to 50% in Melbourne and Sydney. More recently, they have increased to around 70%. However, there are very few transactions. In terms of property numbers, new listings are down by around 30% over the past 12 months. In terms of the value of property sold, only $138 million of property changed hands last weekend – well below a peak market volume of $1 billion.Therefore, I do not place a lot of weight on the improvement in clearance rates, although it is a positive signal. It is very difficult to get a true sense of the market with such low volumes. The spring market should be a good test.Reminder that markets can change quicklyOne thing you must be mindful of is that the market can change quickly. Prices can jump significantly from one weekend to the next and it is difficult to ascertain whether the move is permanent or not. If the price movements are permanent and you don’t quickly change your expectations accordingly, it could cost you a lot more in the long run. This is where it is important to have an experienced and reputable buyers’ agent advising you. A lot of money is at stake and it’s too risky to try and do it all yourself. Your lack of experience may end up costing you more than what a buyers’ agent will charge.If you have any questions about your borrowing capacity, please do not hesitate to reach out to us.
The Australian and US share markets reached all-time highs at the end of last week. This is great news for superannuation returns and existing share investors. However, where will the markets go from here?When valuations are high, future returns will be lowThere is a strong negative correlation between the starting valuation multiple (e.g. price-earnings ratio) and an investor’s subsequent 10-year investment returns. That is, if current valuations are high, future returns are likely to be low. This makes sense because if you invest in a company or market that is currently fully valued, there isn’t a lot of upside left. In fact, it could be that you are overpaying to invest in that company or market. If that is the case, you could experience capital deprecation.The US market valuations appear elevatedThe CAPE ratio is a widely accepted measure of a market’s current valuation relative to history. Currently, the US market’s CAPE ratio is over 30. The long-term average is in the range of 18 to 22, depending on the period and adjustments made. The US CAPE ratio has only been above 30 two times since 1871:* in 1929 when the share market crashed nearly 25% (Black Tuesday) – the CAPR ratio was 32.5; and * in December 2000 when it reached 44 during the dot-com boom. The NASDAQ-100 lost 78% of its value between 2000 and 2002 (called the Dot-Com Bubble).
Am I saying that the US market will crash? No. In fact, the CAPE ratio is not a reliable indicator of short-term market movements, only long-term (10 year) returns. But this analysis does indicate that US market valuations are alleviated and as such, history tells us that future returns will likely be lower.What about Australia and rest of the world?Australia’s CAPE ratio is currently 18.4 which is above its median at 16.5. Fair value is considered to be 17.1. So, whilst the Australian market appears to be slightly overvalued, the differential isn’t as much as the US and other markets. It is important to note that most developed markets appear elevated at the moment – except for the UK and Europe.There are some headwinds to considerThere are a few headwinds that might impact future equity market returns including:* The US is arguably towards the end of an economic growth cycle. Whilst the employment market is still going strong with a record low unemployment rate, jobs growth and an uptick in wage inflation, it can’t go on forever. The S&P500 index has appreciated by more than 15% per year over the past 10 years. The only question is whether the slowdown will be a soft or hard (recession) landing? * The RBA has expressed some concerns in regard to the Australian economy namely low wage growth and subdued consumer spending. If the property market recovers, that might improve consumer confidence. But if things deteriorate, Australia might slip into recession. * The UK Brexit debacle is still ongoing. In Europe, the German economy is slowing down and Italy is a basket-case (although is a relatively small economy).
What has driven past growth in the US?The large tech companies are responsible for driving a lot of share market returns in the US over the past decade. As illustrated below, the aggregate value of the FANMAG (Facebook, Apple, Netflix, Microsoft, Amazon, & Google) companies is now circa $US3.4 trillion. Except for the US and Japan, that is more than the entire value of other developed country share markets! Some of these tech companies are trading at very lofty valuations e.g. Netflix’s PE is 139 and Amazon is 82! Tech company valuations are rarely underpinned by fundamentals. For example, Uber’s current market value is $US83 billion – that is similar to BHP’s value – except that BHP makes over $AUD10 billion profit per year whereas Uber doesn’t many any profit!Chart: https://www.prosolution.com.au/wp-content/uploads/2019/07/FANMAG.png?189db0&189db0The answer: focus on qualityThe table below sets out the expected components of overall expected future investment returns in the next 10 years. As noted, the drag created by currently high valuations may have a significant impact on returns – particularly in the US.Table: https://www.prosolution.com.au/share-market-expectations/The best way to mitigate this is to use a value investing approach. Economist, Ben Graham is regarded as the father of value investing and taught Warren Buffett at university. Buffett practices much of what he learnt from Ben Graham.The core tenant of value investing is to invest in companies and markets that look cheap relative to your assessment of intrinsic value. For example, a value investor wouldn’t invest (or would significantly reduce their investment) in stocks such as Amazon, Netflix and Uber.The chart below (courtesy of Schroders) compares the performance of value versus growth strategies between 1936 and 2018. It shows the value has under-performed for the past 6 years. For example, I regard Roger Montgomery as Australia’s best active fund manager (even though I’m an active fund management non-believer) and his firm has under-performed over the past 5 years too!Chart: https://www.prosolution.com.au/wp-content/uploads/2019/07/Fama-French.png?189db0&189db0 Uber (and lots of tech companies) is a good example of why value investing has under-performed. The market hasn’t rewarded companies based on fundamentals. As Buffett says, the stock market is a popularity contest in the short term. Tech has been very ‘popular’ and the current high valuations reflect that popularity. If history is anything to go by, that won’t continue forever. History tells us that the market will “correct” and valuations will be re-weighted according to fundamentals – which is effectively what happened in the early 2000’s.Use a combination of growth and value index strategiesThe best way to protect your investments from the risk of a market valuation correction is to use a combination of index (passive) strategies. Traditional market cap indexing is more akin to a growth strategy and as such, has performed well over the past 5 to 10 years. Alternative strategies such as fundamental indexing and dimensional are value strategies and have under-performed recently – see this blog for more about these strategies).The best thing to do is use a combination of strategies. However, research demonstrates that most investors are typically too late to make this change and miss a lot of the returns. That is, greedy investors won’t want to switch into a lower returning strategy (i.e. value) now. Instead, they keep investing in growth stocks until the correction occurs. But that will be too late, and they will miss a lot of the potential returns. The chart below (from this study) illustrates that the dollar weighted return is circa 2% p.a. below a buy and hold strategy (this chart also highlights that growth underperforms against value).Chart: https://www.prosolution.com.au/wp-content/uploads/2019/07/late-to-party.png?189db0&189db0 Consider making the change nowThe challenge for successful investors has always been to resist what is popular and instead do what is sensible. You can’t expect to jump on the most popular approach year after year and produce quality returns in the long run (this is called “trend chasing”). It just doesn’t work. Bitcoin is a good example of this.Share investors must consider adopting a greater tilt towards a value approach now, even though recent historical performance doesn’t support such a change.
I say “no” more often than I say “yes”. That is, I decline or defer the opportunity to work with more people than I agree to work with because, ultimately, I think it’s in their best interest. Not everyone is ready for tailored financial advice for lots of reasons as I discuss below.Products are easy to sell, tailored advice is notIt’s very easy to buy a financial advice ‘product’ such as a property investment plan. But it’s much harder to buy tailored advice. A product has a clear deliverable e.g. here’s an example of a property plan. You know exactly what you will receive and what the advice is likely to look like.However, with tailored advice, the deliverable is less certain. Because until I do the work (i.e. formulate the strategy), I don’t know what the advice will look like. Maybe it involves super, shares, property or a combination of all three? I might have a hunch, but I won’t know for sure – because that’s what you are paying me for. That is, to:(1) not have a premeditated idea of what your strategy should or shouldn’t include (these often exist due to a vested interest); and(2) to clarify something that is currently unclear e.g. what is the best strategy to fund retirement. If you or I already knew the answer to this question, I wouldn’t need to do any work.However, selling a product is scalable and some businesses do very well out of it. A product is a systemised way of generating financial advice. The business doesn’t need to hire experienced advisors – as the ‘system’ will do all the work. Whereas there is only one Stuart Wemyss (thankfully, I hear some people think). So, my advice is not scalable. But that’s fine because that’s what my clients are paying me for – my experience and professional advice specifically tailored for their situation.Financial ‘products’ often offer limited value because they aren’t completely tailored to meet a specific client’s situation. I can design a great property portfolio and prepare some cash flow projections but that doesn’t mean it will suit everyone. How does the property integrate with your other assets such as super? What about debt management (you don’t want to take a lot of debt into retirement)? What about existing assets and cash flow?If you are seeking advice from a professional, its important to ask yourself whether you are buying a product or tailored advice. Buying tailored advice means you need to put faith and trust in the person that is advising you – and that can be a difficult decision. Just because it’s easier for you to buy (and someone to sell) a product, doesn’t mean it’s worthwhile.But not everyone is ready for tailored advice. Here is a list of reasons that I decline or defer to work with prospective clients.Lack of cash flow surplusA prospective client must have surplus cash flow to invest. It is normally impossible to develop a retirement strategy without it.Surplus cash flow refers to the situation where your expenses and commitments are less than your income i.e. you have monies left over every fortnight or month. If you are spending all your income, there is not much I can do for you as a financial advisor (other than counsel you to reduce your spending).Generally, a prospective client needs to have a minimum surplus cash of over $1,000 per month to justify paying for advice.Building wealth when you have a young family is very challenging because your income is typically unusually low (either or both parents are not working as much) and your expenses are unusually high (childcare is often more expensive than private school fees!). I discussed this challenge in this video previously. If you are in this situation, you might be better off waiting until all your children are in primary school before you consider developing a plan.Too much debtSome people have a lot of debt and it is obvious to me that they should be directing 100% of their surplus cash flow towards repaying and reducing debt – not forever – but at least for now. In this situation, I would typically suggest that person focus on debt reduction and come back in 2 to 3 years’ time. This will demonstrate that they have the financial discipline to consistently direct surplus cash flow towards improving their financial position.Too much uncertaintySome level of uncertainty is almost always present, and we must plan around it. However, sometimes clients are contemplating substantial changes such as moving overseas, change in income or occupation, potential redundancy and so on.When faced with uncertainty, I typically tell clients to wait – even if it’s one or two years – as the uncertainty will usually disappear. There’s no point investing time and money now to develop a plan if your situation will materially change in 12 months’ time and we might have to redo the plan. I appreciate that having a plan creates more clarity and therefore more certainty. But that’s more of an emotional driver than a practical one. My job is to put emotion to the side and advise you on the best practical path.Borrowing capacityNot all financial strategies involve borrowing to invest (in shares or property). However, for people in their early 50’s or younger, many strategies will involve some level of gearing (borrowings). So, if you currently don’t have any borrowing capacity (or I don’t think it’s prudent for you to borrow now), then perhaps its best to wait until you do. That is assuming we expect your borrowing capacity to improve in the coming months or years.Not suited or aligned to work together (e.g. to property or strategy).Firstly, I have a very clear and disciplined investment methodology and philosophy that I always follow (as outlined in Investopoly). I don’t believe we need to speculate with our money. Instead, we should only invest if there’s an overwhelming amount of evidence that demonstrates we’ll be successful (that’s called evidence-based investing). As such, my clients and I must be aligned with these methodologies and philosophies. There’s no point working with a client that holds philosophically competing views.Secondly, I must be totally confident that I can add value – way more than what I might charge in fees. For example, if a prospective client is a property developer (or wants to get into property developing), I tell them I’m not the best advisor for them. They should find someone that can add value to that process – someone that has more experience in property development than I do. Similarly, if I feel the person is already on the right track or there’s limited ability for me to add value, I will not take them on as a client.Quality advise is not scalableI believe that quality advice is not scalable because it requires part science and part art. The science portion is the financial analysis, tax knowledge, proven investment strategy and so on. In a way, that’s the easy bit and is scalable. The art portion is derived from many years of experience – knowing what will work and won’t, problems with implementation, likely changes in the future we need to accommodate and so on. Experience is personal and difficult to scale or replicate. I believe the most valuable thing I offer my clients is my 20 years of experience – they will learn from all the mistakes and successes that I have seen professionally and made personally. That is the art portion.
Every few years The Economist magazine writes a story about how property in Australia is overvalued compared to other countries – or something to that effect. Comparing Australia with other countries is like comparing apples and oranges. Australia is just so different. But this difference creates opportunities for investors that play the long game. Let me explain.Big country and not enough taxpayersI recently spent a few weeks travelling around France. It is so easy to get around. Its roads are in very good condition and the trains are fast, efficient and on-time.It is easy to overlook that France would fit into Australia 14 times and its population is over 3 times more than Australia (25 million versus 76 million people). On average, there are 122 French people per square kilometre of land. In Australia, it’s a measly 3 people per square kilometre (and in the USA, 33 people).In Australia, we have too much land and not enough taxpayers to fund the construction and maintenance of adequate infrastructure. Therefore, in order to access good schools and universities, diverse employment opportunities, health facilities, amenities and lifestyle benefits, you must live close to or in a capital city. That’s why 60% of Australia’s population live in either Melbourne, Sydney, Brisbane or Perth. Whereas only just over 3% of France’s population lives in Paris. Living outside of Paris (in say Lyon or Toulouse) isn’t a big disadvantage. (BTW, I haven’t selected France for any particular reason – just using it as an example)Australian federal and state governments have tried to promote regional centres such as Newcastle and Wollongong in NSW or Geelong and Bendigo in Victoria to take pressure off capital cities. However, they just cannot compete with the large capital cities.Only solution is a massive infrastructure spendIn my opinion, the only way the Australian government will solve the housing affordability challenge is through embarking on a massive infrastructure spend. Improved public transport, fast trains, better roads are some of the things that Australia needs. Essentially, they need to make it easier to live 30km to 100kms away from the CBD by reducing travel times.For example, trains in France travel at speeds of up to 300km per hour. That means a train could travel from Melbourne to Geelong in approximately 16 minutes. Houses are a lot cheaper in Geelong compared to Melbourne – you can buy a large family home in a good suburb for under $1 million.However, as noted above, Australia just doesn’t have enough taxpayers to fund this very costly infrastructure.Australia has over $150bn invested in the Future Fund. These monies were quarantined to cover unfunded government superannuation liabilities – but the government has indicated that it doesn’t intend on drawing from the Fund for at least another 6 to 7 years. This means it will accumulate even more surplus monies (it currently has $14bn of surplus monies). Arguably, the government could draw on these funds to invest in Australia’s future (i.e. infrastructure projects) – preparing us for the next two to three decades i.e. let’s plan for the long term!In any case, Australia’s geographical and infrastructural challenges are complex and very costly to solve. Australian governments have a long history of not planning for the long term and building outdated infrastructure (think NBN) So, I’m not optimistic of this challenge being addressed anytime soon.Nothing beats proximity to CBDI acknowledge that some people enjoy living in the country or regional towns – the city is not for everyone. However, for the majority, the amenities, educational options and employment opportunities (amongst a lot of other things) that capital cities provide are a massive draw card.That said, transportation is a growing problem. One of our team members took an hour to get into work last week and she lives 11kms away from the CBD! Our public transport systems are a joke. Our roads are getting busier. This means the closer to the CBD you are, the more transport options you have, and this alleviates some of these headaches.The strong projected population growth will only exacerbate these transport/traffic woes.Living within 15kms from the CBD is advantageous today. And it will be substantially more advantageous in 10 to 20 years!Supply/demand imbalance likely to get worse over the next few decadesThe chart below is courtesy of Pete Wargent (check out his excellent blog here). It charts the growth in Melbourne’s population versus the number of new houses being built. The gap between the red and blue lines is potentially a housing supply shortage.Of course, there doesn’t need to be a separate house for each person i.e. multiple people (i.e. families) will occupy one house, but the trend demonstrates that market is moving towards a supply shortage. (Pete has charted NSW too – here).Melbourne’s population is forecast to reach 5 million by 2021 (currently 4.44 million) and 8 million by 2050. High-rise approvals have fallen by almost half – which means a lot fewer apartments are in the pipeline.Again, the high population growth together will fall in housing supply means we will probably have a house supply deficit. If you overlay that with the fact that inner-ring, blue-chip suburbs will continue to be very desirable (and even more desirable as traffic congestion worsens), a positive investment opportunity becomes more obvious. I believe that at some point in the future, properties in these blue-chip suburbs will become unattainable for people – except perhaps for the very wealthy.Play the long gameThe long-term indicators for investment-grade, inner-city properties are very strong in my opinion. Due to Australia’s geographical and density challenges, inner-city property will always benefit from excessive demand. Australia’s high projected population growth will only exacerbate this imbalance of supply and demand. And supply and demand imbalances inevitably lead to price growth in the long run.In summary, there are two points I would like to reiterate:1. Australia’s unique situation means that its property markets are very different to other countries. There are huge demand pressures on our capital cities. This uniqueness creates investment opportunities; and2. I can’t predict what property will do in the short term, but the longer-term indicators certainly suggest that Australia property will continue its long-term growth trajectory. Investors that take a long-term view, are likely to be well rewarded for their patience.The property market is showing green shoots. Whilst it is too early to call it a recovery, it possibly indicates that the market has bottomed out. If this is correct, now could be a perfect time to invest (if its suitable for you to do so).
Over the past two years, I have highlighted how tight the credit (mortgage) market has become a couple of times. In the past, borrowing was simple. The bank would always offer you more than you wanted to borrow. You only had to provide a few documents and the money was yours!Things have changed dramatically. These days, banks spend most of their time trying to look for reasons to decline a loan rather than approve it. It’s as if they don’t want the business! The onus is on the borrower to prove why they should approve the loan – you are guilty until proven innocent.The other problem is that many bank employees are just too scared to use their discretion. As a result of closer scrutiny from the regulators and the Royal Commission, the banks significantly tightened credit policy. They also tightened their oversight of credit managers to the extent that they are now reluctant to move outside credit policy for fear being disciplined (e.g. loss of bonus or even job)! This creates perverse behaviour such as being highly pedantic, nonsensical and over-analysing due to fear of missing something.In this new environment, borrowers are beggars, not choosers.With this in mind I have listed 11 tactics you can employ to make you ‘loan ready’.1. Start preparing 3 to 6 months outMy first tip is to start preparing for a loan application a minimum of 3 to 6 months in advance. Consider all the tactics I have listed below. If you need to take corrective action, you will have enough time to make any changes. Leaving things to the last minute might reduce the pool of lenders available to you.2. Reduce discretionary spending three months outThe banks will not distinguish between discretionary and non-discretionary expenditure. They will trawl over your bank statements (3 months) to independently verify how much you spend each month and base the loan assessment on that number. Banks have asked questions about once-off transfers to family members, swimming lesson expenses, small charges by Uber Eats, ATM withdrawals at casinos, a Buck’s Night expense (!?) and so on. You would be flabbergasted by the detail they go into. They must spend hours looking at these things – inventing questions to ask! It is very pedantic and intrusive but unavoidable.Therefore, to make it easier on yourself, minimise expenditure three months prior to lodging an application. Reduce as many discretionary expenses as possible. There are two benefits of doing this. Firstly, you will make the loan approval process a lot easier for yourself. Secondly, you might find it enlightening – allowing you to reset your spending habits.If you have a high income, it might not be necessary to do this – consult with your mortgage broker (us) to ascertain how important this tactic is in your situation.3. Control information flowHaving all your accounts with one bank probably makes things simpler and cleaner. However, it also means that bank knows everything about you. When lodging a mortgage application, banks will typically want to review your last 3 months of bank transaction statements (see item # 2 above). However, if you are an existing customer, it means the bank is able to see whatever history it wants. Keep this in mind.If you want to control the information flow, then it’s wise to use a separate bank for your day-to-day transactions from the bank that holds your mortgages (or you plan to borrow from). Also refer to tip # 5 below.4. Consider shifting loans onto different securitiesLenders borrowing capacities can vary a lot. One way to extend your borrowing capacity in this very tight credit market (assuming you have enough equity) is to move your loans onto one or two securities (properties). This may the free up a property that you can take to a new lender that has a much higher borrowing capacity.Some lenders treat external debt (i.e. mortgages with other banks) differently to internal debt and this allows you to borrow more. Therefore, you can leave all your current borrowings with a lender that has a lower borrowing capacity and use a new lender with a higher borrowing capacity for your new loans.The same applies if you dispose of a property. Instead of repaying and discharging the loan, move it onto a different security (property) and reduce the balance to say $100 – so that you can redraw the loan in the future if you want to.5. Be careful with trust distributionsA discretionary family trust can be a good vehicle to assist with tax planning (minimisation) because it allows you to distribute income and capital gains to various beneficiaries at your discretion. This is particularly useful for self-employed persons. Such beneficiaries could include non-working parents and adult children. This helps spread the tax liability across multiple taxpayers. However, as a result of the tight credit environment, lenders are now disregarding some of this income – let me explain using an example.Rick and Karen are self-employed and have a family trust that has $200,000 of income. They have two adult children at university that do not earn any taxable income. Therefore, Rick and Karen decide (as trustees) to distribute $50,000 of income to each family member. However, when Rick and Karen approach a bank for a loan, some banks will only include Rick and Karen’s distribution (not the adult children as they are not loan applicants). This is the case even though distributions are completely discretionary. Again, this approach is completely nonsensical. Not all lenders will take this approach but many of the smaller lenders do. Therefore, you must be careful when dealing with distributions and/or selecting a lender.6. Having a transaction account and/or credit card with other institutionsI have written about credit scoring and the introduction of positive credit data here and here in the past. Whether you are regarded as an “existing customer” or not has a big impact on your credit score (existing customers attract a lower credit score). You can be considered an existing customer if you have a bank account or credit card with a bank (both is better). Therefore, for borrowing capacity purposes, it is wise to have a ‘relationship’ with multiple institutions. This widens your options – as you can eventually borrow from more institutions that consider you to be an existing customer.7. Consider changes in jobs or circumstancesChanging your employer may have an impact on your borrowing capacity. However, if your role and industry hasn’t changed (just your employer), then it’s less likely to be a concern. In any case, the bank will need a least one pay slip before it will unconditionally approve a loan. This has caused some stress for some clients recently in various situations i.e. they moved interstate or returned from maternity leave. We provided employment contracts, verbal employer checks, etc. – but the bank still wanted to see the pay slip (hence my comment about not moving outside of standard policy)! In the past, banks would typically give us a loan approval subject to us providing a pay slip before the loan is drawn – but not these days. So, if you are planning on changing your job, make sure it won’t negatively impact your borrowing capacity.8. Make sure you have perfect conductIt is important that you have perfect banking conduct. That is, all loan and credit cards are made on a timely basis. No late payments, accidental overdrawn accounts or any “administrative” issues.We had a situation recently where the bank would approve a loan for our client but not the bridging finance component simply because a banking administrative issue – where a loan was attempting to take a repayment from an account that was closed, and the client made manual transfers instead. Unfortunately, sometimes those transfers were a day late! The problem was that a higher level of ‘credit’ had to approve the bridging finance component and their credit policy stated that the customer must have perfect loan conduct. The credit manager wasn’t willing to apply any common-sense in this situation and make an exception to policy. Approving the bridging finance wouldn’t have created any additional risk to the bank as the client has already unconditionally sold his previous home.The lesson here is that seemingly inconsequential and administrative matters might come back to bite you. Therefore, pay extra attention to ensure all loans and credit cards are perfectly up to date.9. Property valuations are coming in lowThe number of properties being sold at the moment is 25% to 30% lower than it was 12 to 18 months ago. However, in Melbourne for example, $235 million of property transacted last weekend. At the peak of a boom market, over $1 billion of property could change hands in one weekend in Melbourne. This shows you how little property is selling at the moment – particularly higher value property.This negatively impacts on bank valuations because:1. there are far fewer comparable transactions for a valuer to rely on forcing them to be more conservative with their estimates; and2. the people that have decided to sell property in this market have typically been motivated sellers i.e. they needed to sell for a particular reason. Given the choice, most people would elect to not sell in this market and instead wait for it to pick up. A motivated seller in a soft market is often forced to drop their price in order to secure a sale. This affects comparable sales data and hence valuations.As such, it is commonplace for bank valuations to come in below client expectations. This must be considered when planning/estimating your borrowing capacity.10. Make sure tax is up-to-date and low credit card balancesThis is an obvious tip, but it is important that your taxation affairs are up to date (i.e. all tax is lodged and paid for). It is also best for any consumer debt, particular credits cards, to be as low as possible.11. Be realistic: It takes a lot longer than it did a few years agoThe final tip is to have realistic expectations. A few years ago, there have been times when we could have a loan move from application to unconditionally approval within 24 hours. Today, it takes two to three weeks, on average – sometime longer. We need to provide more documents, answer more questions and do a lot more work. There is no such thing as an easy loan application anymore. So, make sure you are prepared for it to take a lot longer and to be asked more questions.You need an experienced brokerI hope this blog hasn’t scared you too much. Arranging finance is not impossible, its just harder than it used to be. We are still able to successfully assist almost all of our clients. However, the landscape has changed, and these 11 tactics will help you.Whilst I have a vested interest in saying this, I believe that now more than ever you need a savvy mortgage broker representing you. They can provide you with specific advice on what you need to do to become loan ready. And when it comes to lodging an application, they can insulate you from some of the challenges and frustrations caused by lenders at the moment. If you would like our help, please contact us here.
Last week Jarrod McCabe and I recorded a presentation about the ALP's proposed changes to tax laws that impact investors. You can watch it here: https://www.prosolution.com.au/webinar-negative-gearing-replay/ In this week's podcast, I summaries answers to 5 questions we addresses: 1. What is the impact on investors (in dollar terms)? 2. What impact will these changes have on the property market - prior to 1 Jan and after? 3. Is there anything existing property investors should do now? 4. Will these changes get through parliament? 5. Will these changes improve housing affordability? 6. What can investors do to mitigate the impact of these changes?
Here's a link to chart 1. Here's a link to chart 2. I'm on leave for 3 weeks so there won't be any new podcasts over this time. Sorry.
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 returns are provided by way of income and 50% in capital growth – a lot different to property and international shares.Impact of CGT hike on after-tax returnsAs the table below illustrates, asset classes that generate more of their return in the form of capital growth (and consequently, less income), are impacted by the ALP’s CGT policy to a greater extent. Somewhat ironically, it is these types of assets that suit a gearing strategy the best – because the lower income produces a higher pre-tax loss.See table hereThis is a big deal – more costly than the negative gearing ban!Most of the media focus has been on the negative gearing ban but this increase in CGT will cost investors a lot more.I have calculated that the present value of the negative gearing ban over the first 20 years of ownership of a $750,000 investment property to be $82,762. That is the present value of the delayed tax benefits i.e. how worse off you are as a result of this change.However, if you sold the property after 20 years, due to the reduction in the CGT discount (as explained above), your net sale proceeds would reduce from $950,000 to less than $800,000 (in today’s dollars). $150,000 less – or a 19% reduction. It gets worse the longer you retain the asset. After 30 years you will be $275,000 worse off in today’s dollars due to the higher rate of CGT. This is high compared to the present value of the negative gearing changes after 30 years which is $57,124 (lower than after 20 years because you eventually benefit from the carried forward losses).So, in summary, the negative gearing ban will cost you $57,000 and the CGT hike will cost you $275,000. Which one are you more concerned about?What should you do?You might be excused for concluding that you should only invest in income-style assets (such as Aussie shares) if the ALP wins the election. However, concentrating your investments in one asset class is never a good idea.The best way to minimise capital gains tax is to use entities. A super fund is the best entity as it has a zero-tax-rate in retirement (i.e. pension phase assuming your account balance is less than $1.6 million) and therefore is protected from these proposed CGT changes.The next best entity is a family trust because, as the law currently stands, you can distribute a capital gain to a number of beneficiaries. This allows you to share the CGT liability amongst your family members. Although the ALP has also suggested it will start charging discretionary trusts a flat tax rate of 30%.Apart from using entities, investors should think about sharing ownership with their spouse. The goal should be to have relatively even asset ownership (both in and outside of super) by the time you reach retirement. This will ensure you are well positioned to weather any future tax changes.Planning is the best solutionThere certainly will be a lot of changes coming our way if the ALP wins the election on 18 May. And whilst on the face of it they seem entirely negative, I’m sure they will create market opportunities for investors astute enough to look for them.Like everything to do with building wealth, you must take a long-term approach, invest in quality assets and ensure you receive good, independent strategic advice – so that you retain as much wealth as possible. This is as true today as it was 30 years ago – nothing has really changed.This blog is an edited version of an article written by Stuart Wemyss published in The Australian on 26 April 2019
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 advisor) and possibly taxation (tax agent).Some decisions are relatively simple and only need brief input. However, more complex issues can result in a lot of back-and-forth between the different advisors before an optimal solution is found. The risk in this situation is that its open to miscommunication, misunderstandings and/or omissions.Who’s responsibility is it?Who’s responsibility is it to ensure all your advisors are engaged in dealing with your financial matters when appropriate? There are three possible solutions:1. You need to take responsibility for this. This means its your responsibility to ensure you communicate with each individual advisor and ensure any plans and advice is shared amongst them. My key bit of advice is that there is no downside to oversharing. That is, be careful to assume that a bit of information isn’t relevant because you don’t know what you don’t know. Share everything and let your advisors decide what is relevant or not.2. Engage a holistic independent firm. The firm should be independent and hold all three key licenses (AFSL, ACL and Tax Agency). Secondly, the firm must have a good collaboration culture – so they are sharing information about clients amongst themselves – rather than working is silos. I know that this is easier said than done as a lot of effort in our business goes into ensuring we are effective sharing information between ourselves.3. Engage a group of firms that have a deep relationship with each-other. If you deal with independent businesses that know and respect each-other there is a greater chance that they will pick up the phone and share ideas/solutions about your financial situation. You will still need to facilitate and encourage the communication, but it will be easier.There are non-advice benefits tooIf we have set up insurances for a client, then our tax accountants know to ensure they claim a tax deduction for their income protection premium. Similarly, if we have set up a client’s loan structure, we will ensure those interest deductions are correctly reflected in our client’s tax returns. When the right hand knows what the left hand is doing, nothing gets missed. Its our responsibility to ensure we pick these things up, not yours.Holistic might not suit everyoneThe key point I want to get across is that many financial decisions require a multi-disciplinary approach which means you must ensure all your advisors are included in the conversation. Most people don’t have the knowledge and experience to identify what information is relevant to each advisor. Any omissions or miscommunication can cause expensive and sometimes irrevocable mistakes or missed opportunities. If you acknowledge this fact, then you must select one of the three solutions above.Ultimately, the more eyes you have looking over your financial circumstances, the greater the chance of you maximising your opportunities. Over the past 17 years of operating a multi-disciplinary, holistic financial services business, I observe this benefit on almost a daily basis.
An investment property should be selected based on the likelihood of it generating strong capital growth rather than secondary benefits such as rental yield or negative gearing. However, saying that, this doesn’t mean we shouldn’t maximise the gearing benefits of your current or future investment property to save on tax! So, if you’re looking to purchase an investment property or currently have one, these are some commonly missed methods/deductions that will help you get the most from your investment property: 1. Depreciation schedulesClaiming depreciation and the associated capital works deductions is a significant taxation benefit, and one which many property investors are unaware of. Depreciation is a non-cash deduction meaning you do not need to spend any money to claim it.As your property ages and items within it wear, they depreciate in value. The ATO allows deductions for this wear and tear. Deductions can be claimed on the building's structure and items considered permanently fixed to the property. Further deductions can also be claimed on the plant and equipment assets contained within it.To claim depreciation deductions, property investors need to engage a specialist Quantity Surveyor to complete a capital allowances and tax depreciation report. When completed, the report outlines the deductions available for both capital works and plant and equipment items on an income producing property and is used each financial year when preparing tax returns. The cost of obtaining this report is also tax deductible.Click here for an update to the depreciation laws since this blog was published. 2. Prepay interestIf you anticipate your income to substantially decrease in the next financial year due to factors such as maternity leave or redundancy, prepaying your interest in the current financial year will allow you to reduce your current higher taxable income – maximising your tax savings. 3. Statement of adjustmentsThe purpose of the Statement of Adjustments is to calculate the exact amount the Purchaser will need to reimburse the Vendor on the day of settlement for the property’s annual costs already paid by the vendor for the remainder of the year. These expenses can include, but are not limited to council rates, water rates and body corporate fees. Many property investors are unaware of these expenses paid upon settlement and are usually missed as a rental expense within the first year when the property is acquired. 4. Borrowing expensesThe cost of establishing a loan can sometimes be quite substantial with some loan establishment fees costing in excess of $2,000. These costs are more often than not missed as it forms part of the loan proceeds and let’s face it - we’re always more interested with the interest expense rather than the menial bank charges!5. Waiting until tax time to get a refundMany employees don’t realise that they are entitled to vary the tax subtracted from their salary to ease the cash flow burden of investing in property (called PAYG withholding variation). This means you can enjoy the cash flow savings sooner – rather than waiting until the end of the financial year.Of course, there are more… The above is not an exhaustive list of investment property deductions – just a handful of the deductions I have found are commonly missed. Of course, there are many more expenses that can be claimed to help reduce the tax you pay. The ATO produce a guide each year to help investors but you really do need to use an expert.Experts in investment property taxWe look after hundreds of property investors and help them maximise their taxation benefits. We know where the boundaries are. Therefore, if you need help, please do not hesitate to reach out to us for a complimentary discussion.Visit this page and scroll to the bottom to download our tax deduction checklist: https://www.prosolution.com.au/commonly-missed-investment-property-tax-deductions/
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.<< Chart - click here >>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.<< Chart - click here >>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 on future growth:* New apartment supply peaked a few years ago at 35,000 apartments per year. Ten years prior to this, the average annual apartment supply was in the range of 10,000 and 15,000. * Tightening in laws permitting sales of apartments to non-residents in the past few years has dramatically reduced demand for new-build apartments. * Tighter credit has significantly reduced borrowing capacities meaning fewer people can qualify for a loan. This makes it more difficult for developers to sell apartments. * Approvals for apartments in Melbourne and Sydney have reduced dramatically (see chart by Pete Wargent here). This will have an impact on supply for the next few years. * New apartments show a lot of wear-and-tear after as little as 3 to 5 years. They lose their initial ‘shine’ very quickly. This makes older-style apartments look more attractive by comparison. Also, given changes to laws, recently built apartments offer no depreciation benefits to secondary buyers. * Melbourne’s annual population growth is approximately 125,000 – so it won’t take long to soak up any excessive supply.
Work your way downIn summary, you need to understand the performance of different markets (states). Then the performance of different assets (apartments, houses, townhouses, etc) within each market. And then distinguish between any suburb or geographical considerations. This knowledge helps you assess past performance and, more importantly, form a view on expected future performance on which you can base future investment decisions.What should you do with this information?You can use this information to your advantage in two ways:(1) Have patience and disciplineYou must have patience. Property is a long-term asset and you really need to hold an asset for 30 years to enjoy the significant benefits it offers. Entry-level investment-grade assets in particular do take longer to deliver returns. Therefore, it is unfair to buy a property and expect to see results after only a relatively short period of time. It’s a little bit like declaring a winner at an ALF game at quarter-time (although you can probably safely do that if you’re playing Carlton!).Also, you must have the discipline to stick to, and believe in, the fundamentals of an asset. If it has performed in the past, has a strong land value component and is a scarce asset (i.e. its investment-grade), it will work out in the long run. Have faith. You’ll be rewarded for it in the long run.(2) Fundamentally sound approach with a strategic tiltYou can use this information to be more strategic with the implementation of your investment strategy. Let me be clear. I am not suggesting you speculate and do things like invest in an unproven location on the hope/view that growth is going to pick up. Definitely not! You must always stick to a fundamentally-sound, evidenced-based, proven, low-risk approach (methodology). However, you can be strategic in your implementation.For example, let’s say that your investment strategy included investing in two properties; one apartment and one house. In that case, I would suggest that buying the house in Brisbane has merit (because median house growth has been pretty flat since 2011 so it’s probably ready for a growth spurt, especially given improvements in overseas and interstate migration). And I would buy the apartment in Melbourne given this sector (i.e. older-style apartments) has been quite flat for a number of years and supply of new stock is contracting which should eventually drive growth in investment-grade apartments.Take advice from someone that is holistic and independentI acknowledge that I have a vested interest in what I’m about to write – but that doesn’t make it untrue or less valuable. My experience tells me that there’s great value in receiving advice from someone that doesn’t have a vested interest in you (1) investing in a particular asset class (e.g. property) and (2) in which market you invest in (and the type of asset you buy). That is what I have shaped my business in this way – because I believe it positions us to add the most value. Develop an astute strategy, be strategic with its implementation and know the right professionals to trust on the ground to ensure you invest in the right assets.So, you can either try and figure all this out yourself and hope you get it right, or you can engage an independent expert.
“First rule of business is never get emotional about stock, clouds the judgment.” Gordon Gekko, from the movie Wall StreetThe quote above is from the fictional character, Gordon Gekko from the legendary 1987 movie, Wall Street. The challenge he was alluding to is the fact that it’s impossible to have a completely impartial lens when making financial decisions. There are many reasons for this.Firstly, it’s our money, we worked hard for it and we don’t want to make a mistake and lose it. I have observed marriages dissolve because of financial losses. It’s a big deal and a lot is at stake.Secondly, we tell ourselves stories about money. These stories have been shaped over many years by our upbringing, culture and personal experiences. Stories like money is evil, money is a measure of success, it’s hard to make money from investing, money changes people, money will solve all my problems, money makes me feel safe and so on.The sun is smaller than it looksHave you ever taken a photo of a sunset or landmark and been surprised how small it looks in the photo compared to the naked eye? The reason is because our brains play a trick on us… it’s an optical illusion. Our brain makes us see something that’s not real. Here are some explanations why this happens – although it’s not important for this blog – I’m merely making the point that sometimes we see what we want to see. Our impression of “reality” is shaped by our beliefs.My observations over the past 17 yearsI agree with Gordon Gekko that emotions are rarely a useful human behaviour when it comes to making financial decisions. They distort our views and can cause us to make expensive mistakes. In my experience, emotions can cause a few common errors including:§ Overthinking – it might sound a bit perverse, but you can overthink financial decisions. The problem with overthinking is that you start to explore every possible outcome and add too much weight to outcomes that are very unlikely to occur – almost so remote that they do not really warrant any attention or consideration. This can cause people to jump at shadows.§ Blind to risk – sometimes we want something to be true so much that we irrationally ignore any evidence to the contrary. This often happens when people decide to invest in a certain asset. At that time, they almost have rose coloured glasses and can’t see any risks or flaws. This is a very risky mindset.§ Paralysed by the fear of making a mistake – this is particularly common for people closer to retirement. They know they need to have an investment strategy and they also know that they don’t have any room (time) for error. As a result, they feel so anxious about making a mistake that they find it very hard to see what might be in front of their eyes. Similarly, people that have lost a lot of money on past investments can also be unduly influenced by fear. They become overcautious – not recognising that their past mistakes were caused by breaching investment fundamentals. They have a high level of nervousness even when a prospective investment is fundamentally sound.§ Overconfidence – how can you expect to be an expert at something without acquiring many hours, weeks, months and years of experience? When it comes to finance, it is important to be consciously incompetent i.e. don’t think you know everything. Because you only have to be a little wrong to completely ruin an investment. And often, mistakes are not obvious (to non-professionals) at the outset. Arrogance is the silent enemy of successful investing. If you are going to make a significant decision about money, why wouldn’t you seek advice from an expert? It is what you don’t know that will likely hurt you in the long run.How to mitigate this riskThere are two ways you can avoid letting your emotions get in the way of your investment success. I would argue that you should employ a combination of both.Rules-based approach to financial decision makingEmploying a rules-based approach forces you to stick to the fundamentals of investment. Sticking to fundamentals is hardest when we are in an emotional state.For example, we know that anger isn’t a response that serves us well, solves problems or gets results. So, it makes sense to choose a different response. That is easy to say but difficult to do when we are in a heightened emotional state i.e. angry! All of us get angry from time to time despite us knowing it doesn’t help. The interaction of emotions and finance is not different.Therefore, setting out a number of rules and making a commit to stick to them will help you avoid making mistakes. These rules can be things like:1. I will save X dollars each month before spending money on anything else.2. I will never invest more than 1% of my wealth in a speculative stock.3. I will adopt a diversified asset allocation and not make large bets on sectors, industries or geographical markets.4. I will never invest in a residential property unless it possess all 18 attributes (see investment grade property checklist here for example).5. I will not make an investment based on subjective information. There must be overwhelming, objective historic data confirming expected investment returns.Therefore, if you are feeling stressed, worried or over confident, you can refer to your rules to avoid you making a mistake. If the rules are sound, your decisions will be sound too, irrespective of your emotional state.Engage an independent advisor or get a coachOf course, I have a vested interest in saying this but that doesn’t make it any less true. The fact is that I don’t have the emotional baggage that my clients do. My lens is clear, unemotional, very pragmatic with a fanatical commitment to sticking to proven fundamentals. This serves my clients very well. If an advisor does nothing else other than stop you from making one or two expensive mistakes, they have probably gone a long way to creating value in excess of their fees.If you don’t want to engage an advisor, get a trusted friend to hold you accountable for sticking to your rules and plans. Meeting with them periodically and share your goals and strategy. You can give each-other feedback. You can be your own board of advisors. One of your rules could be to never make an investment without your peer’s endorsement.Its your money and that’s the problemIts easy to see the wood from the trees when advising my clients because I’m not emotionally attached to their money. It can be a lot more difficult to make your financial decisions because as Gordon Gekko says, emotions “cloud your judgement”. Acknowledging this risk is the first step to avoiding its potential negative consequences.
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 with these characteristics, you might consider divesting of that asset before any changes to negative gearing are confirmed. Of course, you must consider this in context of the property’s past investment performance, likelihood for future returns, divestment costs such as Capital Gains Tax, real estate agent fees and the like. The point is that if it’s a dud investment today, its likely to be an even worse investment if negative gearing is banned.4. Prepare to increase your rental incomeSQM Research predicts that acquisition rental yields will rise by around 1% if negative gearing is banned. This is what many professionals said what happened when the Hawke Labor government banned negative gearing between 1985 and 1987. They reinstated negative gearing to take pressure off rents. If rents do rise, you should ensure that your assets are well positioned to benefit from this.To achieve this, you could consider doing two things. Firstly, avoid any lengthy rental agreement terms with your tenant. This may allow you to review rent levels to meet the market. Secondly, consider making cosmetic improvements to your property that will enhance its rental demand. Things like installing air conditioning, giving kitchens and bathrooms a facelift, recarpeting or painting can have huge appeal to tenants. These improvements don’t have to cost a fortune, you can use a mortgage to fund these expenses and you can depreciate these improvements (i.e. get a gradual tax deduction for them).Another way to increase a property’s income is to consider furnishing it and letting it out on a short-term basis via businesses such as Airbnb, stayz or corporate let. You can potentially more than double the amount of income produced by a property (compared to having a permanent tenant) thereby transforming its overall cash flow from a negative position to neutral or even positive. There are risks associated with this including ensuring you have correct insurance cover, getting approval from Body Corporate managers if it’s an apartment and preparing for the likelihood that income receipts may be lumpy. If abolishing negative gearing does put downward pressure on values, then hopefully you can offset some of the impact by maximising your property’s rental income.5. Maybe it will create opportunities?The impact of these proposed negative gearing changes could also create investment opportunities too. My analysis has demonstrated that, in the long run, the abolition of negative gearing will only have a small impact on overall investment returns in investment-grade locations (see here).In the long run, the immutable laws of supply and demand in the face of strong population growth will continue to generate substantial capital growth. A strong level of capital growth will, over time, dwarf the lost tax benefits as a result of banning negative gearing. Therefore, if banning negative gearing does temporarily depress prices in quality locations, it might create an opportunity to buy investment-grade property at a level below intrinsic value.Should you invest in property prior to 2020 to ‘lock in’ negative gearing?Of course, the answer to the above question depends on your individual position and goals. However, as a very general rule, I would say that if your retirement strategy was to invest in property over the next 5 years then, yes! I would bring forward the implementation of that and try and invest prior to 1 January 2020. However, if for whatever reason that is not possible, I would not be too upset. Investing in the right asset is far more important than negative gearing benefits.Remember, a negative gearing benefit diminishes over time. It is typically material over the first 5 to 10 years of ownership. After 10 years, the benefits of negative gearing have typically evaporated. So, if you intend to hold the property for many decades, the initial negative gearing benefits become less material over time.Therefore, if you decide to try and invest in property before negative gearing is banned, don’t cut any corners and invest in just any property. A quality property without negative gearing will always produce better returns (in the long run) than an average property with negative gearing.I would caution anyone from being driven by the Fear of Missing Out (FOMO). Don’t invest in property just because you feel that it’s a once in a lifetime opportunity to enjoy some negative gearing benefits. Making investment decisions purely in the pursuit of tax benefit is a recipe for disaster (i.e. mistakes).Stay calm and focus on the long-runThese potential changes to negative gearing generate a lot of noise. The media and politicians love it. But in reality, in the long run, they are relatively meaningless. Its just noise.Focus on the fundamentals (it’s exactly why I wrote Investopoly). Invest in quality assets. Have a plan and stick to it. I’d bet in 2030 we’ll look back and laugh at all the negative gearing hyperbole and be thankful it didn’t distract us from making important decision.
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 strong and sustainable businesses. If the business isn’t sustainable, then they might not be around in the future to continue to help my clients and me. So, I must understand their business model, how they make money and ensure that doesn’t contradict with my goals. I want them to make a fair profit, not more or less. How they get paid should be transparent and easy to understand. And alignment of goals is good too e.g. they only make money when I do.2. Is there overwhelming evidence that the results will be good?I have written about the benefits of evidenced-based-investing in the past. Essentially, there must be strong evidence that utilising the investment methodology/approach has driven quality investment returns. If there’s an absence of evidence, then often the risk is too high.3. Do I understand how they deliver investment returns?I need to understand what has driven past investment returns. Is it luck or good timing? The market? Or their skill/intellectual property? Obviously, I’m only going to pay a fee for the latter.4. Longevity – how long have they been in business?How long have they been in business? This is important for a few reasons. Firstly, if they have been in business for many years/decades, they have navigated and experienced many markets and client situations. They have seen it all. Secondly, if they have retained clients for a long period of time, it provides strong social proof.5. Exemplary ethics and moralsThis one can be hard to ascertain but it’s still very important. I only work with “good” people. People that have pride in what they do. That want to do a good job. That get a kick out of helping people. Honest. Open. Transparent. Will always tell you the good, the bad and the ugly. Will always put their clients first. If there are any signs that the person doesn’t have perfect ethics and morals, no matter how small the sign is, be concerned!6. Are they on the hook?Accountability makes a big difference. Therefore, if the person giving me some advice will be on the hook for the outcomes of the advice, they will always do their best work. That’s why I’m a strong believer that financial advisory relationships must be long term. Because you want the advisor to be around to take responsibility for the outcomes 10 years from now (and beyond). They are on the hook.Could you up your professionalism?When you read the examples in the above table, which category do you fit into; professional or amateur? What improvements can you make to your approach and the people you engage to make it more professional? Its worth taking a moment to think about this as it could make a huge difference to your long term success. Good luck.
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 profits?I think most Australians would be less than confident that the banks will pass on the full rate cut.Upside opportunity for variable rates is limitedCurrent variable interest rates are typically in the range of circa 3.60% to 4.60% p.a. for owner-occupiers (rate depends on repayment structure, LVR and loan size). Current variable investment interest rates range from 4.00% to 5.50% p.a. (again, depending on repayments, LVR and loan size).The likelihood of these rates being materially lower by year end is relatively low in my opinion. It all hinges on the unemployment rate, GDP growth, the RBA and what the banks do – many things need to happen before we see lower variable mortgage rates.However, importantly there is no evidence to suggest that the RBA will hike rates in the short to medium term. It looks like variable interest rates will remain at historical lows for some time to come.3-year fixed rates look attractiveIn context of the above commentary, 3-year fixed rates appear to represent good value. Owner-occupier 3-year fixed rates are in the range of 3.64% and 3.85% p.a. If you don’t have a high variable rate discount (i.e. higher than 1.50%), switching some of your loan onto a fixed rate might be a good option.For investment loans, 3-year fixed rates range from 3.99% and 4.20% p.a. for principal and interest repayments or 4.10% and 4.35% p.a. for interest only repayments.Currently, 5-year fixed rates are around 0.50% higher than 3-year fixed rates – so they are less attractive – particular if you agree that variable rates aren’t going to rise anytime soon.3 years is the most popular fixed rate term for good reason.When not to fix your rateHere are 4 reasons you wouldn’t fix your interest rate:1. If you want to make extra repayments. Most fixed rate products restrict the amount of extra repayments you can make. Therefore, leaving some of your loan on a variable rate might be a good idea. 2. If you plan to increase your borrowings in the next 3 years e.g. renovate, upgrade, invest. Borrowing capacity can vary significantly between lenders and it changes regularly. If you fix, you will handcuff yourself to that lender for the next 3 years. This might restrict your opportunities. 3. If you want to sell your property. Fixed rate product could have high break fees i.e. if you repay or refinance the loan before the fixed term matures. The quantum of break fees is unascertainable as it depends on what future rate movements. So, if you plan to sell your property, it’s probably best to not fix. 4. If you want to use an offset. Very few lenders allow an offset to be attached to a fixed rate loan. See point # 1 above.
Interest rate summaryIt looks like interest rates won’t be on the rise anytime soon. In fact, they might remain at historical lows for a few more years.It is possible that the RBA will cut rates, but we’d need the banks to pass it on to benefit from this – and based on past form, there’s a good chance that won’t happen.Taking this into account, we think 3-year rates look attractive at the moment.If you need any help with your interest rate management strategy, loan structure, lender selection or the like, don’t hesitate to reach out to us.
A client was telling me a story about how the Chief Financial Officer (CFO) of a business he used to own passed away unexpectantly. Of course, it was a very sad event both personally and professionally. But an unexpected additional consequence was that the business was locked out of internet banking. The CFO had many important passwords committed to memory (for security). The business had to pay staff the week following his death without any access to banking! This taught my client a very important personal lesson. That is, make sure your loved ones are looked after in the event of your unexpected demise. Don’t leave them in the dark!Here are a few things you must organise.Passwords galore!Its ridiculous how many passwords we have these days – almost too many to keep track of. If your spouse or loved ones don’t have ready access to your passwords, it can be very frustrating and stressful – at a time where additional and avoidable stress is definitely unwanted. You need to make a list of important passwords, including:* Online banking * Superannuation accounts; * Managed fund providers or share brokers; and * Any other investment providers.
There are password apps you can use or a simple password protected Excel spreadsheet does the trick. Save the file in Dropbox (or similar) and share it with your spouse (or executor/s). This is simple to do and will avoid a lot of unnecessary stress.Summary of assets and liabilitiesIt is important to have an up-to-date summary of all your assets and liabilities. This will make it easier for your executor/s to ascertain what assets you have, their value and what immediate actions need to be taken, if any. It is also useful if you have a summary of regular financial commitments such as loan repayments to ensure these are met on time. This will help your executor get on top of everything. Perhaps you can include this information in the password-protected Excel file mentioned above.List of personal risk insurancesYou should also maintain a list of personal risk insurances such as income protection, life and total & permanent disability insurances. You need to note policy numbers, sum insures and insurer. This will be important because if you have an accident, your partner/spouse may be able to lodge a claim on your behalf.Who to contact list?Your spouse or loved ones will need to know who to speak to for help. Therefore, keep a list of any trusted advisors including a description of what they do for you and when to contact them, including:* Financial advisor * Accountant/tax advisors * Insurance advisor * Estate lawyer (person who drafted your will) * Mortgage broker and/or banker.
Your investment strategy and what steps to takeSharing your investment strategy with your spouse and loved ones is very important as it will ensure they have a clear picture of what steps to take. They should know exactly what to do if you pass away (e.g. sell assets, repay loans, invest insurance proceeds, etc.) and what to do to have a safe retirement. They should also know who to speak to and when.This will obviously be a very stressful and emotionally painful time for them, so its best if you can ensure they don’t have any financial worries (or at least less worries). Communicating this important information will ensure they aren’t left in the dark and don’t need to worry about the future.Each spouse MUST understand their financial position, tax structures and borrowingsI find that typically one spouse takes more of an interest in the family’s financial affairs – often because they have a genuine interest. As such, that spouse usually takes on the responsibility for ongoing financial management. However, each spouse must have an understanding of their financial structure including asset ownership and liabilities (i.e. if they are liable for any loans as either an applicant or guarantor). Lack of interest is not excuse for ignorance. Having an understanding of your own personal financial situation is not a responsibility you can delegate to someone else. It is your money. It is your responsibility. You don’t need to immerse yourself in all the detail – a high-level understanding is satisfactory.Letter of Wishes accompanying your willA letter of wishes is not a legally binding document but is a document that provides you with the ability to give guidance to your executor/s. You can outline who is to receive what assets or assistance, or more importantly, when not to provide such assistance (e.g. if a child is irresponsible with money or has an addiction). Your instructions can be more direct, descriptive and personal. You can also update your letter of wishes at any time without needing to see a lawyer. It’s a good way to help your executor/s fulfil their duties without second-guessing whether they are making the right decisions.Will your spouse or loved ones need help?Does your spouse and loved ones have enough confidence, knowledge and experience to make financial decisions if you are not around? If not, they might need to engage a trusted advisor. Selecting a trusted advisor can be a stressful and difficult task. Perhaps this is something you need to arrange in advance?What if your spouse and you pass away at the same time?Acting as an executor can be a very time-consuming and stressful responsibility. You can make this a lot easier by ensuring any executor (i.e someone other than your spouse) have all of the abovementioned information in case you and your spouse pass away at the same time. Therefore, share this information with your executors – particularly if you have young children to look after, as guardianship and parenting need to be addressed.Having a financial advisor is a simple solutionHaving a trusted financial advisor makes things nice and easy because they maintain the above records on your behalf. All you have to say to your spouse and loves ones is; speak to this person and they will look after you.If your spouse is less financially minded, then at least you will know they will be well looked after and not burdened with the sole responsibility to make all financial decisions without independent counsel and support.Plan for the worst, hope for the bestI hope you live a long and enjoyable life. None of us plan to die tomorrow. However, for the sake of our loved ones, it is good to ensure everything is organised. My advice is to set aside one to two hours over the next month to organise and/or document these matters.Of course, if you need help, don’t hesitate to reach out to us.
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 an extensive list of managed funds, index funds and domestic and international listed securities. Good platforms will offer a list of over 600 managed investments plus all listed stocks (i.e. on the ASX and often NYSE/NASDAQ). Therefore, you have a very broad array of investment options.The wrap platform will also take care of all administrative requirements including reporting of super contributions, payment of tax, provide you with annual statements and so on.The wrap platform will also provide you with investment performance reporting so you can easily compare the performance of your super to relevant indexes – something that is more difficult to do in an industry fund environment.In essence, a wrap platform is like an industry fund but with more transparency and flexibility.Benefits of a wrap platformThere are a number of benefit a wrap platform provides compared to industry super funds:§ Full transparency which greatly improves accountability. You will be able to separately identify the fees you pay to the wrap provider for administration of your super. If a different wrap provider provides better service or lower fees, you can switch to it. You will also be able to identify fees paid to each fund manager – and hold each of them accountable for their performance. You have full control over who gets paid from your super and how much.§ Full control over your investment methodology – if you want to invest your super using a 100% passive methodology, you can do that using a wrap platform. See this blog for reasons why this would be beneficial.§ Full control over your asset allocation. This is an investors most important decision because investors cannot control markets (returns), but they can control which markets they invest in. If you want to reduce your exposure to the US market for example, you can easily do that with a wrap platform. See here for more about asset allocation.Industry fund optionsSome industry super funds offer an option to invest in direct shares including ETF’s – called ‘Member Direct’ (see here). This is similar to a wrap solution but with significantly fewer options. In my opinion, this is an inferior option compared to a wrap product as it does not allow you to invest in any managed investment such as Dimensional Fund Advisors– an alternative passive manager.How much do wrap platforms charge?For someone with a relatively modest amount of super (say a balance $100,000), the administration fee would be circa $720 and the investment management fees circa $290, so approximately 1.0% p.a. in total. This is approximately $100 p.a. more expensive than AustralianSuper (which costs $897 p.a.) – so it’s not the lowest cost option.However, for larger account balances, say for $500,000, the wrap admin fee would be circa $2,300 p.a. plus investment costs of circa $1,500 p.a. – so total fees would be $3,800 p.a. or 0.76% p.a. This compares favourably to AustralianSuper as it would charge total fees of $4,217 p.a. (0.85% p.a.). Other industry funds charge much higher fees than AustralianSuper so the saving would be even greater.Investment management fees depend on how you chose to invest your monies. They could be nil or 1-2% p.a. Typically, a well-constructed, diversified passively managed portfolio would cost circa 0.30-0.35% p.a.The good news is that there is a lot of downward fee pressure on wrap platform providers at the moment. Fees in the US for example are a lot lower than in Australia. As such, I expect there will be a downward trend in fees over the next few years – meaning they will become even cheaper.Macquarie is one of the largest independent wrap platform providers in Australia. This means it has the most scale and therefore is arguably in the best position to maintain competitive pricing. Other notable independent wrap platforms are Netwealth and Hub24.Don’t bother unless you have a clear strategyOne of the problems with SMSF’s is that people have established them and subsequently done nothing with their monies since i.e. they have left their super invested in cash. In this case, they would have been better off investing their super in an industry fund.Therefore, if you are considering setting up a wrap platform, make sure that you have a very clear strategy on how to invest your super – or you are being advised by an independent financial advisor. If you don’t have a robust, evidenced-based, low-cost investment strategy, then use an industry super fund.Similarly, if you think you might be tempted to make silly investment decisions (e.g. invest in higher-risk, speculative stocks), then refrain from setting up a wrap product and stick with an industry super fund.Wrap products are powerful and flexible product but in the wrong hands, they can do more damage than good.What next?Don’t automatically think that the only way to gain greater control over your super is to set up a SMSF. A wrap product deserves a lot of consideration and is often the best solution, particularly if you share my concerns with industry super funds. A SMSF is only a better option if you want to invest in direct property, unlisted investments or have complex estate planning needs.If you need any help, don’t hesitate to reach out to us.
What is the best way to manage cash flow? Do you need a monthly budget to track every single cent? Or is high-level budgeting ok? And, how much is too much to spend i.e. how do you know if you are over-spending compared to your peers? This blog will answer these questions and many more.You cannot earn your way to improved cash flowHave you heard the saying; “it’s not what you earn, it’s what you spend that counts”? Well, it’s true! If you have poor cash flow management habits, it doesn’t matter how much you earn, you will always find it very difficult to save money. I have met people with seven figure incomes and very little wealth to show for it. And I have clients on five figure incomes that have accumulated substantial wealth.Of course, the more you earn, the more you can “afford” to spend on living expenses. But best-practice cash flow management is mostly about avoiding over-spending – rather than turning into a scrooge. I define over-spending as expenditure that adds very little to your standard of living (or only provides very temporary improvements). Typically, people with poor (or no) cash flow management techniques can trim expenses without it having a material impact on their standard of living.The cost of doing nothing is too big to ignore!Sometimes people avoid facing the truth because it’s painful. When it comes to cash flow, they avoid taking steps to manage it better because they fear (or know) they’ll have to make painful compromises.However, you can’t make a problem disappear just by ignoring it. In fact, ignoring a cash flow problem will only make it worse. You will have to pay the price of poor cash flow management at some point. And the longer you avoid it, the more painful it will be. Worst case is that you will have to sell your home to reduce debt, be reliant on public housing and will have to live off the aged pension – which is less than $36,000 per year for a couple!You can’t build wealth if you spend everything you earn. The good news is that 90% of people can improve cash flow management pretty easily without it impacting on their standard of living. For others, it will require a painful but necessary adjustment – but less painful than it will be if you continue to spend all your income.Spending: minimise non-discretionary, more experiences and less “stuff”There are two types of expenses; discretionary and non-discretionary. Non-discretionary expenses include items such as food, power, insurance and so on. There are ways to minimise these expenses as listed in our financial hacks. Non-discretionary expenses are necessary but really don’t enhance our ‘enjoyment’ of life. Non-discretionary expenses tend to be relatively finite and there’s a limited amount you can do to minimise them. Discretionary expenses are all the things we buy purely for pleasure but could live without (if we needed to).The main purpose of non-discretionary expenses is to make you happy and give you a sense of enjoyment. Research shows that expenditure on experiences (holidays, sky diving, etc.) have the greatest impact on our happiness compared to buying “stuff”. Buying “stuff” (e.g. designer shoes) typically gives you a temporary hit of dopamine but it never lasts (and you need a bigger hit next time). Let’s face it. We reminisce more about past holidays than we do about past purchases. Don’t use money to change your mood – it’s an expensive treatment plan and never works long-term – spend money wisely to enrich your life.FIREFIRE stands for Financial Independence, Retire Early and it’s a relative new movement that involves cutting your expenses to a bare minimum so that you can invest as much income as possible. The goal is to build an asset to free you from the requirement to work. Some adopters of FIRE are aiming to retire in their 30s or 40s. The centrepiece of FIRE is expense management. It highlights how impactful expense management can be.[Sidebar: the problem with retiring very early is that it can be an empty victory. Typically, you must replace work with something meaningful otherwise you risk losing a sense of purpose and ultimately happiness.]How much is too much?The most interesting observation I have made over the past 17 years is that most people spend a similar amount of money on general living expenses (“GLE”). GLE includes everything except for home loan repayments, investment expenses, additional super contributions, school fees, child care fees, substantial holidays and once-off expenses. The amount of GLE depends on your income, age and children (age and number). The table below sets out the amount of general living expenses for various family scenarios.See table here. I estimate that less than 5% of my clients spend more than $150k on GLE.Lower your ego and spend within your meansSometimes we allow our ego to influence our spending patterns. I know people that spend like they are millionaires – but they aren’t millionaires! Now, it’s their money and I don’t judge them for how they spend it. But they must realise that there’s a price for everything. The price of building wealth is making short-term sacrifices. The price for living for today (spending all your income) is likely to be the incapacity to fund tomorrow (i.e. an uncomfortable retirement). But it’s not an all-or-nothing decision. There’s a balance.Be realistic about your financial means and spend accordingly. If you aren’t in the position to afford business class flights, fly economy or go on fewer holidays. If your financial position doesn’t allow you to spend $1,000 on a pair of shoes on a whim, then don’t. Save up for them over a number of months or years.It has nothing to do with whether you are worth it or not – that’s ego – and a convenient excuse. It’s all about what is reasonable and sensible. If we listen to our egos, we will end up wasting an awful lot of money. The longer you do that, the harder it will be to recover from.You can’t manage what you don’t measureAll you need to do is measure how much you spend on GLE and if it’s within the ranges in the table above, then it’s likely you don’t need to do anything – except to continue to track it at a high level. Click here for a description on how to measure GLE.We are in the process of introducing an automated online tool to help all our advisory clients track and manage their cash flow. This will ensure all our clients will have good cash flow management practices. It will also help us make future financial plans and investments with complete confidence. An additional important benefit is that it gives us confidence that our clients will be able to maintain (or improve) their current standard of living as they move into retirement (because we accurately know what their desired lifestyle costs them).Steps to take if you are spending more than the above rangesIf you are spending more than the GLE ranges noted above, here are a few possible solutions:* Identify where the over-spending is occurring. Look for expenses that don’t add anything to your standard of living and cut them. Here are some savings tips from the governments Money Smart website. If you are spending too much on discretionary items, it is possible that you are going to have to start denying yourself – the least painful way is to reduce your spend per occurrence rather than the regularity of occurrence. That is, if you go out to dinner twice per week, continue to do so but eat at cheaper place or limit spend on wine, etc. You will also need to become better at tracking and managing cash flow. You may have track expenditure closely on a monthly basis until you are back on track. * Get help. Coaching and accountability are a great help when trying to change behaviours and habits. The most obvious evidence of this is personal training. People tend to achieve better health outcomes with the guidance and accountability a personal trainer provides. Therefore, if you need to rein in spending, seek assistance from your accountant or independent financial advisor. * If you have pre-school aged kids, realise that things will probably get better. The most difficult time to manage cash flow is when you have young kids. Expenses are higher than usual. Income is lower than usual. Sometimes there’s little room for improvement in this situation. Cash flow will normally improve when the kids start going to school – unless the cost of primary private school fees will be greater than any additional earning capacity. In that case, you should start planing for that cash flow now.
Essentially, you need to reduce expenditure until you are living within your means. There are budgeting mechanisms that help you to do this – such as having multiple bank accounts as outlined in Barefoot Investor.What should you do with your surplus income?The whole point of improving cash flow management is so that you can allocate a regular amount toward building wealth. Doing so will help you feel more comfortable, safe and ensures you’re well on the way to enjoying a stress-free retirement.There are a number of things you can do with surplus income including:1. Reduce debt – make additional repayments into your home loan or offset account to reduce your debt exposure – particularly whilst interest rates are low. 2. Additional super – most workers can contribute up to $25,000 into super. Employer contributions (the compulsory 9.5% p.a.) are included in this cap. So, if your employer is contributing less than $25,000 p.a., then it might make sense to make addition regular (salary sacrifice) or ad hoc lump sum (personal) contributions into super. 3. Borrow money to invest in property. This can be a good ‘forced savings’ strategy – particularly for people that are tempted to spend money on discretionary/luxury items. 4. Invest in a low-cost, diversified index fund portfolio (share market). Depending on your situation, you might consider using a conservative level of gearing i.e. contributing $2,000 per month from cash flow and draw an additional $1,000 from a mortgage (so total contribution is $3,000). Regular contributions reduce your timing risk. 5. Invest in commercial property, bonds/fixed-interest securities or other asset classes.
Which tactic (or combinations of tactics) listed above you employ depend on your financial position, risk profile and goals.But these tactics are only possible for people that consistently spend less than they earn. As such, the first step to building wealth begins with good cash flow management. If you need help with any of this, please don’t hesitate to reach out to us.
Perhaps a softer property market will allow you to buy a future home now for below intrinsic value – especially if you plan to upsize or downsize in the next few years. Purchasers are in a stronger position in a softer market – especially with a backdrop of lower median property prices and lower auction clearance rates. This blog considers the financial merits of this strategy and what to look out for.What’s the benefit of doing this now?The advantage of buying at the bottom of the market (or close to it) is the probability that you will pay less for a property than you would if you purchased it in a more balanced or buoyant market. I wrote a piece for The Australian (here) in December stating that I believed we were close to the bottom of the market. And I still hold this view (e.g. auction clearance rates picked up over the weekend). So, if you agree that the market is unlikely to fall materially from here, then now might be a good opportunity to purchase a future home.In addition to the benefit of buying below intrinsic value are lower transactional costs (stamp duty) and lower reoccurring holding costs (i.e. lower borrowings means a lower annual interest expense).Buy now and rent it outOne strategy could include buying a replacement home now and tenanting the property until (1) you are ready to occupy it and/or (2) the property market improves and is more of a sellers’ market. This might help you to ‘buy low and sell high’ thereby maximising your equity and financial position.An additional benefit to this strategy is that you will ‘lock-in’ your entitlement to benefit from negative gearing. This is important if you believe that the ALP will win the federal election in May and implement their ban on negative gearing. Purchasing before this ban is implemented could save you a lot of tax.In order to do this, you must consider two factors:1. Does your borrowing capacity allow you to buy now and sell later? As I have written about in the past, borrowing capacity has contracted a lot and just because you think you can afford a loan, doesn’t mean a bank will share the same opinion; and2. Can you afford the debt from a cash flow perspective? Typically, I test affordability at an interest rate of 7% p.a. – to ensure debt is still manageable in a higher interest rate environment. Obviously, interest rates are a lot lower than 7% p.a. at the moment. And the market has priced in an RBA rate cut this year – although we’d probably need to see the unemployment rate increase for that to happen. So, there is a reasonable argument to be made to say that rates will remain low for a while. But don’t get seduced by the lower rates and risk over-borrowing.Market arbitrage has its risksMarket arbitrage refers to buying and selling in different markets. This strategy is not without risk. Obviously, the key assumption behind this strategy is that buying today will cost you less than say buying in 5 years’ time. And it’s also assumed that selling your existing property in 5 years’ time will yield a higher sales price than selling now. However, this is merely an assumption and it could turn out to be wrong. Therefore, the lowest-risk approach is to buy and sell in the same market (i.e. this year).However, for some people, the risk is worth taking i.e. buying now and selling in a few years’ time. This depends on your risk profile, financial position, location of properties and so on. If it’s acceptable to do risk-wise, and the market turns out how you expect it, the benefits could be significant (see below).What are the financial merits?If you have been a long-time reader of my blogs, you will know that I never resist the temptation to crunch the numbers! (Nerd!) So, I have considered two situations; one upgrading where the homeowners buy and sell in the same market (now) and a downsizing strategy where the homeowners buy now and sell later.Scenario: Upgrading through buying and selling in the same market.Here’s the scenario I considered:Rick and Karen own a family home currently worth $1.5 million with a home loan of $450k. In a stronger market, their home might sell for close to $1.7m. They always planned to upgrade their house/location in the next 5 years so that they resided in their desired school zone for their kids. They have identified a perfect house that is currently for sale for $2.25 million. They anticipate that they’d have to pay a lot more for the same house in 5 years’ time and feel that its intrinsic value at the moment is over $2.5 million. I have compared two options:1. Buy now for $2.25m and sell for $1.5m which results in a home loan for $1.365 million; versus2. Buy in 5 years’ time for $3.3 million (being current intrinsic value of $2.5 million plus 6% p.a. growth) and sell in 5 years’ time for $2.0 million (being current intrinsic value of $1.7 million plus 4% p.a. growth – lower growth because of inferior location). This results in a home loan of just over $1.5 million.In 10 years’ time, I project that buying and selling now (option 1) will result in $240k more wealth (net) in today’s dollars i.e. almost 10% higher net wealth. In my opinion, the key determinants are:1. Is your desired location intrinsically undervalued by the same amount (or more) than your current location (in dollar terms)?2. Is the growth rate in the desired location over the next 5 years expected to be higher than the growth rate in the current location?If the answer is yes to both questions, then this strategy might be worth implementing now.Scenario: Downsize through buying now and selling laterHere’s the scenario I considered:Ian and Robyn own their home which is worth $2.75 million and have a home loan for $950k. They would like to downsize in 5 years’ time (as a home repayment strategy). They have identified that they could buy a suitable smaller home in a blue-chip location today for $1.6 million. In a normalised market, this asset would cost more than $1.8 million. I have compared two options:1. Buy now for $1.6m and put a tenant in the property. Then, in 5 years’ time, sell the current home and move into the smaller property; versus2. Don’t do anything now and instead downsize in 5 years’ time. I have assumed that the homeowners sell for $3.75 million and buys for $2.45 million at that time.The first option (i.e. buying now and putting a tenant in the property) is projected to be better by over $800k in today’s dollars over 10 years. That is a significant benefit. It makes logical sense that buying in a softer market and selling in a stronger market would generate good financial returns. Especially since no Capital Gains Tax is involved.Make sure you undertake careful planning and be realisticThese strategies take time to analyse and organise – so don’t rush into it. You must be fully aware of all the risks and ensure its affordable from a cash flow perspective (now and in the future).One thing to note is that, probably due to emotional attachment, most people over-value their home. It’s an easy trap to fall into. So, the best thing to do is obtain third-party evidence (real estate, bank valuation, etc.) in respect to your property value. Undertake some research into growth rates of both locations and similar due-diligence.Finally, loan approvals will obviously need to be organised (pre-approval) and, if you have read anything about banking and mortgage approvals, you would know that approvals take a lot of time to organise. Make sure you allow for this.It is possible that available stock will dictate when you transactHaving a great plan is one thing. But the value in a good plan lies in its correct implementation. Sort-after locations sometimes do not turnover often. That is, an area can be tightly-held and properties rarely come onto the market. Therefore, whilst analysis might suggest that now is a good time to buy, it’s definitely not worth compromising in order to do so. If there aren’t any properties on the market in the location you desire, have patience. Don’t rush. But make sure you are ready when the right property come up.Property is a long-term asset – so think long termJust to be clear, I am not advocating short term thinking. I am not suggesting you can perfectly time the market and as such everyone should buy property now. Not at all. Property is a long-term decision and as such you should be mostly influenced by your circumstances and goals rather than “the market”. I am merely suggesting that if your goal is to upgrade or downsize in the short to medium term, then the current market might present a great opportunity to do so.
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:1. 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). 2. Buying above or under fair market value – I measured the impact of buying 10% below market value versus over-paying by 10%. 3. 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. 4. Interest rates – my midpoint is 6% but I sensitised using a range of 4% to 8% p.a. 5. 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%. 6. 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. 7. 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 about the timing, just focus on the quality of the asset and get that perfect (see this blog). To do that, I always recommend engaging the services of a reputable buyer’s agent. Never, ever compromise on quality.Secondly, think about capital gains tax – especially if you plan to (or already) own multiple investments. People that own multiple investment properties might need to sell one in the future to assist with debt reduction and/or increase liquidity. Take this into account before you invest and seek advice from a financial advisor and tax agent.Thirdly, actively manage your property portfolio. Keep on top of your property manager to ensure they are reviewing your rental income and recommending if you can make any minor or cosmetic improvements to maximise your income. Also, make sure your mortgage broker is reviewing your loan structure and lenders – as this can have a big impact on your interest rate.Number one: put your ego and fear asideMaybe the most valuable take-away from this analysis is to let go of the desire to try and time the market. This desire is usually driven by fear or ego and frankly neither are very useful emotions when making important investment decisions. Instead, stick to the fundamentals. The above analysis is simple math. There’s no smoke or mirrors or subjectivity. It clearly demonstrates that timing has have little impact on your success.
It was reported over the weekend that private school fees have increased by 3.6% over the past year. However, the longer-term trend is closer to 5% p.a. Private school fees are tipped to soon exceed $40,000! That is a big hit to after-tax cash flow. This blog compares three financial strategies you can use to fund future school fees.What is the future cost?There are two things to keep in mind with respect to future education costs. Firstly, the average rate of fee increases is close to 5% p.a. Secondly, these expenses must be paid from after-tax income – so you have to earn a lot more pre-tax in order to meet these costs.A child born this year will most likely start secondary school in year 2031. Assuming fees increase 5% p.a. and inflation remains at 2% p.a., the total cost of secondary private school education will be $280,000 in today’s dollars. A parent will need to earn at least $460,000 before tax (in today’s dollars) over a 6-year period to meet these costs – an average of $75,000 p.a. per child.I am sure you agree that this is a substantial cost and one that you must plan for as early as possible.Steer clear of education fundsThe most prominent education fund producer is ASG. It creates structured savings plan so that parents will be better positioned to meet future education costs. However, their fees are high and investment returns are terrible. Parents would be far better off following one of the lower-cost, more transparent options below.Strategy One: Park savings in your home loanThe best place to save money is to park it in your home loan and redraw it whenever you need it. The reason being is that the home loan interest rate is much higher than the deposit rate. At best, you might receive 2.5% p.a. in interest for money in a savings bank account. The home loan mortgage interest rate is currently around 4% p.a.I completed my financial projections using a home loan interest rate of 5% over the next 18 years (the average rate over this time will likely be higher – but I’m being conservative). I worked out that parents would need to direct additional cash of $1,200 per month into their home loan over the next 18 years in order to fund their children’s school fees. That is, in year 2031 they would redraw these extra repayments from their home loan to pay for their children’s school fees as they are incurred.This approach (i.e. $1,200 per month for 18 years) costs $258,000 in after tax dollars – slightly less than the $280,000 above – because of the interest saving generated by the extra repayments.This approach is very low risk because your return (being the home loan interest you will save) is certain. That is, home loan interest rates will almost always be between 3.5% and 8% p.a.You can also park money in an offset linked to an investment loan – although it is less effective than a (non-tax-deductible) home loan.Strategy Two: Invest in the share marketThis option includes investing a regular amount in the share market. You don’t need to ‘pick’ shares in order to implement this strategy. Instead, you can use a low-cost, diversified index fund from Vanguard to do this. This means you only need to buy shares in one stock (codes are VDHG or VDGR for example) each month in order to make these investments. This one stock has exposure to Australian and international shares, emerging markets and some bonds too. It is very simple. You can use a low-cost online trading platform such as Commsec or CMC Markets to do this.Long term equity market returns (dividend income plus growth) have been circa 10% p.a. over the past 30 years. However, to be conservative, I will assume returns will be 8% p.a. over the next 18 years (being 4% income plus 4% growth).I calculated that parents would need to contribute $14,500 per year ($1,210 per month) into a share portfolio over the next 18 years. They would gradually liquidate the share portfolio to fund the school fees as they are incurred.Strategy Three: Invest in a property and sell it when they finish schoolThis strategy would involve borrowing to purchase an investment property, then accessing the equity (via borrowings) in that property before you child starts secondary school to fund school fees. You could then sell the property when your child finishes school to repay all loans.I assumed an investment purchase acquisition of $750,000, a conservative capital growth rate of 6% p.a., a gross rental yield of 3%, allowed for expenses and assumed an average mortgage interest rate of 6%.The cash flow cost of this strategy over the 18 years of ownership amounts to approximately $210,000 which is a lot lower than the other two options.The net equity in the property in 18 years’ time (after allowing for repaying the original loan and CGT) is circa $900,000. Don’t forget that you will have an additional loan which you used to pay for the school fees and that would be circa $450,000. Therefore, this strategy leaves you with a surplus (cash proceeds) of $450,000 after tax.The breakeven capital growth rate (needed to generate enough wealth to cover all schooling costs) is only 4% p.a. A well-selected, investment-grade property should definitely generate substantially more growth than this over the next 2 decades.Why does property win?Here’s a summary of the results:The property strategy produces the best outcome for three reasons:1. The returns I have assumed are higher for property. In the home loan strategy, I assumed an interest rate of 5% p.a. In the share market strategy, I assumed a gross return of 8%. And in the property strategy I assumed a gross return of 9% (growth plus income). I assumed a high gross return for property simply because it has half the volatility rate than shares. 2. Property provides less of its total return in income and more in capital growth. See this blog for why that is important. 3. Only the property strategy includes borrowing to invest. Borrowing to invest is a higher risk strategy and does not suit all people. Also, borrowing to invest magnifies investment returns – both positive and negative.
Which strategy is best for you?Of course, that depends on many things such as the age of your children, your expected income, your asset base, your risk profile and so forth. The point of this blog is to point out that there are a few strategies that can be considered and that it’s very important that you implement said strategy as-soon-as-possible. The longer you leave it, the more painful it will be to fund private school education.If you want to send your child to a private primary and secondary school, then it’s even more important to have a plan – as I have only considered secondary school costs in this blog.The best time to start planning for education costs was yesterday. If you didn’t do that, the second-best time is to start today. We can help.
One of the biggest mistakes that people make is deciding to invest in a few assets/investments and then, after that, figure out what their strategy looks like. Worse still, many financial services and property businesses do this too. They market investments that initially appear attractive but ultimately won’t help you achieve your goals. I outline why this is a very bad approach and what to do instead.Sexy investments sellThe most successful way to sell investments is to market them using the two primary emotions of fear or greed. An investment that promises high returns with little risk will typically have great appeal to the mass-market. The problem is that sexiness and fundamentals are almost always inversely related. Fundamentally sound investments are usually dry, dull and boring. Therefore, it is difficult to get people excited about them. However, shiny objects attract a whole lot more attention.The fastest way for a financial services business to attract more investors is to market sexy investments. The problem with this approach is that whilst it might deliver short term profit (to the business – probably not the investor), it is at the costly expense of creating long term value for both the business and the investor.Be sceptical of businesses that market investmentsNo one trusts used-car salespeople. The reason is that we are well aware that their goal is to make a sale and they might say or do anything to achieve that goal. Its not that they are the enemy or bad people. It’s just that we have a very healthy level of scepticism for anything they say or do.The same is true for any financial services business that markets investments. Their goal is to highlight the benefit of their investments and pitch to you why it is perfect for you. Therefore, you must maintain a healthy level of scepticism. If you want to find someone you can trust, find someone that has nothing to sell you (other than their advice).Here are two different examples of what I’m talking about:§ Because borrowing capacity has tightened, some property advisors are now recommending their clients invest in regional locations – because they no longer have the borrowing capacity to invest in blue-chip locations. However, these same businesses have in the past communicated that regional locations have inferior investment prospects. It is clear to me that businesses like these are designing their advice to fit their client base. Instead, I believe that you must have the integrity to sick to what you believe is right and attract the clients that can afford to invest. A reputable business should never adjust their advice to accommodate the market or client demand. My advice is always; if you can’t afford to invest in an investment-grade property, then do not invest in property. Simple.§§ Some fund managers offer ‘high conviction’ share market investments. These are managed funds that invest in a small, concentrated portfolio of holdings (so they have high concentration risk). Often, these funds have high turnover too – meaning they buy and sell stocks regularly triggering tax and expenses. As such, almost their entire investment return is in the form of income and capital gains i.e. very little capital growth. Therefore, whilst the headline investment returns might seem attractive, they are very tax-inefficient which makes them financially inefficient because you lose half of your return each year in tax.§Would you swim to Europe?Swimming has a lot of positives. It doesn’t cost anything. It is good for your health. Many people find the activity enjoyable. However, everyone realises that they cannot swim to Europe. They have to take a plane flight to get there. This might sound like a far-fetched analogy (and it really is), but it highlights the foolishness with investing in an asset without considering will it help you achieve your goals? Analysing an investment without the context a strategy provides is a sure way to make a mistake.When contemplating an investment, you must consider two important things:1. Is it a quality investment? That is, does the investment possess all the sound fundamentals to deliver the expected investment returns? Is there an overwhelming amount of evidence that this asset or methodology will produce the expected returns?2. Will the nature of expected investment returns (i.e. quantum and combination of income and/or capital growth) help you reach your goal as efficiently as possible?The above two considerations are objective – there is often little subjectivity involved.Strategy development is actually simpleIf you don’t have a strong asset base (i.e. net worth) then you must invest in assets that will help you achieve this. To do that, you need two things. Firstly, you must let the law of compound capital growth do all the heaving lifting. This means investing in assets that provide a high and sustainable level of capital growth over the long run. Secondly, borrowing (safely) to invest will allow you to speed up the benefits of compounding capital growth.If you already have a strong asset base and you are relatively close to retirement, then your focus should be on (1) generating a balanced amount of income and capital growth and (2) investing in a way that protects your capital (i.e. reducing your investment risk).Once you know what you need (i.e. either a strong focus on capital growth or more of a focus on income and capital preservation), is will be easier to identify and select assets that will help you achieve your goal. Of course, you might still need help developing what mix of assets you should aim for. However, this approach will definitely help you avoid investing in the wrong assets – thereby avoiding the most common investment mistake people make. Always select assets that fit your strategyYou must start with a strategy first.A strategy is simply the steps you need to take to achieve your goal. Your goal could be as loose as “retire by age 60 on $100,000 of annual passive income” – it doesn’t have to be more complex than that.Having a goal and strategy gives you a context for making investment decisions. That is, you can ask yourself; “if I do X, Y or Z, does it bring me closer to achieving my goal or further away from it”. A simple calculation should help you answer that question e.g. what will this property’s income and equity be in 17 years’ time?If you want to learn more about this, grab a copy of my book Investopoly. The reason I wrote the book was to help people follow a set of rules so they could figure out their own investment strategy. If nothing else, it will help you avoid making costly mistakes (by highlighting what to not invest in).
If the ALP wins the election in May and ban negative gearing on established property (as proposed), does that mean property is no longer a good asset class to invest in? The answer is no, if you do it right. In an environment of no negative gearing, capital growth becomes even more important.The razzle dazzle of tax savings is too tempting for some people to ignoreToo many people have been seduced by tax benefits when selecting a property investment. Potential tax savings distract investors’ attention away from an asset’s poor quality (lack of fundamentals). The problem is that you have to live with the asset’s quality long after the tax savings have evaporated. And the asset’s quality will dictate whether you will enjoy adequate investment returns (mostly in the form of capital growth) or not.Tax benefits can come in two ways.Steer clear of depreciation benefitsFirstly, there’s ‘depreciation’ which is a measure of the reduction of a dwellings value over time. If you are the first owner of a property, you can claim a depreciation deduction in respect to the building and its fittings and fixtures. The problem with depreciation is that it actually happens. It’s like driving a new car off the lot – they say it immediately depreciates by 10%! A new building will depreciate substantially in the first decade of ownership. Therefore, for the investment to work, the land value must appreciate at a much faster rate to (1) offset the building depreciation and (2) contribute to the property’s overall value appreciation (if there is to be any). The problem is that new-build properties typically have a smaller land value component so that doesn’t happen. The existence of a depreciation benefit is a red flag that a property isn’t investment-grade and therefore should be avoided from an investment perspective.Negative gearing should help you generate capital gainsAmazon is worth over $USD830 billion according to the stock market. However, it makes $USD3 billion profit per year – which is not a lot for a company that is worth so much. Therefore, the reason that people invest in Amazon is because they think that the businesses will be worth a lot more in the future. Amazon shareholders are clearly investing for growth, not income (it’s never paid a dividend to shareholders).The same concept is true for investment-grade property. Smart investors don’t invest for negative gearing. Negative gearing is merely a positive consequence of their investment. Smart investors are targeting capital growth so that whatever they lose in income (net loss after tax benefits) will be dwarfed by the amount of capital growth in the long run. However, some investors have incorrectly focused on (or been seduced by) tax savings when making investment decisions. In reality, this is an unwelcome distraction from what is ultimately going to make-or-break an investment in the long run.In the future, you’ll have to be more pickyIf you agree that the primary reason we invest in property is for capital growth, then, when considering any prospective investment, we must consider its future capital growth prospects. That is, we must be sure that a property’s future growth will more than offset any income losses to the extent that the net investment returns are still very healthy.The existence of negative gearing means that an investor needs a lower amount of capital growth in order to generate an adequate return. However, if negative gearing was to be abolished, I would argue that all investors must become even more focus on future capital growth prospects.The chart below sets out the projected cash flow of a $750,000 property investment with and without negative gearing. Over the first 20 years, the difference is approximately $131,000 in today’s dollars. You must generate a higher capital growth rate of 0.40% p.a. (on average over the 20-year period) to offset the impact of having no negative gearing.See chart here. How do you become a better property investor?In short, by nailing asset section. That is, few properties in Australia have a high probability of generating strong capital growth. Put differently, you must only invest in properties that have the highest probability of doubling in value every 8 to 12 years. That knocks out probably 95% of properties.Here is a blog which outlines the three characteristics that an investment grade property must have, being:1. Strong land value component – more than 50% of the total value of the property must be land value. 2. Scarcity. The land must be located in a position that enjoys excessive demand and fixed supply. This means there’s no available vacant land within a 20 to 30 minute drive (i.e. fixed supply). The location must be well serviced by amenities (e.g. schools, shops, medical facilities, parks, public transport, arterial roads and so on). The area should be dominated by owner-occupiers, not investors. Secondly, the dwellings architecture and type must be scarce. Take an art-deco apartment for example. Typically, a block will consist of 6 to 8 apartments on 1,000 sqm of land. So, there few apartments (compared to a high-density development) and no one’s building double-brick, art-deco apartments anymore. The imbalance between demand and supply will cause capital growth. 3. The property must have demonstrated its capacity to generate strong capital growth in the past. That is, when you review past sales over the last 2, 3 and 4 decades, the average growth rate is impressive. This is a core tenant of evidence-based-investing. That is, only invest where there’s strong evidence that doing so will generate quality investment returns.
If negative gearing gets abolishedThere are two key benefits of investing in property compared to shares:1. Investment-grade property provides most of its return in capital growth. Typically, an investor could expect say only 2% income after expenses and therefore say 8% p.a. growth. However, with the share market, you are likely to receive 4-4.5% income and therefore 5.5-6% growth (in Australia). If you are more than 10 years from retirement, you should prioritise growth over income because it will (1) reduce the tax you pay and (2) allow you to benefit from compounding capital growth. 2. Most people feel more comfortable borrowing to invest in property compared to shares – probably because property has half the rate of volatility compared to shares. Mathematical, borrowing to invest more sooner will have a dramatically positive impact (compared to not borrowing, or borrowing less – holding all other assumptions including returns constant).
These two benefits are important to people who need to grow their asset base. However, if you already have a significant asset base (i.e. close to or in retirement), then these attributes will be less (not) important.You will note that these two benefits have nothing to do with negative gearing. Therefore, if negative gearing gets abolished, investing in property will still be a smart thing to do. The only thing is that there’s less margin for error with respect to asset selection. That is, you must get it 100% correct. And the best way to do that in my opinion is to engage the services of a reputable and experienced buyers’ agent.
When working out a retirement strategy, often people try to work out the value of investments they will need by multiplying the amount of annual retirement income they will need by a nominal interest rate. For example, if you want $100,000 p.a. in retirement and you think you can earn an income rate of say 3% p.a., you’ll need $3.4 million of net investment assets. The more aggressive you are with your interest rate assumption, the fewer assets you need to meet your goal. The reverse is also true.Beware, there are a couple of pitfalls with this approach.It results in a lazy asset allocationIf all of your investment assets are invested in cash or fixed interest investments (such as government and corporate bonds) in order to generate a stable income, you have little protection from inflation. This is because these investments do not provide any capital growth. All their return is provided in the form of income and your capital stays the same – think term deposit.This means that over time, your assets will be worth less and less in real terms – because of inflation, your purchasing power is reduced. For example, $1 million today will be equivalent to $477,000 in 30 years’ time assuming the inflation rate averages 2.5% p.a. over that period.People are living longer. Medical technology is improving at an increasing rate. Therefore, we must consider the likelihood of living to age 100 and beyond. To ensure you don’t run out of money, you must ensure you invest in assets that provide some capital growth so that your money at least keeps up with inflation and hopefully increases over time.You must account for taxesOf course, you must account for any taxation liabilities. If all your money is inside super (and your balance is less than $1.6 million), then no tax will apply if you draw a pension. However, if you have assets outside of super, you will need to account for any income tax consequences. The good news however is that an individual can earn approximately $20,500 per year before they need to pay any tax. Therefore, hopefully you can share any personal income between you and your spouse to minimise any taxation liabilities. My point here is you must think carefully about ownership structures i.e. where your investments are held. Super is excellent, but you don’t want to put all your eggs in one basket. Putting all investment assets in one person’s name also typically isn’t very wise in the long run.Markets will go up and downThe role of asset allocation (i.e. the methodology used to spread your money across various asset classes) is to smooth returns and minimises losses. That is, some asset classes are negatively correlated which means when one asset class generates high returns, the other will likely generate low or negative returns. However, if you invest in both asset classes in the right proportions, you will achieve better investment outcomes at a portfolio level. This (i.e. asset allocation) is the most important decision a professional advisor can help you with. Its an investor’s most important decision. Because investors cannot control markets or returns. But they can control where and how they invest their monies.Therefore, by putting all your money in cash and fixed income assets, you risk missing out on a lot of returns. Take the last decade for example. Government bond returns have been historically very low – sub 3% p.a. Whereas international equity markets have provided a total return of just under 10% p.a. over this period of time. This demonstrates the perils of putting all your money in one asset class.Sometime in the future, this will probably reverse. Equity markets will perform poorly, and bonds will perform well. Therefore, we must invest in a way that positions our money to perform well regardless of how individual markets behave.Maybe interest rates will be lower for longer?There as been a lot of commentary since the GFC that perhaps interest rates will be a lot lower than they were in the two to three decades before 2008. Quantitative easing and loose monetary policy are two reasons that are cited for adopting this view. I am always cautious when anyone forms the view that history will not repeat itself – because it invariably does. Therefore, I do leave room for the possibility that interest rates (and more specifically bond returns) will one day rise above 3% p.a. However, equally, I leave plenty of room for the possibility that rates will be persistently low for a longer period of time. If this is true, then putting all your money in cash and fixed interest securities will be financially unproductive.You risk overestimating the amount you really needIf you assume that all retirement living expenses need to be funded from investment income, you must therefore assume all your monies will be invested in income-style assets (cash and fixed interest). As such, you will need to be relatively conservative with your interest rate earning assumption, especially in the current environment (e.g. current term deposit rates are circa 3% or less). This will mean that you will need more wealth in order to achieve your goal.However, if you assume that you will have a more diversified asset allocation e.g. a mixture of Australian and international shares and bonds, it is reasonable to assume a higher overall portfolio return (see more below). This will then mean you need less wealth to fund retirement than what you might have originally thought.So, how do you fund retirement then?Most people will not be able to fund retirement purely just from investment income – they will need a combination of income and capital growth – for the reasons discussed above.This is achieved through developing an appropriate asset allocation target and then a long-term strategy to achieve that target by the time you reach retirement age. For example, an investor might aim to achieve the following asset allocation by retirement age:· 30% of investment assets in residential property – assume net income will be 2% p.a. and growth 7% p.a.;· 40% of investment assets in Australian and international shares (most of which are in super) – assume net income will be 3.5% p.a. and growth 3.5% p.a.[1]; and· 30% of investment assets in cash and fixed interest assets (bonds) – assume interest rate of say 2.5%.If the retiree has $2 million of investment assets, the above portfolio will, on average, generate $55,000 of income plus $70,000 of growth per year. If the retiree needs $100,000 for living, they will need to spend $45,000 of their cash holdings on living expenses. However, the retiree’s investment assets will increase each year by $25,000 (being income $55k + growth $70k less living $100 = $25k). Sure, they eat into their cash savings, but this is more than offset by an increase in asset values.The weighted average return on the above portfolio is 6.25% p.a. Therefore, if an investor needs $100,000 p.a. in retirement, they need assets worth $1.6 million to break even. However, if we assumed that they were invested 100% in cash and earned an interest rate of only 2.5% p.a., they would need $4 million of investment assets. This demonstrates having a well-diversified asset allocation means you need fewer investment assets to reach your goal.This is a simplistic example to illustrate my point. I am not suggesting that the above asset allocation is in fact appropriate as it depends on many factors.What does this all mean?I guess the biggest take-away from this blog is that it is best to acquire a combination of investment assets i.e. some property, some shares (hopefully in super) and some cash by the time you reach retirement. It is not necessary to acquire these assets equally each year. In fact, as this video demonstrates, you should acquire the property first, then shares and then cash. This is the why having a clear, simple, easy-to-follow investment strategy is so important – don’t leave it until it’s too late. Of course, if you would like to discuss your investment strategy with us, don’t hesitate to reach out to us.[1] Whilst long-term share returns are circa 10% p.a., I have been conservative to account for the fact that shares have twice as much volatility as property.
Question one: What didn’t work well in 2018?When planning, a good place to start is to ask yourself what were the one or two things that didn’t work well in 2018. Maybe you planned to sort out your super and didn’t get around to it? Or maybe you didn’t have a good enough handle on expenses (spending)? The idea is to identify one or two big things that didn’t turn out how you had hoped and develop a plan for rectifying them this year. Here’s two tips:1. Often, it’s not a what, but who question. The best way to find a solution to a problem is not by asking “what steps do I need to take” but “who has solved this problem previously that can help me”. Seeking advice or experience from someone that has been in the same situation you will save a lot of time and help you avoid repeating common mistakes. People such as family, friends, colleagues or an independent advisor could help.2. Who’s going to hold you accountable? Creating some sort of accountability has a massive impact on the likelihood of someone achieving a goal. When you set a goal, you must set a deadline and then have someone hold you accountable for achieving that deadline. That could be your spouse, friend, accountant or an independent advisor.Question Two: What are the one or two things you need to achieve in 2019?All of my financial advisory clients have a very clear understanding of the one or two priorities that they need to focus on/achieve this year in order to achieve their longer-term goals. This could include reducing/offsetting debt by a predetermined amount (through good cash flow management assisted with software), investing a certain amount in super, making regular share investments, investing in property or similar.The key question to ask yourself now is “what can I do this year that will have the largest impact on my financial position by 2030?” This will force you to take a long-term view and not be distracted by short-term worries or noise. Don’t try and take on too many goals in 2019 – you really only what one to three goals. And if you are struggling to develop a long-term plan then grab a copy of Investopoly and follow the 8 rules outlined therein.Question Three: Are you safe and secure?It is very important that you periodically consider the things that are in place to protect your wealth and family and the start of a year is a perfect time to do that:· Are your wills up-to-date? Are your executors still wiling and able to preform their role? Have any beneficiaries changed? Do you have current medical and financial powers of attorney? Should/does your will include a testamentary trust?· Are your personal risk insurances (Life, TPD and income protection) up-to-date and still appropriate? Are they structured is a way that you are getting the best value for money i.e. deepest, quality cover for the lowest cost?· Have you reviewed your mortgage interest rates? Should you convert loan repayments to principal and interest (to reduce the interest rate ≈ 0.50% p.a.)? Should you lock in access to equity now? Should you fix any interest rates (3-year fixed rates can be lower than variable rates)?· Is your super invested in the correct investment option? If you have multiple super accounts, should you consolidate them? Have you looked at your super fund’s long term (10 year) performance compared to the leading industry funds (see here – refer to Chart 2)?· Are your tax structures effective? Have you had a review of your taxation affairs?One hour of planning could be the best investment you make this yearMany of the above questions and items really don’t take a lot of time to answer or address. As I say in my book (Investopoly), investing and building wealth is very, very simple – people (and finance professionals) often make it way more complex than it needs to be. So, keep it simple. Spending one hour thinking about the above could reveal some valuable opportunities and help kick start 2019. Of course, if you need any help or referral please don’t hesitate to reach out to us.
Last weekend, The Australian newspaper published the blog I sent you last week where I predicted that the property market is close to the bottom and that prices next year would either be unchanged or improve slightly. Well, that article received over 60 comments and none of them were complimentary or supportive of my prediction. Upon reflection, I wanted to share some very important comments and observations.Be aware of the story you are telling yourselfI am almost certain that 95% of the people that commented on my article have never invested in property and probably never will. They desperately want to prove that their decision to not invest was correct; “See, the market is about to crash. That’s why I didn’t invest!”. So, when there’s an opportunity for support the idea that investing in property is destined for failure, they jump at it.Successful property investors tell themselves a story too. Most investors will say that the market will be fine in the long run so there’s nothing to worry about – it’s all just media hyperbole.With this in mind, I would like to make two points:Be careful that you don’t fool yourselfOnce you understand that humans are susceptible to only seeing things (data, media, ideas, etc.) that validate the story we are telling ourselves, you must be careful to not be too one-eyed. One of my favourite sayings is “hold strong opinions, loosely”. Always leave room for the idea that your story could be wrong.Be careful who you listen toIt is interesting to note that the economists that don’t invest in property themselves (personally) tend to always hold negative views about the property market. The ones that do invest in property tend to be more balanced. Also, negative property views make perfect clickbait and some commentators have built a career out of holding perpetual negative views – because it garnishes media attention. So, be careful who you listen to.In short, people that voice very strong views tend to do so to defend (validate) past decisions.The chorus is getting stronger for a loosening in credit policyEven over the past week, the chorus of people that are saying that credit is too tight has been growing and getting louder. Business leaders, economists, RBA and media are all saying that it’s a threat to the wider economy, not just property. My view that credit will loosen in 2019 becomes firmer as the weeks pass.Negative gearing might not even be banned if the ALP winsLast week Bill Shorten said that he may delay the implementation of negative gearing until as late as mid-2020. This is the first time that Mr Shorten has hinted at a possible delay. Perhaps the ALP is slowly backing away from its policy especially in the face of a weaker property market.The cash flow impact is totally offset by low interest ratesI make this point mostly as an interesting observation rather than trying to make a water-tight financial argument. It is interesting to note that the cash flow cost of a $650k investment property with no negative gearing at current interest rates is still less than when rates were 7% p.a. with negative gearing.See table here. Were people saying that investors would dry up when interest rates were over 7% in the early 2000’s? Was there as much hysteria about higher interest rates as there is about negative gearing?Of course, at some point in the future, interest rates will increase, and, in this situation, negative gearing would be very valuable. However, a property investment won’t produce a negative cash flow forever – its normally only material in the first 5 to 8 years of ownership. After 8 or so years, a property typically will not produce a material negative cash flow. If interest rates are lower for a longer period of time, the banning of negative gearing will have less of an impact.Focusing on tax laws promotes (incorrect) short term thinkingTax laws don’t drive property markets. Supply and demand drives markets.The Australian market is arguably neither in over or under-supply – we have enough houses. Demand however is growing. It is stimulated by overseas migration and interstate migration in Victoria and Queensland. It is this imbalance of supply and demand that will push prices up in the long run – particularly in locations close to the CDB as these are better serviced by infrastructure than outer suburbs. That is the difference between Australia and the rest of the world. Infrastructure in suburbs 30 kms from the CBD is greatly inferior to that in a suburb that is 8 kms from the CBD. The only thing that will solve the housing affordability issue is a massive infrastructure spend – so living further away from the CBD is less of an impediment.However, the common argument is that if negative gearing is banned, the number of property buyers will significantly reduce. However, less than 9% of Australian taxpayers invest in property. That leaves over 91% of taxpayers – or would be property owners – totally unaffected by any changes to negative gearing. In addition, not all investors will be deterred by changes in tax laws.Will banning negative gearing reduce demand for property? Yes, in the short run. But that demand will be quickly replaced by growing migration and people will naturally adjust their expectations to the new tax laws. In the long run, the laws of supply and demand will dwarf any impact that taxation has.The best question is where will property prices be in 2028? Cheaper than today? More expensive? A lot more expensive? Focus on this – not what will happen in the next 2-3 years.Stick to the fundamental laws of investingThis is the reason I wrote my third book, Investopoly. There’s always a lot of noise distracting investors. Instead of being influenced by the noise, it is best to stick to the sound fundamentals of investing.
I think we are very close to the bottom of the property market – if not already there. In fact, I believe that price growth next year will be positive. I appreciate that this prediction is contrary to most, if not all the predictions in the marketplace – most notably AMP Capital’s chief economist, Shayne Oliver predicted last week that property will fall by a further 15%. I explain my view below.Predictions are worthlessThe largest and longest study of expert predictions was undertaken by Professor Philip Tetlock in 2003. He studied 82,000 predictions over 25 years by 300 selected experts. Tetlock concludes that expert predictions were only slightly more accurate than random guesses e.g. coin tosses. Interestingly, experts with a greater media profile tended to do worse than their relatively unknown peers – which maybe suggests you should give more weight to my prediction than Shayne Oliver’s above.
Paul Nugent, the co-owner of Melbourne-based buyer’s agency, Wakelin Property Advisory, sadly passed away recently. I first met Paul back in 2004. Over the past 14+ years, Paul and I have given many presentations, shared a large number of mutual clients and have had numerous conversations and debates about property investment.Not only was Paul a true gentleman with an encyclopaedic knowledge of the Melbourne property market, he had a fantastic sense of humour (although I never dared to say that to his face). I really enjoyed working with Paul and he'll be sadly missed. As you can imagine, over the past couple of weeks, I've been reflecting on the information and knowledge that Paul passed on to me through conversations and interactions. And this has inspired me to write this blog. I'd like to share with you the three things that Paul Nugent taught me about investing in property.Paul’s lesson 1: Some properties just take timeAs Warren Buffet says, "The stock market is an efficient device that transfers the money from the impatient to the patient." And that's the key ingredient for any robust, long-term investment strategy. That is, time and patience.However, patience should not be confused with apathy. Of course, it is important to review investment performance and make sure that your assets possess the requisite fundamentals to deliver performance. This will give you the confidence that you have the right assets to help you achieve your financial and lifestyle goals. But, as Kenny Rogers says, you must “know when to hold them and know when to fold them". So, if you do have an impaired property, no amount of patience will make up for a poor-quality asset.Paul would also often would remind me that some assets just take more time. And it’s patience and having faith that the fundamentals of an asset that will ultimately deliver long-term returns.This concept is most applicable to entry-level investment grade assets. A lower quality asset (yet still investment grade) tend to take more time to deliver adequate investment returns. Therefore, if you own an entry-level investment grade asset, you will just have to have more patience and let time do its thing. Sometimes, this might mean that you need to hold onto a property for a couple of decades before you're satisfied with its overall return – so consider this when mapping out your plans.I recall conversing with a very experienced and wealthy property investor and he was telling me about a property that he owned for 10 years. Over the first nine years of ownership, the property did nothing. And just over the last year, the property has more than doubled in value. Time and patience.Paul’s lesson 2: Ignore all the indicators and just buy when you can afford itOne of the things that Paul used to say regularly is that, "You should invest when your circumstances allow it – not any sooner or later than that"Put differently, ignore all the media noise (which is persistently negative) and advice from well-meaning family and friends. Over the last 16 years, I've only read one (say, one) article that has advised that now is a great time to buy property. Of course, I've read thousands of articles suggesting that property is no longer a good investment. The current environment is a perfect example of the negativity around property. Changes to negative gearing, falling property prices, tighter credit are possible reasons why you shouldn't invest today.However, Paul would always advise you to ignore all these things and instead, only focus on what you can control, which is your own personal circumstances. We can't control markets, the media, tax legislation or the banks appetite for credit. What we can control is, how much we earn and what we do with it, the investment decisions we make and what we invest in. So, Paul’s advice was to focus 100% of our energy on those matters and forget about the rest. There’s always going to be reasons why you should not invest.Lesson 3: Most people don't truly understand propertyPaul used to get quite frustrated by commentators talking about property who really didn't have a thorough understanding of the fundamentals – he used to say; “They wouldn’t be able to identify an investment-grade property if it hit them on the head.”I appreciate that not defining what we mean by “property” probably leads a few people astray. When Paul talked about property, he was only referring to investment-grade property, which probably accounts for less than 5% of total property in Australia. However, when the media talks about property, they are usually generalising to such an extent that they imply property is a homogeneous asset, contained in only one market. However, we all know that the property market is very fragmented and is made up of thousands of different geographical-markets that are influenced by various micro and macro supply and demand factors.Putting that issue aside, there are plenty of people in the property and media industries that hold themselves out to be property experts that don’t really understand property. Or maybe, it's just that they're more interested in understanding what's commercially beneficial for them, rather than what's right for their clients. A true understanding of the property market takes many years to acquire with regular experience and interactions with transactions (practical experience). Someone in Paul's position was able to acquire a very deep wealth of knowledge. I guess, the key learning from this is be careful who you listen to and be careful what you read. Not everyone is going to have the same level of experience and knowledge, and not everyone is going to be solely focused on what makes a great investment for you.Great life lessons, thank you Paul.So, there you have it. These are the three key learnings that I am forever grateful that Paul Nugent taught me over the past 14+ years. I hope you get as much value from them as I have. RIP Paul.
Nice family homes in blue-chip suburbs are becoming increasingly difficult to acquire from an affordability perspective. This also puts pressure on one’s capacity to fund an investment strategy whilst repaying a large loan. So, a few years ago, a strategy called ‘rentvesting’ was popularised. But this has some limitations. I have formulated an alternative strategy which I’ll call livevesting.What is rentvesting?Rentvesting involves renting a house in a location where you would like to live. One that has all the lifestyle benefits and amenities that you desire, thereby freeing up as much cash and equity as possible to allow you to invest in pure investment locations. Investments that you can make without needing to consider lifestyle considerations.In reality, there's a couple of challenges associated with rentvesting.Firstly, there's an emotional consideration. That is, some people feel more comfortable living in a home of which they own rather than renting. To some people, rent money feels like dead money.Secondly, schooling can be a concern. There's not a lot of certainty with respect to the longevity of the renting relationship. That is, the landlord can decide to sell or occupy the property and not renew your lease. If that happens, you've got to find a new home. And if your children are attending a school in that location, then you’re forced to find another house close to their schooling. That can be difficult at times, depending on what sort of rental stock is on the market.And lastly, the other complication with rentvesting is a possible change of mind. If you implement a strategy that requires you to rent for the next twenty years, what happens if you change your mind in five years’ time? You might find that because you have exhausted your borrowing capacity, you’reSpreading yourself too thinOne of the challenges that people are finding today, especially in light of the tighter credit market, is that they could be spreading themselves too thin. That is, their borrowing capacity might restrict them from being able to afford the size of home or location that they truly desire. Plus, their borrowing capacity might restrict how much they're able to invest once they have purchased their desired home. In this situation, sometimes people are seduced into compromising on the quality/location of both home and investments. In this situation, it's possible for people to end up owning two or three very average quality property assets.A new strategy: LivevestingIn short, an alternative strategy is Livevesting. This involves using your full financial capacity to buy the best quality home in the best location that has all the investment fundamentals but also fulfils your lifestyle requirements.This strategy has added benefits if you're able to buy a home that's located in a really good quality public school zone for two reasons. Firstly, properties located in public school zones that contain highly desired and rated public schools, tend to exhibit higher capital growth. And secondly, if you're able to buy a home in that school zone, perhaps that negates the need or desire to send your children to private schools, thereby saving you a lot of money.The premise behind the Livevesting strategy is that you occupy a property that is expected to generate a significant amount of tax-free capital growth. You service the inevitably large mortgage through the period of occupation with the intention of crystallising the tax-free capital gains when you downsize in the future (i.e. prior to retirement). Part of that equity will help you fund retirement.This strategy is distinct from one that involves you buying a home with a view to eventually repaying the mortgage and occupying that property for the foreseeable future. The benefit of this strategy is it allows you to direct all your financial resources into buying a stellar property asset. Because it’s of such a high quality, it’s likely to result in substantial capital gains over a period of one or two decades.Here is an example of how this might workRick and Karen are married with two children and have an annual family income of $370,000. They currently own their home which is worth $1.5 million with a $500,000 home loan.Rick and Karen have two options:· Option one: upgrade to a family home worth $2 million and buy a small investment property for $600,000; or· Option two: upgrade the family home to $3 million and don't buy any investment property.The challenge with option one is they could be spreading themselves too thin. That is, a $2 million budget might allow them to get close to their desired area but not perfectly in it. They may need to make compromises in terms of accommodation size and also land size. Additionally, once they do that, they're only able to afford an entry-level investment property for $600,000 which is likely to have lower capital growth prospects compared to a higher quality property.Let's assume that in option one, both properties grow at a growth rate of 6% p.a. Option two is potentially better because it gives Rick and Karen a much larger budget, therefore allowing them to buy a very high-quality asset. That is, they might be able to buy in a perfect suburb in a nice quiet street without needing to compromise on land size or accommodation size.Assuming that they get this asset selection perfect, let's assume the growth rate for that asset is 9% p.a. Looking at the numbers over the long term, under option one, if the properties grow at 6% p.a., both properties will be worth $8 million in total in 20 years' time. As such, Rick and Karen will have $6.2 million in equity.However, under option two, if the growth rate is close to 9% p.a., their home will be worth $16 million in 20 years. As such, Rick and Karen with $13.8 million of equity.I'll remind you that this strategy's premised on two very, very important assumptions. Firstly, that Rick and Karen don't have the capacity to buy a home and invest without compromising on the quality of either or both property assets. Secondly, that they get the asset selection absolutely perfect. That is, that if they're going put all their financial resources into one property, it must be a perfect property from a future capital growth perspective.Four risks with this strategy that you must considerThere are four risks that must be considered when assessing whether a Livevesting strategy is appropriate for you.(1) Concentration riskThis strategy has significant concentration risk. That is, all your wealth is concentrated into one asset (excluding super). If you select the wrong asset, then your overall wealth building success will be adversely impacted. It is never good to put all your eggs in one basket expect if its an exceptional quality basket.(2) Borrowing riskOften this strategy requires people to borrow substantial amounts of non-tax-deductible debt. This has cash flow implications. You must consider this very carefully, you must build in buffers and ensure that you have appropriate insurance arrangements to mitigate foreseeable risks. Home loans are great servants but terrible masters. You certainly don't want to put yourself in a situation where you expose your family to avoidable risks.(3) Unwillingness to downsizeOne of the challenges with this strategy is that possibly you'll get used to living in a certain location. You'll build a community and friendships in that location. It's quite possible that in 10, 20 or 30 years you might not actually want to downsize to another location. So, you really need to consider your financial capacity to be able to stay in that location if you think that's going to be a risk.(4) Poor implementation.If you determine the wrong budget (i.e. over-borrow), have the wrong loan structure or select the wrong assets, this strategy is not going to work. You must absolutely ensure that your strategy implementation execution is nothing short of perfect.How we live with property is changing.In my opinion, the way we interact with property has changed over the past number of decades. In the 60s, 70s, and 80s, the conventional wisdom was to get married, have kids, buy a home, build a career with the same employer, repay your home loan and retire.This changed in the 90s as people became more proactive with respect to managing their money. People started to use the equity in properties to buy investment properties, build their careers (not necessarily with the same employer) and so on.Today, people tend to get married later in life, spend more time building their careers and in the main, are more proactive with their wealth accumulation activities. People are less willing to make compromises. I suspect that in the future, the strategy of buying a home, occupying it and repaying the home loan to zero will be less popular. Especially for high income earning professionals that want to live and work close to the city. As such, it might become more common to occupy a property with a view to downsizing as a way of repaying debt as opposed to using cash flow.Also, another experience that's becoming more prevalent is receiving a substantial inheritance. There are predictions that there'll be a massive transfer of intergenerational wealth (circa $3 trillion) over the now coming decades. This will also inevitably be factored into people's debt repayment and retirement strategies.It's not for everyone – proceed with cautionObviously, I've talked about some of the risks associated with Livevesting as a strategy. These risks cannot be underestimated, and this strategy will only be appropriate for a select few. However, it could be a perfect solution for some people and if nothing else, the strategy that should receive some consideration (in addition to other strategies). You must absolutely ensure you get independent financial advice, to ensure that you've planned out your cash flows, considered all the risks associated with the strategy and ensured that it's in line with your risk profile.Finally, as I've mentioned above, this strategy must be implemented perfectly. Of all the risks associated with this strategy, the implementation risk is probably the highest one in my opinion. Therefore, if you're going to do it, make sure you do it properly and pay to get the right asset selection advice.
With the tightening in credit and the reduction in borrowing power, many investors capacity to invest has been adversely impacted. For example, an investor who planned to invest in two properties worth say $750k each might find that when it comes time to purchasing the second investment property, they can only afford to spend say $400k due to a contraction in borrowing capacity.This begs the question, what do they do?As I see it, they have four possible options:1. Reduce the budget for the next investment 2. Invest in a regional or outer-suburb - so you can still get a house for example 3. Consider other investments such as a regular gearing strategy into a portfolio of low-cost index funds. 4. Wait to see if things change - will credit loosen up? Will your financial position strengthen? Will expenses (school fees) disappear?
I discuss these options in the below video and explain what approach I think is best.The theme of my message is twofold:You must NEVER compromise on the quality of your investments. Only quality assets will produce quality returns.Typically, there’s more than one strategy to build wealth. A quality share portfolio is better than a sub-quality investment property.An astute investment strategy should be robust and flexibly enough to navigate inevitable market challenges such as a tight credit market.
No one wants to buy at the peak of the property market! Imagine if you buy a property and then a month later property values fall and it takes more than 2 years to recover to the amount you paid for it. That two years of holding costs (interest) for no gain. Would you kick yourself if that happened? This begs the question, how important is property market timing?How important is good timing?I used the graph below to pick two points in time to measure the importance of “good timing”.See chart here. You will notice above that the median property price in Sydney fell between December 1988 and Dec 1990. Similarly, in Melbourne, the market fell between December 2007 and March 2009.I considered the question; what if you had a crystal ball and instead of buying in 1988 in Sydney or 2007 in Melbourne, you held out and purchased a property at the bottom of the market in 1990 in Sydney or 2009 in Melbourne? How much better off would you be?The table below illustrates the difference in equity and overall percentage returns over the total holding period.See table here.The percentage returns look significantly better. However, in fact, the dollar value difference isn’t that significant at all. The investor with poor timing in Sydney still has over $860k of equity in his property (versus $915k for the perfect investor). In Melbourne, the less successful investor has $255k (versus $325k).This suggests that timing really doesn’t have a huge impact – even if you get it terribly wrong. In fact, the longer you hold onto your investment, the less timing really matters. I propose that if you plan to hold your investment property for 20 years or longer, timing is irrelevant.Equity could have easily been zeroImportantly, these investors that had “poor timing” could have been a lot worse off. Imagine if they hadn’t invested in property at all? In this case their equity would have been zero!No one knowsThe fact of the matter is that no one really knows where the market is now (peak or otherwise) and what it will do over the next 2 to 3 years. No one. Zero. Nil. Zilch!The largest study of forecasts that has ever been conducted concluded that forecasters were about as accurate as random guesses (and well known forecasters do worse than the average). As Warren Buffett says, “forecasters will fill your ear but never your wallet”.Forget about worrying about short term (possible) movements – it will paralyse you, won’t add any value and probably encourage you to do nothing. Instead, focus ONLY on long term outcomes.Aim is to outperform the medianWith the correct asset selection principals, your goal is to outperform the median price return. The median is just the mid-point after all. It includes a bunch of terrible properties and some great ones too. It is a pretty rough and arguably meaningless measure of price movements. Therefore, it makes sense that you should be able to do better than the median if you apply a fundamentally sound approach. The higher the quality of the property, the less important timing is.So what do you do about property market timing?Simple. Don’t read sensationalist articles and media reports about property bubbles and crashes – which are only written to sell newspapers and create fear. Instead, focus on investing in assets that have the capability (fundamentals) to be worth 4 times more in 20 years’ time. That’s exactly what wealthy people do. None of my wealthy clients have ever expressed concern about market timing because their experience has proven that time “in” the market (not market timing) together with quality assets are the only two important things which create wealth. Meanwhile the people that try to forecast what the market will do in the short term, inevitably do nothing and are a lot worse off.
You must have a robust methodology for selecting the right share, property or bond to invest in. If you select the right asset, your investment returns are likely to be very healthy in the long run.However, if you make a mistake, it is likely to cost you money – in terms of opportunity cost and/or in real terms.The best way to prevent making a mistake is to use a methodology for selecting the right asset that is proven to work. In this blog I outline the four different methodologies and the two that I think are best to use in combination, where possible.There are four different asset selection methodologiesThere are many different asset selection approaches which can have their own subtleties and idiosyncrasies. However, every methodology can be broadly allocated into four different categories:1. Value investingThis involves identifying assets or sectors that are intrinsically undervalued. Markets are not always perfectly efficient and sometimes assets transact for amounts less than fair market value. This could be due to factors such as a motivated seller, misinformation, market sentiment (fear) and so on.2. Growth investingThis involves identifying assets or sectors that have high growth prospects. This approach is less concerned with the price paid for the asset compared to its appraised value - it’s all about the idea that you can buy this asset today for $x and that price will look cheap in the future after the expected growth has materialised. This methodology requires you to form a view as to what the future growth opportunities could be which is often highly subjective.3. Fundamental investingThis approach involves identifying the assets or sectors that have the strongest underlying fundamentals such that the asset quality is extremely high. This approach is less concerned about the price paid and usually the assets growth prospects might be already reflected in the current price. The thesis underlying this strategy is that investment returns are directly linked to asset quality i.e. you can only expect above average returns from above average quality assets.4. Technical analysisThis approach involves looking for trends in data and statistics (such as price movements and volume) to identify assets and sectors that are expected to deliver above average returns in the short or longer termFundamental with a value tilt, if possibleThe lowest risk approach by far is fundamental investing. Asset quality will typically persist longer than market mispricing or unrecognised growth prospects. As Warren Buffett says, he would rather buy a wonderful stock at a fair price than a fair stock at a wonderful price.However, sometimes it is possible to employ both a fundamental and value approach. That is, for example, sometimes you can buy a wonderful property or stock for a wonderful price. But, you must never pursue a value approach at the cost of the investment’s fundamentals. That is, never compromise on asset quality.You can reduce your risk by using an evidenced-based approachAn evidenced-based approach involves only adopting an asset selection methodology where there is overwhelming evidence that it will produce the desired investment returns. Too many people adopt investment methodologies and approaches without considering whether the evidence stacks up and that is just too risky – it is totally unnecessary to take that risk. Therefore, if you want to find a fundamental approach to adopt when selecting the right residential property to invest in, make sure there’s an overwhelming amount of evidence that demonstrates the methodology works.Specifically, there are several things to consider when assessing the historical evidence:Rules-based investingIs there a list of pre-determined rules that you follow to implement the methodology? For example, if looking to invest in an apartment, it must have carparking on title. One of the major benefits of a rules-based approach is that it is repeatable without highly specialised (expensive) human resources.You must understand historic returnsIt is important to understand what has driven investment returns. Can the returns be attributed to the investment methodology alone or were they influenced by other factors? Are returns likely to persist over the long run through various market cycles? Observing returns is only half the picture. It is equally important to understand the factors that have driven the returns because that will demonstrate whether your rules-based approach will continue to work.Methodologies can be openly critiqued and stress-testedEvidenced-based approaches are often peer-reviewed and critiqued. This allows methodologies to be scrutinised and tested by peers and industry participants to ensure they are robust.They tend to be low-costEvidenced-based and rules-based approaches tend to be low cost because the methodology itself is responsible for generating the returns, not an investment manager who are often paid large sums of money.I’d like to share our fundamental approach with a value tiltI invite you to join me for a livestream seminar on Tuesday 13 November 2018 after work at 7:30pm where I will share with you where I think the best value opportunities exist in the share market and residential property markets at the moment.Click here (https://www.prosolution.com.au/investment-briefing-nov18/) for more information about what I will cover and to register for this event.
There has been a lot of commentary in the media about the “credit crunch” that we are in at the moment. Why is the credit crunch going to impact you and your plans? And what can you do about it?Why has credit tightened?Over the past year I have written (here and here) about how the government has tightened up lending standards in an effort to cool the property market and reduce the volume of interest only loans. The reason for this is that they didn’t want Australians over-borrowing whilst interest rates were very low, and they didn’t want investors speculating in the property market. They have certainly achieved their aims. The property market has cooled and investor and interest only loans have fallen dramatically.The RBA is out of touchThe RBA seems to be comfortable with the credit tightening as noted in its most recent minutes:“They noted that most borrowers took out a loan that was substantially smaller than the maximum loan that lenders were prepared to offer; three-quarters of borrowers had taken out loans that were less than 80 per cent of their maximum borrowing capacity based on serviceability considerations. This suggested that relatively few borrowers would have been constrained by the tightening in lending standards that had reduced maximum loan sizes to date.”The RBA’s comment is ridiculous because this statistic doesn’t include the fact that many borrowers would have had loans declined. And, of far greater importance, many prospective borrowers would have been told that they would no longer qualify for the borrowings they desire by their mortgage broker or banker and in these cases would never proceeded to a formal application. So, to say that relatively few borrowers have been constrained by the credit tightening shows how out of touch the RBA is and that is a worry!Anecdotally, I estimate that a least 30% of our clients have been impacted by the credit crunch i.e. they are willing and able to borrow more but cannot do so. Given that our clients almost always have higher than average earnings, the broader market has definitely been significantly impacted.Applying for a mortgage can be like a criminal forensic investigationUnfortunately, in many instances, I liken the loan approval process now to a criminal forensic investigation and the applicants are assumed to be guilty until proven innocent. The lender will trawl through your bank and credit card statements and ask questions about where you are spending your money and why. They will want third-party documentation to verify the existence of every asset, liability and commitment (and sometimes they want multiple forms of verification!). These days it can be an intrusive and laborious process.To me, what is going on feels a lot more severe than just prudential lending standards. I wonder if this is how the banks are repaying the government for introducing the 'major bank levy' (tax) and the Royal Commission? Maybe the banks are thinking “we’ll show the government whose boss… we’ll restrict money supply and potentially cause economic problems such as a falling property market, lower confidence, etc.”. Maybe they are using the excuse of “tighter credit” to show how much power they have?Some stories from our office that will blow your mindI would like to share with you some stories that demonstrate just how crazily tight credit has become:§ A client invested some monies in a peer-to-peer lending platform (e.g. you deposit money with them and they pay you interest each month). The bank is refusing to treat this as an investment (asset). In fact, they are treating it as a loan (liability) unless the borrower can get a letter from the provider confirming it is an investment. Getting such confirmation from an online/app business is near on impossible.§ Lenders are now asking about Life, TPD and income protection insurance. That is, sometimes they require it to be in place before they approve a loan.§ One client that has a family income of over $250k p.a., total assets of over $7 million (75% are investment assets) with existing loans of approximately $1.2 million with over $1 million of cash in the offset account – so virtually nil net debt. This client wanted to buy another investment property and borrow circa $950k. Their existing bank (who they had an excellent credit history with) asked for copies of nearly every document in their possession together with letters from their accountant and us (as their financial planner) re-confirming the information. The approval process was arduous and drawn-out.§ Most lenders will ask for a copy of a rental property’s lease agreement plus a transaction listing for the past 6-12 months. Lenders will then review this to ascertain the consistency of income.§ A lender identified a regular monthly fee of $70 and asked why it wasn’t separately disclosed in the applicant’s budget – oh, I forgot to mention, you must include a budget of your living expenses in the loan application.§ A colleague told me that a lender queried a $20 monthly payment in an applicant’s bank account. The applicant repaid a small layby purchase. The bank asked the applicant to get a letter from the vendor confirming what this $20 charge related to and that the debt has been fully repaid.Everyone is treated the same. It doesn’t matter whether you are a first home buyer with a very small deposit or an established family with a net worth of several million dollars and six-figure incomes. Both parties will have to jump through the same hoops. It’s almost as if the bank employees are too scared to approve a loan unless the evidence is overwhelming that it’s a strong application.What can you do?Successful investing is as much about finding solutions to (potential) problems as anything else. That is, you must look for the opportunities. The silver lining. You must expect there to be bumps in the road. Some challenges here and there. Don’t be dissuaded by them. Understand that its all part of the journey. Today’s credit crunch is no different. Here are a few adjustments you can make:1. Realise things have changedThe first thing you probably need to do is adjust your expectations. Of course, not all applications are a nightmare. But you must expect to provide a lot more supporting documentation, answer lots of questions and the whole process to take longer. Some loans are approved relatively simply and quickly. However, just don’t expect it. Expect it to be difficult and that way you leave room to be pleasantly surprised if everything turns out to be relatively smooth.2. Understand the far-reaching consequences of what you do day-to-dayWhat you do today could impact on your ability to borrow in one or two (or more) years’ time. The reason for this is twofold. Firstly, lenders are closely reviewing your transactional and financial history with a fine-tooth comb. Secondly, the new comprehensive credit reporting regime (in place since July 2018) will mean that a lot more credit history data is being collected. Things like applying too often for credit cards or personal loans, late bill payments and having high credit card balances will negatively impact your credit score and therefore your ability to get a loan.This means when contemplating a financial transaction, you always must consider whether there will be any negative impact on your borrowing capacity or credit score. This is something new that all Australian’s will need to get used to.3. Plan ahead… well aheadGive all these challenges, it is more important than ever before to plan ahead. This gives you an opportunity to position yourself so that you maximise your chance of getting the required lending approved. You must consider the timing and impact of things like changes in employment, income, property valuations and so on. I have always said that the best time to borrow is when you don’t need it so proactively accessing equity (i.e. increasing loan limits to 80%) every few years becomes an event more important and valuable practice.4. If you sell a property, don’t repay the loanOne of the problems with the credit crunch is that some people wouldn’t be able to qualify for the amount of lending they currently have. This means, if they sell a property and repay any related loans, they might not be able to borrow again to purchase another property. If you fall into this category, one solution to consider is to not repay the loan. Depending on the lender and product, you may be able to secure that loan using another property (or the cash you receive when you sell) so that the loan remains open. You can repay the loan balance such that only a few hundred dollars is outstanding (don’t repay it in full otherwise it will automatically close the loan). This will allow you to redraw the loan if you need the money in the future – and a redraw changes the original tax nature of the debt. Be careful with this – make sure you receive the correct advice.5. Split out unused loansFor example, if you have a large amount of cash in your home loan offset but do not qualify for additional borrowings, what you might be able to do is split your home loan into two accounts – a used and unused portion. You can then repay and redraw the unused portion (to change its tax nature) and use it for investment purposes.Its not all bad newsWhilst the credit market is very tight, in most circumstances we are successful in getting our clients loans approved. It’s just that the process is more convoluted, and it takes a lot longer.But we are in a new credit environment and borrowers must understand that their financial history will have a far greater impact on their borrowing capacity than it did in the past. As such, making sure you work closely with a banker or mortgage broker will help you avoid some of the things that could impair your borrowing capacity and therefore your financial plans.
How many properties do you think you need to own to generate enough wealth to fund a comfortable retirement? Most people think they need more than 3 properties to become independently wealth.Of course, the answer will be different for everyone because it depends on your income, existing assets, time until you retire, goals and other factors. However, having been involved in developing hundreds of investment strategies (possibly more than a thousand), I can tell you that 90 per cent of people need to hold somewhere between one or two investment-grade properties. It is unusual for an average person to need to invest in three or more properties.Quality is the keyIndeed, the number of properties is not really the most relevant measure. In fact, its meaningless. More important is the quality of the assets that you own and the amount of equity you have in them. I would prefer to own only one sensational investment property compared to three average ones.Maybe it’s a sales pitchSome books and property promoters suggest that investors should aim for acquiring a portfolio of more than three investment properties. However, I fail to see how this could work and think this is a high-risk approach.You either have to acquire several low-value properties (and are therefore you are likely to compromise the asset quality, meaning they aren’t investment-grade) or, if you are buying investment-grade property, you must borrow a significant amount of money. I have seen profiles of investors (in property magazines) who have $2 million to $3 million in loans when their family income is between $100,000 and $150,000 p.a. in total. This is a very high-risk approach and a recipe for disaster in my opinion. Given the immense amount of credit tightening over the past 1 to 2 years, it would be difficult to access this level of financing anymore (which is a good thing).Think about debtDebt is a great servant but a very bad master. You must control it, not the other way around. Therefore, when borrowing to invest in property you must conservatively assess your capacity to be able to service the debt and sleep at night regardless of the variability in interest rates and repayments.Also, you need to have a debt exit strategy. That is, how will you repay the debt when you retire? I typically like my clients to have little to no debt when they enter retirement because, at this stage of life, they will be very sensitive to interest rate changes (because their only income source is investment income).Therefore, if an investment strategy involves borrowing a lot of money to invest, you must also develop a plan for how you will reduce debt before retirement. This might be achieved through gradual debt repayment funded from your surplus cash flow, the sale of investments on or after retirement (property or shares) or drawing a lump sum from super – or a combination of these things. The point is, you must have a clear debt repayment strategy.Constructing your investment property portfolioYou need to consider a few factors when constructing or planning out what types of properties you will include in your property portfolio. These factors relate to diversification of your portfolio and include:1) Diversifying geographicallySpread your properties among different suburbs and market segments, and even consider investing in different capital cities. The idea behind this is that markets do not grow uniformly so, by diversifying geographically, you will hopefully smooth your return (growth). Growing your asset value will allow you to access further equity to assist you in building wealth.I realise that it is tempting to invest in one location you know well. However, the benefits of diversification should not be discounted.2) Diversifying across various price pointsDifferent sectors of the market (in terms of price points) will perform differently at different times – mainly because different buyers drive this performance. For example, if you have an investment apartment already, then you could look at buying a house for your next investment – and vice versa. Stick closely to the median value within a suburb too – because that is the price point likely to attract the larger volume of buyers.3) Diversifying your tenant profileThis involves owning properties at different rental income amounts so that you appeal to a wide sector of the market. For example, if you have a house as an investment and are charging, say, $800 per week in rent, then you might be better off investing in an apartment next at a rental level of $400 per week (to reduce the risk and financial impact of vacancy).Also, different types of properties will appeal to different markets – some will appeal more to couples and singles, for example, whereas others will be more suitable for professionals or for families. It is advantageous if all your properties do not appeal to any one market.4) Investing in a different market to where your home is locatedWhile your home is purchased for different reasons than building wealth, investing in a different geographic location from your home is advisable. I’m not necessarily suggesting a different state, but a different suburb is advisable for the purposes of geographical diversification.Your home can be an investment tooWhen coaching my clients, I try and encourage them to approach a home purchase similar to an investment purchase. I realise this is not always possible and there are maybe lifestyle considerations. However, I know the significant compounding benefit to my clients of buying a home that generates a strong amount of (tax-free) capital growth. Sometimes its possible to have your cake and eat it too i.e. a nice home that also makes a good investment.Leave some room for other investmentsAnother very good reason not to try and buy too many investment properties is to leave some room to invest in other assets such as shares or making additional super contributions. If you over-invest in property, you might find that all your eggs are in one basket and that might be something you end up regretting.You probably only need one or two investment propertiesMost people will only need to acquire one or two investment-grade properties to fund a comfortable retirement. A few people might be able to comfortably invest in three. However, it is very unlikely that you will need more than that.If you feel strongly that you need more than 3 properties, or someone is suggesting the same to you, please get a second opinion from an independent advisor as it could help you avoid making a very costly mistake.
The two certainties: death and taxesThere are two unfortunate certainties in life; death and taxes. And, unfortunately, tax cannot be avoided (legitimately) even by dying.Australia is one of the very few countries in the world that has no death taxes. However, although there is no tax levied on the property of a deceased person, there may be tax consequences flowing from the dealings with the deceased assets.This blog outlines some of the key considerations you must address.The deceased estateWhen a person dies, an executor or administrator takes control of their assets. The executor named under the (valid) Will is known as the legal representative. An administrator is appointed by the probate court when a will does not exist.A deceased estate is not a separate legal entity but a relationship between the executor/administrator and the beneficiaries – much like a trust. The deceased estate would comprise of all assets owned by the deceased as at the date of death – except for any assets owned as joint tenants, superannuation and any assets held in a discretionary trust.A Will covers matters such as how the assets should be shared amongst family members and other beneficiaries, trusts to be established subsequent to death, bequests to charities and institutions and funeral instructions.A Will is a legal document and therefore should be drafted by a lawyer preferably one who practices in the area of Wills and Probate and has tax knowledge – or at least a lawyer who would work in conjunction with an accountant who is familiar with the tax treatment of such estates.What if you don’t have a will?If you die intestate, the Supreme Court will decide who will be your administered and who will benefit from your estate. Dying intestate creates a lot more work, cost and stress for the people you leave behind. It also might result in people benefiting from your estate who you don’t want to benefit. Therefore, for the sake of a relatively small cost and to ease some of the stress on your family, it is always best to have a valid and up-to-date will.If you’re a single and have little assets and no special beneficiaries, a cheap will kit will probably sufficive. However, if you have any significant assets or liability, children, a spouse and so on, you really need personalised legal advice.Taxation of assets received from a deceased estateDeath is generally not a trigger point for taxation. Assets owned by the deceased are passed onto beneficiaries without any immediate capital gains tax consequences. When an asset passes to a beneficiary, the beneficiary becomes the owner of the asset and generally inherits the same cost base and tax treatment of the deceased.For example, if you were to inherit the main residence of the deceased, you would be eligible for the main residence CGT exemption, if the property is sold within 2 years. If you were to inherit an investment property held by the deceased, and sell it at a later stage, your cost base would be the purchase price (plus costs) initially paid by the deceased person.Controlling assets from the graveOften people wish to regulate the time/age their beneficiaries obtain control of the estate. For example, it is best to avoid a situation where a beneficiary inherits a substantial amount of money when they are not mature enough to make prudent financial decisions, may be under the influence of an addiction (such as gambling or drugs) or at risk of a relationship breakdown. The best way to accommodate these risks is to provide your executor with clear instructions and enough flexibility to execute those instructions effectively.Typically, the best vehicle to facilitate this is a Testamentary Trust. A testamentary trust (usually a type of a discretionary trust), is a trust established under the terms of a Will. In this situation, some or all of the assets from the deceased estate are transferred into the Trust, and the trustee can distribute income and/or capital to any named beneficiaries. The definition of a beneficiary can be as wide as you would like to make it. You may permit the executor to establish a different testamentary trust for each beneficiary.There are three main benefits of including a testamentary trust in your will:Asset protectionYour will can dictate that all your assets be transferred into a testamentary trust. This will protect your estate and any “at-risk” beneficiaries. An at-risk beneficiary is someone that has a high risk of a relationship/marital breakdown or has certain self-employed or occupational risks (see this recent blog about asset protection).Tax savingsUnlike other trusts, distributions to minors (people under the age of 18) from Testamentary Trusts are not subject to the special minors’ tax rates – meaning each minor has access to the tax-free threshold which is currently $18,200. This is advantageous if you have any children or grandchildren that are under 18 years if age. Essentially, the executor can spread the estates income across multiple minors and possible avoid paying any tax. This should also assist with minimising any future capital gains tax.Practical benefitsQuite often beneficiaries will be at different stages from a financial strength perspective. Therefore, it is possible that one beneficiary wants to liquidate assets whereas another may want to retain assets. This can be difficult when assets will have different values e.g. property. A testamentary provides a good solution. It allows the executor to sell some assets and retain the rest in a tax effective environment.How to minimise the risk of your will being contestedVirtually anyone can contest your will and the estate (your money) must pay for the contester’s legal costs. However, there are a few things that you can do to minimise this risk.Firstly, be as transparent as possible with everyone that expects or doesn’t expect to benefit from your estate. If you are going to purposely give less or exclude someone, have that (sometimes difficult) conversation whilst you are alive.Secondly, move existing or acquire future assets in entities like family trusts or own assets jointly (not tenants-in-common) with others. This minimises the pool of assets that ends up in your estate. So, if you have no or very few assets, there’s little to fight over.Finally, make sure your will is up-to-date. It is best to review it annually to ensure the way it is structured is still correct, executors are still appropriate and so on. It’s unlikely you will need to redo your wills often but its important to consider them periodically.Power of attorneysA power of attorney is a document that permits someone (called your attorney) to make decisions for you and those decisions will have the same legal force as if you had made them. Practically, this is most useful in situations where you travel and are unable to sign documents and/or for individuals where their capacity is impaired due to age or illness.Normally it is advisable to have a separate medical power of attorney. This document sets out the people that can make decisions about your medical treatment on your behalf.Super death benefit nominationSuperannuation does not form part of your estate. Instead, the trustee of a super fund must decide where to pay your super. However, most super funds allow you to complete a binding or non-binding death benefit nomination which directs where your super is to be paid. These must be updated every 3 years. Typically, it is advisable to nominate a financial dependent (such as your children and/or spouse) to avoid the benefit being taxed.Estate planning is crucialThe last thing you want to happen is that you work hard throughout your whole career, invest successfully and then lose a large amount of your wealth you intended for your beneficiaries to unexpected tax bills, unintended beneficiaries or avoidable legal fees and costs.There are many factors that need to be considered in your estate planning process, from tax, asset pool distribution, wills, cash flow distributions and investment strategy. By having a well-rounded network of trusted and independent advisors, you will avoid the unnecessary complexity of estate planning whilst ensuring the intent for your wealth is seen through, well after your death. If you need help don’t hesitate to reach out to us.
The last thing you want to happen is that you work hard throughout your whole career, invest successfully and then lose a large amount of your wealth due to an unexpected event. Therefore, asset protection is just as important as asset accumulation. Asset protection is a subject that most investors fail to consider, don’t get good advice on and/or take the wrong advice. The goal of this blog is to give you an overview of the key risks people typically need to consider and what to do about them.Be careful who you ask for adviceOver the past few months I have come across a few people that have paid a lot of money (over $5,000) to lawyer or accountant for asset protection advice. In every case, they ended up with a complex and convoluted structure which they arguably didn’t need.My advice is simple. Get independent advice before paying anyone a lot of money for asset protection advice. Someone is independent when they have no asset protection services to offer you other than their advice. Independent financial advisors are typically the best source of advice as they rarely set up structures (such as companies and trusts) or provide legal services. That is, they have no vested interest in the advice given.Asset protection risk: Self employedIf you are self-employed, you might be exposed to additional risks. There are two important points to consider:§ Firstly, your risk is that you get sued. You must ensure that you have the correct business insurances in place including, product liability, warranty and indemnity, business interruption, WorkCover insurance, professional indemnity, public liability and so on. Also, you must ensure that your business is structured correctly so that your liability is limited (e.g. trading company with the shares owned by a discretionary trust). Make sure that you don’t leave any retained profits in the trading company – the company must have as fewer assets as possible.§ Secondly, typically, there are only two risks that directors of companies can be held personally liable for being; trading whilst insolvent and not maintaining a safe workplace. Therefore, if you are a director of a trading company make sure you receive up-to-date financial reports and if you don’t understand them, ask questions or get advice. If your business maintains a higher risk workplace (e.g. manufacturing, construction, etc.), make sure you are confident that you are maintaining a safe workplace.Asset protection risk: Occupational risksIt is true that certain occupations carry a higher level of risk. A good example is obstetrics because an error or mistake whilst practicing could result in a lost life. Even so, it is important to consider the depth and history of professional indemnity insurance cover. This cover is typically very deep, and the experience of personal loss is very limited – almost non-existent – even for the highest risk occupations. The most likely situation where personal loss could be experienced is if one’s actions were considered ‘criminally negligent’. Therefore, if you conduct yourself in a prudent and professional manner it is probably unlikely that you need to be concerned about suffering loss because of your occupation.Asset protection risk: Property investorsProperty investors could be exposed to additional risks such as a tenant or guest suffering an injury whilst attending your property. Also, certain properties carry higher risks such as unsafe balconies and properties with pools.Therefore, it is important to maintain adequate landlord insurance as this will provide public liability cover, damaged caused by tenants, loss of rent, legal fees and so on.Asset protection risk: Relationship breakdownsIn Australia, approximately one-third of marriages end in divorce. Therefore, statistically, this is probably your most significant asset protection risk if you are married or in a de facto relationship. The family court has very wide-ranging powers and will typically look through structures such as companies, trusts and super funds. So, those asset protection measures won’t work here.Whether you are considered to be in a de facto relationship depends on your individual circumstances. The things that will be considered include the length of the relationship, whether you are cohabitating, the sharing of household chores, amalgamation of finances (sharing of income and expenses, joint assets, etc), existence of children, common friends, sharing pastimes and so on.The best thing you can do before entering into a de facto relationship or getting married is enter into a Binding Financial Agreement (BFA). A BFA is a document that stipulates each party’s entitlement in the event of a relationship breakdown. These are often referred to as pre-nups (or pre-nuptial agreements). SBS’s program, Insight recently aired an episode about BFAs which featured lawyers and couple’s discussing the legal and practical issues. It was very informative – click here to watch it online. You can enter into a BFA at any time – even after you are married.Going through a divorce can be an emotionally and financially painful experience. One of the problems is that the court system was designed about 1000 years ago to resolve commercial disputes. They were not designed to adequately deal with family matters. Therefore, a new approach to resolving these matters is becoming more popular and it’s called collaborative law. Many people believe the adversarial legal system can sometimes aggravate, exacerbate and elongate the divorce process causing more emotional turmoil and large legal costs. The collaborative legal process aims to reduce any friction between the parties and mediate an agreement that both parties feel comfortable with. There are various legal practitioners that are trained in and practice collaborative law. It may not always be possible or appropriate to engage in a collaborative process. However, perhaps in addition to entering into a BFA, your partner and you can agree to engage a collaborative process in the event of a relationship breakdown.It should be part of your planAsset protection must be considered when formulating your financial strategy. This is one of the benefits of engaging a holistic financial advisory process. That is, there are many factors that need to be considered as a lot of factors are interrelated. The key factors that holistic advice must include are cash flow management, investment strategy, asset selection, asset protection, risk management, insurances, estate planning and wills. A well-rounded independent financial advisor should be able to address all these considerations and, where possible, avoid unnecessary complexity and cost whilst ensuring nothing is missed (often with the assistance from a trusted network of other advisors). Of course, if you need help don’t hesitate to reach out to us.Please note: The above blog is general in nature. ProSolution Private Clients is not licensed to provide legal advice. Please do not act on any of the information above without first obtaining specific and personalised independent legal and financial advice.
Paying minimal tax probably appeals to most people. And as tax is often our biggest lifetime cash outflow, it might seem logical that minimising it is a great way to build wealth. However, I’m going to suggest that perhaps you need to pay more tax to build wealth. A higher tax bill typically means you have a higher income and therefore a higher borrowing capacity.I have seen lots of people cut their nose off to spite their face by focusing on the wrong things at the wrong times. Sometimes tax minimisation is more important than borrowing capacity maximisation. However, the reverse can also be true too. You must understand when to focus on one and not the other – particularly in this very tight credit environment.The wealth impact of minimising your taxesEven a modest increase in your income can translate to a significant increase in your borrowing capacity. For example, if your taxable income increased by $37,000 from $150,000 to $187,000 it would increase the amount of tax you pay by approximately $15,000. However, I estimate that this higher income will increase your borrowing capacity by approximately $300,000. This additional borrowing capacity might be the difference between affording an entry-level investment-grade property at say $500,000 versus a higher-grade property for say $800,000. A higher-grade property should, in the long-run, result in a higher capital growth rate. The difference between the value of these two properties in 10 years’ time could easily be more than $500,000 in today’s dollars[1].I am sure that the investor that buys the better-quality asset (at $800,000) won’t even think about the higher tax bill he had to pay 10 years earlier. This is why it’s important to take a long-term view when making financial decisions.Minimal tax = minimal borrowing = big disadvantages?Every now and then we receive enquiries from people that operate their own businesses and report very little taxable income (BTW, I’m not certain their tax minimisation strategies are always legal). These people then complain that the banks won’t lend them any money. I have no sympathy for people in this situation as you can’t have it both ways.Putting aside the moral and ethical obligation to pay our fair share of taxes, we also must realise the opportunity cost resulting from self-sabotaging your own borrowing capacity. Doing so retards your ability to borrow to invest and therefore build wealth. In the past, this was less of an issue with low-doc loans. However, these days, no such options exist so if you decide to report a low taxable income then your borrowing capacity will be equally low.Timing your tax minimisation strategiesThere are several strategies that tax advisors might employ to legally reduce your taxable income including:* Delaying the billing/receipt of income until after the end of the financial year; * Prepaying expenses or bringing forward expenses into the current financial year; * Claiming a portion of your personal expenses for business use e.g. home office, phone, car and so on; and * Distributing income to people outside of your immediate family.
As the above list demonstrates, in any one year many people have the capacity to legally influence their taxable income and their decisions can have a material impact on their borrowing capacity. For example, some lenders only want to see one years’ worth of tax returns (most recent year) whereas others will work on the average of the last two years. Therefore, in order to maximise your borrowing capacity, you might decide to bill your work-in-progress before the end of the year, delay expenses and/or perhaps not claim a tax deduction for some mixed-use expenses (phone, car, etc.).In addition, some investors can be very tax-focused, and they allow it to influence their investment selection. That is, they select the investments that have the greatest impact on their tax expense. An example of this would be investing in a new-build property because of its depreciation deductions. This approach is often short-sighted as short-term (tax) savings almost never translate to the creation of long-term wealth.Know when to minimise your taxable (or not)In today’s tight credit environment, it is critical for people to ascertain how much money they would like to borrow in the next one to three years and work closely with their mortgage broker and tax advisor to determine their priorities i.e. do they actually want to minimise or maximise their taxable income? Or maybe minimising your taxable income as much as possible doesn’t adversely impact your borrowing capacity to the extent that is compromises your ability to achieve your goals – in which case you can do both. The point is that you must ensure your tax planning and borrowing capacity planning are congruent.This is something to think about before you lodge your tax return for the 2017/18 financial year. Your 2017/18 tax return will dictate you borrowing capacity until January 2020 (when lenders will start asking for your 2018/19 return). Therefore, some planning now may help you avoid future disappointment.——————[1] Ignoring the higher after tax holding costs associated with the more expensive investment property.
Significantly tighter credit, the potential abolition of negative gearing and increase in the capital gains tax rate, falling property prices, new apartment supply… these are some of the head winds facing property investors today.Given these challenges should you give up and not invest in property? I don’t think so. In fact, good investment opportunities tend to reveal themselves during times where there is negative sentiment and/or uncertainly.I would like to share with you four tactics that you can employ to mitigate many of the above risks and ultimately enjoy quality long-term returns.Tactic 1: Invest with owner-occupiersIt is prudent to invest in a location and type of property that suits owner-occupiers equally as well (if not better) than investors. By doing so you increase your pool of prospective purchasers which will help drive property price appreciation. Also, if future changes in tax legislation negatively impact investor demand, the owner-occupier market will still underpin demand for your investment property.The chart below from CoreLogic (from 2016) sets out the percentage of units and houses owned by investors. Most inner-city high-rise residential towers are often marketed to investors and due to the sheer quantity of these apartment towers, they are probably responsible for skewing the percentages somewhat. However, this sector is a good example of one that you must avoid like the plague – for lots of reasons including that fact that this it is dominated by investors.Chart: https://www.prosolution.com.au/wp-content/uploads/2018/09/Corelogic-units-v-houses.pngTactic 2: Invest before 2020The Shorten government has stated that its ban on negative gearing and higher capital gains tax rate will only apply to properties that are purchased after a yet to be determined date. That is, these new rules will not apply retrospectively to property you already own. Assuming the election occurs in May 2019, I expect that it will take at least one year to draft and pass legislation. As such, perhaps the earliest practical start date for these new tax rules would be 1 July 2020. Therefore, if you purchase an investment property before this date you will still enjoy the current negative gearing benefits and 50% capital gains tax discount.Tactic 3: Level up on qualityAs discussed in my recent article in The Australian newspaper, if the ALP’s tax policies are implemented as proposed, they will reduce the after-tax long-term return on property by 26% from 12.6% p.a. to 9.3% p.a.The best way to mitigate the negative impact of higher taxes is to generate higher returns. And you cannot expect above-average returns from below average quality assets. Therefore, you absolutely must invest in the highest quality assets that you can afford.In my book, Investopoly, I talk about how notionally there are sub-grades with the class of investment-grade properties and these will have an impact on the potential investment returns that you can enjoy. I have provided and excerpt below (click to enlarge).Book: https://www.prosolution.com.au/wp-content/uploads/2018/09/investopoly-grades.pngTactic 4: future-proof your loan structureWhen it comes to borrowing, the best starting assumption these days is that you may not have access to more credit in the future, so you should take whatever you can get now. Therefore, if you are going to invest in a property, borrow the full cost (using equity in existing property) and putting all existing and future surplus cash in a linked offset account is the best approach.In regard to repayments, consider opting for principal and interest repayments as it will save you approximately 0.48% p.a. in interest (as interest only loans attract higher interest rates). Better still, you might consider running your repayments through a line of credit so that is soaks up the principal portion of the repayment. This will give you the best of both worlds i.e. the lowest interest rate whilst minimising the cash flow cost of the investment through only funding interest only.The point with this tactic is that due to much tighter credit, getting your loan structure right is even more important today.Remember, we are playing the long gameI have written about this a lot previously but it’s a good reminder. A lot of the potential risks facing investors today have been experienced before. They will have an impact in the short run, but not in the long run. The property market has generated very good returns over the past 3 to 4 decades. Over this time, it has endured many changes in tax (far more severe than what are on the cards today), double-digit interest rates, economic shocks, market crashes and so on. The risks today are nothing new. If you are investing in property you are best to take a very long-term view and ignore any short-term worries. Long term investors that are focused on quality are always rewarded.Uncertainty your friendI recall attending an auction in October 2008. Two weeks prior to this auction, Lehman Brothers filed for bankruptcy and the share market was in free-fall (it lost 35% of its value between September 2008 and March 2009). According to the media, the end of the world was nigh. It was a very volatile time. Anyway, back to the auction, I bought the property for $1.21 million. In a normal market it was probably worth $1.4-1.5 million. This property would be easily worth $2.5 million today (due to personal circumstances I don’t own it anymore). My point is, during times of uncertainly and low consumer sentiment, opportunities can arise but only if you are looking for them.Therefore, perhaps now is not a bad time to start investing in property. That said, I don’t think there is good or bad time to invest. You do it when your circumstances allow it. Ignore the media and run your own race.
According to the ATO, over 70% of people engage the services of a tax agent/accountant. However, according to Blackrock, only 15% of Australians have a relationship with a financial advisor.I believe that many people would benefit from having both. In fact, to crystallise the most value it is imperative that they have a close working relationship. To make my point, I would like to share some real-life stories about how integrated financial advice and tax advice can be and the value created when the approach is seamless.I believe that lots of people are missing a lot of financial opportunities simply because they don’t have the right advisors. This is such an easy problem to solve. The key point of this blog is that tax and financial planning are so heavily interrelated and if not looked after properly, many opportunities could be missed.Real-life storiesI could list all the pros and cons of having an advisory team that can provide both financial and tax advice, but I think that is both boring and relatively unconvincing. Instead, I have shared some stories below about some clients we have worked with recently. Whilst their financial circumstances are all different, I think they do demonstrate how interlinked tax and financial advice can be.Use of tax lossesI was working on a plan for a new client. He has made some investment in the past that didn’t work out how he had hoped, and as a result had a lot of carried forward tax losses in a unique type of trust (hybrid discretionary trust and not a type we would typically recommend using). Part of the client’s financial plan included investing in shares and I wanted to investigate whether we could somehow utilise these carried forward tax losses.The manager of our tax business was able to quickly review the trust deed, arrange a lawyer to draft documents to change the structure of the trust and confirm we can use the losses. This helped me finalise the plan (share investments will be owned by the trust) and has resulted in a great saving for the client and far less tax compliance risk for the client.Start super pension to save taxWhilst preparing SMSF financial statements for some clients, our accountant noticed that one of the members just had a birthday and as such reached her preservation age. He came and spoke to me and asked if we should therefore convert her account into pension phase as it then attracts a zero tax-rate. Of course, I agreed. A close working relationship, and our strong focus on finding ways to add value, have resulted in a perfect outcome for this client.Structure of investmentsThis client was self-employed and had a company with a reasonable amount of retained profits in it. If we paid the profit out of the company (via declaring a dividend), the client would have paid more tax. Whilst formulating their investment strategy, our accountant and I considered how best to utilise these “trapped” profits. Considering we were going to recommend the client invest in a property, we advised the client to purchase that property as tenants-in-common such that the company owned 20% of the property and the clients owned the rest (in personal names). This allowed the clients to put that money to good use without crystallising additional tax liabilities (and it helped them avoid messy Div. 7A loan compliance issues).Structure of super contributions to ensure you get a tax deductionIf you are self-employed, making super contributions can become messy and if you get it wrong, you might miss out on a tax deduction. Often, from a financial planning viewpoint, we review whether a client should make additional super contributions towards the end of the financial year (i.e. in May/June). If they are self-employed, these contributions could be recorded as personal or employer contributions – depending on whether they are made through an entity (company or trust) or personally. If they are recorded incorrectly, it could compromise their deductibility (as we have seen for some clients). The advantage for us is that we can meet as a team (i.e. both financial advisor and tax advisor) and work out the correct way for our clients to make super contributions so that tax deductions are not compromised.Maximising your borrowing capacityA tax accountant is usually keen to maximise all tax deduction because that will reduce the amount of tax payable by the client. However, this also reduces a client’s borrowing capacity too – and might retard their ability to achieve lifestyle and investment goals.When we act as an accountant and financial planner for a client, we can give the bank written confirmation of expected normalised earnings (income) which they will rely upon when undertaking their borrowing capacity assessment.We were recently helping some clients obtain finance to upgrade their home. However, last financial year they had a few non-reoccurring expenses (tax deductions) which reduced their taxable income. We were able to certify to the bank that their normalised income is actually a lot higher.The more complexity you have, the more you could benefitIf you have a relatively simple financial situation i.e. few investments, no entities (company, trust, SMSF), not self-employed, etc., then you probably don’t have a lot to gain by having your financial advice and tax advice in one place.However, if you do have some complexity then it is likely that you have a lot to gain from having one team look after all your financial affairs.All in one place saves you timeWe are all time-poor and having to see various advisors in various locations, providing the same information and having the same or similar discussions multiple times can be a waste of time. This problem is solved by having all your advisors in the one team. Only one appointment is needed which can be attended by your accountant, financial advisor and mortgage broker (if necessary). During that meeting you can review/address your tax, insurances, financial plan, investment super and mortgages needs in one fell swoop!Nothing slips between the gapsI love it when we look after a client’s tax and financial planning needs because it makes our job a lot easier:- Whilst formulating a strategy, if I have questions that relate to taxation affairs, I can walk over and speak directly to our accountant and we can workshop the issue to identify the best answer. Whilst I’m a registered tax agent too, it is virtually impossible to keep on top of all the tax laws so it’s important to speak directly with someone that lives, breathes and specialises in tax.- When our tax manager works on a financial planning client, he too can come over and speak to me and we can share ideas and thoughts to ensure all actions are congruent with their financial plan and goals. It is important that the right hand knows what the left hand is doing.- If I provide advice to a client as part of a plan (e.g. how to structure and investment), at least I know it will be implemented correctly. I know this sounds a bit control freakish and I acknowledge that there are some very good accountants out there, but there are also some practitioners that don’t have enough knowledge and experience and can unknowingly mess up an otherwise good plan.Most accountants cannot give you financial adviceThe misconception is that accountants can give you simple investment advice such as where to invest your super, whether to make additional super contributions, set up a SMSF and so forth. In fact, they cannot provide any financial advice unless they are authorised under an Australian Financial Services License (AFSL) and most are not. Some accounting firms might have in-house financial advisors but, depending on how they are licensed, they might be restricted on what advice they can give you (e.g. often no property advice).It would be remiss of me to not mention that ProSolution has its own ASFL, Australian Credit License and tax agency registration so there’s very few matters that we are not able advise clients about.Most accountant are focus on the past, not the present or futureOver the past 16 years since starting ProSolution, I cannot recall one time that a client’s accountant has picked up the phone to discuss or understand what a client’s financial plan looks like. Perhaps accountants are just too busy completing tax returns which forces them to focus all their attention toward what has happened in the past. And they probably move onto the next client before they have time to stick their head up and ask any questions about the future. Also, as noted above, most accountants are reluctant to overstep the advice mark for fear of breaking the law and exposing themselves to liability (if they are not licensed) – notwithstanding that they might not have the skill and experience to provide financial advice.Don’t you think it is potentially dangerous for your tax advisor to not know what your plan is?Are you missing out?Have a think about your current advisors, your tax structures and investments. Are you confident that you are making the most of your opportunities?If not, perhaps the best way to remedy the problem is to engage a firm that is able to provide holistic tax and financial advice. Or maybe you need to be the conduit for sharing information and future plans between your advisors – assuming they are all receptive to receiving it.Of course, we welcome the opportunity to have a confidential discussion with you.
Over the past few weeks I have seen a couple of financial plans produced by firms that have experience in providing advice on investing in residential property (i.e. not the traditional managed fund/shares type advisors).Unfortunately, the quality of the advice was very poor and not worth the fees paid in my opinion. It upsets me to see people pay several thousands of dollars for financial advice and receive virtually nil value. Therefore, I wanted to write this blog to tell people what questions to ask before paying for any financial advice.Before I get to the questions, there are usually two failings with poor quality financial advice:Potential problem # 1: Limited in scopeIn most situations, limited financial advice is risky. Advice can be limited to a specific asset class (e.g. only consider shares or property but not both) or be limited to a specific investment such as superannuation.A useful analogy is going to the doctors but telling your GP that they can only examine the left side of your body. No doctor could ever be confident with their diagnosis as they wouldn’t know what they may have found if they could have examined your whole body. That’s why when it comes to quality financial advice, you really need to consider if limited advice will be worth paying for. Often, it is what you don’t know that can hurt you the most.Potential problem # 2: Just a guise to sell you a productContinuing with my medical analogy above, would you feel comfortable going to a doctor that could only prescribe one type of medication?If a financial advisor can only recommend one type of investment (be it shares or property or something else), then there should be no surprises when they recommend that you should invest in that asset too. As Warren Buffett says, “you never ask your barber if you need a haircut”.However, what if you have already decided to invest in a particular asset class? Even then I think it’s prudent to seek advice from a financial planner that can consider all types of investments. The reason being is that if you have missed something (i.e. if you were not aware of an issue that might compromise your investment success). Surely you would want to learn about it before jumping into an investment and costing yourself in lost time or money?I am very careful to not let my clients self-diagnose. That is, a new client might come to me and say; “we have decided to invest in property”. However, I always ask myself, is property the right asset class for them?Here are some questions I suggest you ask…Below I list some questions that you can ask any advisor before agreeing to pay them a fee. The answers to these questions will hopefully help you understand if there are any limitations or hidden agendas behind the advice that you may subsequently receive.What strategies will you compare or consider?Any experienced financial planner should be able to highlight two or three strategies that you might be able to utilise. Alternatively, and often just as useful, they might be able to articulate which investment strategies or asset classes are definitely not appropriate for your circumstances (and why).In this answer you aren’t looking for definitive advice – as the advisor hasn’t had any time to complete any analysis and financial modelling. However, you’re looking for evidence that the advisor has the knowledge and experience to consider various approaches, asset classes and strategies.Ask for a copy of some advice that they have issued in the past month?Ask to see a copy of some advice that the advisor has issued in the past month or so. The first thing to look for is how generic the advice document (report) is. If the report is mostly template paragraphs, then it might be an indication that the advice you receive won’t be customised. Similarly, if the report is very thick (i.e. 30 or more pages), it typically indicates that it contains a lot of generic information. You don’t need to pay a lot of money for generic information – a book will have 50,000 words and only costs $30! You only want to pay for customised advice.Will they consider all asset classes?Holistic advice should consider whether it is appropriate for you to invest in all investment asset classes (i.e. the main ones include shares, direct property cash and bonds). Ask the advisor if there are any asset classes that they are not (licensed) able to advise upon.Will the advice cover the four main financial planning topics?Holistic advice should consider four main areas:1. Investment strategy formulation (i.e. what to invest in, when, how much and ownership structures);2. Cash flow management/projections;3. Risk management (insurances and ways to mitigate risks); and4. Estate planning and asset protection (wills, power of attorney, financial agreements, etc.).Ask the advisor if their advice will cover these four main topics.Do they eat their own cooking?Consider whether the advisor is a doer or teacher. That is, do they follow their own advice? Do they invest in the same things as they advise their clients to invest in. Are they on the path to building a strong financial asset base. Whilst this is not imperative, it goes towards the advisor’s authenticity and to some degree, integrity. Also, it makes sense to take advice from people that have achieved what you want to achieve. Therefore, only listen to people that are successfully building wealth themselves.Do they have a vested interest in the advice?Of course, as I have written about previously, the advisor must be independent. That is, they should not have a vested interest (i.e. make money from) in whether they recommend you invest in shares, property, super funds or nothing at all.The reality is, financial advice businesses are not scalableThe easiest way to build a stainable and profitable business is to develop a product that you can sell at a high profit margin and then sell a lot of it (i.e. scale up the business). The reality is, a financial advisory business is not scalable. As soon as you turn advice into a product, you destroy a lot of its value because it becomes templated, you have to build in a lot of controls and restrictions and it’s difficult to scale “experience” (not everyone has the same experiences). The banks are a very good example of this.This is why good quality advisory business tend to be small in size and the principal advisors tend to be very hands on.Ask questions and go with your gutThe above questions should help you ascertain whether an advisor will be able to give you valuable, customised and holistic advice. Do not be shy to ask questions before you engage their services. In fact, its is your obligation to do so.Also, trust your gut feeling. If you don’t feel perfectly comfortable with an advisor, move on and find one that you do. The best way to find a good advisor is by referral i.e. ask friends, family and colleagues that you know and trust. Good luck.
All the clowning around in Canberra last week is likely to have increased Shorten’s chances of winning the next election. Given the ALP’s proposed changes to negative gearing and capital gains tax, will these policies spell the end for property investor?Why the change?According to the ATO[1], approximately 2 million Australians invest in property and 61% of them claim negative gearing benefits. Negative gearing occurs when you borrow to invest in a property and the income from that property isn’t enough to cover the expenses and interest related to that property investment. That loss helps reduce your total taxable income resulting in a lower income tax liability.According to the ALP, higher income earners benefit the most from negative gearing. The ALP report that The National Centre for Social and Economic Modelling estimate that the top 20% of income earners enjoy around half of the negative gearing benefits.What is the ALP proposing?Labor is proposing to scrap negative gearing on any investments in established property that are made after a yet-to-be-determined date. Existing property investments will be grandfathered. Negative gearing on new-build properties will still be permitted. If you do invest in established property after the yet-to-be-determined date, you will be able to carry forward the income losses and offset them against future property income or capital gain.The ALP is also proposing to increase the rate of Capital Gains Tax (CGT). Currently, if you own an investment for more than 12 months and make a capital gain on sale, you only pay tax (at marginal rates) on 50% of the net gain. The ALP is proposing to reduce the discount such that the CGT liability will be on 75% of the net capital gain. Again, existing investments will be grandfathered.What is the impact on the after-tax return?The impact of these taxation changes on the internal rate of return will be material. Internal rate of return is an estimate of the profitability of a potential investment. The internal rate of return under the current tax laws on a $750,000 investment in property is 12.6% p.a.[2] Adjusting for the proposed ALP changes reduces the internal rate of return to 9.3% p.a. That is, the proposed tax changes wipe out 26% of the after-tax investment return! The reason is that the carrying cost is higher (because there’s no negative gearing benefit) and the investor pays a higher rate of CGT when they sell.How will these changes impact property markets?You don’t have to be a Rhodes scholar to work out that demand for property investment is almost certain to fall materially if these changes are implemented.The chart below compares the volume of owner-occupier and investment dwelling finance commitments with the median house price (average of Melbourne and Sydney) since 2000. It demonstrates that housing prices are heavily impacted by both investment and owner-occupier housing finance commitments.If the demand for investment housing finance was to fall it is likely that it would have a negative impact on property price growth.Property prices in locations where the majority of dwellings are owner-occupied will be somewhat insulated from the risk of price falls. Conversely, investor-owned dense locations will likely be impacted more severely.It is likely that some of the additional cost to hold a property investment will be passed onto renters – so its reasonable to expect that rents will rise as a result of these proposed changes.A property developer and spruikers dream!The fact that new-build properties will still receive negative gearing benefits will mean developers and property spruikers will heavily market these types of properties to unsuspecting investors. The fact is that new-build properties rarely make good investments as they tend to be located in areas where land supply is not scarce, and scarcity of land supply is the main driver of price appreciation. I fear that the ALP’s policies will encourage people to invest in the wrong assets because they are chasing tax benefits.If you think Shorten will win, should you invest or not?Property is a long-term investment. The average capital growth rate since 1980 has been 8.1% p.a.[3] Adding a net rental income (after expenses) of say 2% p.a. results in a total return of over 10% p.a. Over this time (since 1980), the property market has endured many challenges including double-digit interest rates, the abolition of negative gearing in 1985, the introduction of GST in 2000, wars, share market crashes and many different governments and prime ministers. Despite this, returns have been very healthy and comparable to the share market. I doubt these proposed tax changes by the ALP will have any material impact on pre-tax investment returns in the long run.However, if you are concerned about these changes coming into force and would like to invest in property, then it might be wise to do so over the next year so that your investment will be grandfathered (and you will still enjoy negative gearing and lower CGT).In reality negative gearing probably won’t be banned as proposedI doubt that the ALP will be able to get these changes enacted into law as proposed – unless they win with a very strong majority. Instead, I think the changes will be watered down. I suspect that instead of abolishing negative gearing on established property in totality that they will probably limit it. For example, maybe negative gearing will be limited to one property or a certain dollar value. Or maybe negative gearing won’t be permitted for very high-income earners. But I think it’s unlikely to be as severe as its been proposed.There might be other solutionsIf the negative gearing rules are implemented as proposed, then there might be merit in investing using an un-geared unit trust or company. Astute structuring may help you mitigate some of the impact of the proposed ALP changes.Might win votes but unlikely to improve housing affordabilityApproximately 89% of the Australian voting public do not invest in property and therefore will not be impacted by this proposed policy. The ALP has been selling its tax policy as curbing the “tax breaks for the rich” and its probably going to win votes.Whilst these polices might win populist election votes, it is very unlikely to have any long-term impact on housing affordability in my opinion.A fall in in the value of peoples’ homes tend to have a dramatic negative impact on consumer sentiment which impacts the whole economy. When peoples’ homes are falling in value they become fearful and stop spending – as we saw in the US during the GFC. Therefore, the ALP’s polices risk creating many unintended negative consequences for the wider economy.====[1] ATO Statistics for the 2015–16 income year[2] Assuming a capital growth rate of 5% p.a. above inflation, gross rental yield of 3.5%, mortgage interest rate of 7% and making an allowance for property expenses.[3] Average median house price in Melbourne and Sydney per REIA
I typically strongly recommend to property investors to never contribute any cash into an investment property acquisition. I’m not suggesting that you should blindly borrow more and therefore pay more interest. What I am suggesting is that if you have cash to contribute towards an investment that you do so indirectly using an offset account.Contribute cash into the offset insteadInstead of contributing your cash and only borrowing the difference (i.e. what you need), I suggest that you borrow 100% of the property’s cost and deposit any cash savings in a linked offset account. Let me explain using a simple example.Peter buys an investment property for $600k and has $275k of cash to contribute towards this investment. The total cost of Peter’s property (including stamps, etc.) is $635k so Peter needs to borrow $360k. However, I would recommend that Peter borrow $635k and then deposit his cash ($275k) in an offset account. This means that he would only pay interest on the net difference (i.e. $360k) but he has crystallised the maximum tax-deductible loan.Peter should be able to borrow $635k if he has equity in other property – whilst being careful to avoid cross-securitisation.Here’s why it makes senseThere are a number of benefits associated with borrowing the maximum and depositing cash into the offset – some of which are discussed below:1. It reduces your risk because it means that you have ready access to a large amount of cash savings in case of emergencies such as a change in personal circumstances, unexpected large property expenses and so on. Peter can withdraw the $275k of cash from the offset without any restrictions. Maintaining access to your cash is critical to ensuring you have a safe financial buffer.2. Your circumstances might change in the future (employment, illness/accident, etc.) and/or the banks rules might tighten (reduce the amount they will lend you) which might negatively impact your borrowing capacity. I have always recommended that the best time to borrow is when you don’t need it. Therefore, if you have the opportunity to lock in a higher loan now, take it. This maximises your current and future options and costs you nothing.3. As noted above, it crystallises the maximum tax-deductible loan. You only have one opportunity to set the maximum tax-deductible loan and that is when you first purchase an asset. You will have to live with how you finance the asset initially for the rest of the asset’s ownership period. That is, Peter cannot contribute his $275k of cash and then say one year later, change his mind and increase the loan from $360k to $635k to pull his cash out again – because the purpose for what he uses the additional funds will determine whether the loan is tax deductible or not.Let me share a story about two clients. When we met these client’s, the husband was retired, and his wife was still working. They wanted to buy an investment property and had a large deposit – about 80% of the property’s value. We counselled them to borrow the max and put the cash in the offset (as described above). They couldn’t see any benefit as they thought since they were in (or near) retirement, that they probably won’t need the money (i.e. no changed or planned changes in circumstances). Despite this, they thankfully followed our advice. A few years later they unexpectedly decided to relocate i.e. move homes. This relocation required them to spend more. They easily facilitated this by drawing cash from the offset account. This meant that they didn’t need to borrow more monies which would have been non-tax deductible (home loan). Avoiding having a home loan in retirement is important. This story demonstrates that you never know what is around the corner and therefore you should always maximise your flexibility/options.4. Preserving the cash in the offset gives Peter the option of reinvesting these monies in other asset/s in the future. For example, in 20 years’ time, the property might be worth say $2.5 million and assuming a conservative rental yield of 2.5% p.a., the property might generate say $60,000 to $65,000 of annual gross rental income. Interest on a $635k loan at 7% p.a. is $44,500. Therefore, Peter could withdraw all the cash from the offset at this time and it’s very likely that the net rental income will cover the total interest expense i.e. property will pay for itself. This means that Peter could safely withdraw the monies from the offset and invest them in the share market, another property, another investment altogether or use them for personal purposes.5. Consider the situation where you would like to retire but your pension/income from super isn’t sufficient by itself (or you cannot access super yet). In this case, you could sell your investment property to facilitate retirement. However, if you have a large amount in the offset account, then alternatively you could gradually draw on these monies to fund retirement. This would allow you to hold onto the investment property for a longer period thereby enjoying the compounding benefits of capital growth.The above four benefits are generic in nature. I find that there are often a few additional client-specific benefits associated with this loan structure too (depending on their circumstances and goals of course).You need some credit adviceIt is important that you engage an experienced professional that is licensed to provide credit advice (i.e. a mortgage broker) to review your position and recommend the best loan structure for you. I have discussed one loan structural consideration above but there are many to consider. It is also possible that the above structure isn’t appropriate for your circumstances. That’s why personalised advice is important.We have credit, tax and financial advice licenses so we can provide holistic advice. Therefore, if you need help, don’t hesitate to reach out to us.
Whilst historically ATO audits were targeted at big business and the wealthy, this has changed. Now more than ever, individuals, business and self-managed superannuation funds are at risk of being selected for an audit, investigation or review. The Tax Commissioner, Chris Jordan has confirmed the ATO has been instructed to undertake random audits targeting over claiming of business expenditure and work-related deductions.The ATO is using real-time data to compare taxpayers with others in similar occupations and income brackets, to identify higher-than-expected claims related to expenses including vehicle, travel, internet and mobile phone, and self-education.Innocent until proven guilty tends to be the ATO’s presumption. So, even if your books are squeaky clean, this won’t stop a random ATO enquiry! These audits don’t only involve emotional stress but can disrupt your business or work and can cost a significant amount for extra accountancy, bookkeeping and if necessary, legal fees.The ATO’s Golden RulesThe ATO has provided three rules in determining whether the deduction your claiming is eligible:1. The taxpayer must have incurred the expense themselves – and not have been reimbursed.2. The expense must be incurred in gaining or producing assessable income.3. The claim must comply with the substantiation rules – i.e. all records must be kept.Remember, the onus of proof is on the taxpayer. It is important to know what you’re eligible to claim before lodging your tax return and to make sure you don’t claim more than what you’re entitled to. For example, it’s a myth that you can claim the standard $150 laundry expense for having a work uniform, or the $300 work related expense without having incurred the expense or the 5,000-kilometer motor vehicle claim.While the ATO will certainly be looking at unusually high claims for work-related expenses of all types, car expenses and clothing and laundry expenses are the two categories which will receive the most scrutiny.Having a uniform doesn’t automatically mean you’re eligible for a deductionExpenditure on conventional clothing is generally not deductible. For clothing to be deductible, there must be sufficient nexus to the income earning activity. This means the clothing must distinctively identify the wearer as a person associated with a particular profession, trade, vocation, occupation or calling.There is no standard laundry deduction of $150Although there is no substantiation exception for deductions for washing, drying and ironing if the amount doesn’t exceed $150, this does not automatically provide taxpayers with a standard deduction of $150. The taxpayer must still be able to verify that they actually incurred the expenditure.No standard deductions for 5,000 kilometresAlthough there’s substantiation exception for claims made under the cents per kilometre method — capped at 5,000 kilometres, this does not represent a ‘standard deduction’. The taxpayer is entitled to a deduction only for kilometres actually travelled in the course of producing assessable income. Travel between home and work is generally not deductible.The substantiation exception means that there is no requirement to keep detailed records in a logbook or similar. However, you must still be able to verify that you undertook the purported trips for a work purpose, and that the kilometres claimed reflect the distances actually travelled by car during those trips.Don’t be aggressive to save a couple $$ in taxThe mindset that everyone cheats a little, is one that the ATO won’t tolerate. The ATO’s compliance activities and data analytics many years ago were not as sophisticated as they are now. Their data matching activities across taxpayers with the same occupation codes has already generated significant audit activity in the past few months alone.The risk of deductions falls on the taxpayer, not their accountant. It is imperative to get the right advice before claiming your deduction.Should you consider audit insurance?The cost of responding to a tax audit or government compliance investigation can be very costly. The audit process can be time consuming and take your accountant many hours responding to questions, information requests and audit findings.Tax Audit Insurance covers a business in the event that it receives a random audit from the Australian Tax Office. It covers the costs of professional fees incurred whilst preparing for the audit from accountants, lawyers, bookkeepers and any other advisers required, and other expenses incurred during the audit.Being audited can be both time consuming and costly for you and/or your business – you will most likely be asked to provide records and receipts of past transactions and you will almost certainly need the services of the above to assist in the ATO enquiry.What should you do now?The beginning of a new financial year is a great time to set new habits. Speak to your tax advisor to understand what substantiation/information you might need to collect to maximise your tax deductions at the end of this financial year. A proactive accountant will be able to tell you exactly what you need to do for you to safely maximise your deductions. Leaving it until the end of the financial year might be too late.Consider getting audit insurance – particularly if you operate your own business (we can arrange this for our clients if needed. We confirm that we do not receive any benefits for doing so).Of course, if you have any questions, don’t hesitate to reach out to us.
Last week, I highlighted some evidence that indicates investment-grade apartments in Melbourne are perhaps intrinsically undervalued. The topic of this week’s blog is all about whether a house or apartment makes a better investment, specially:1. If your investment budget is $1.3 million or more, should you invest in one house or two apartments?2. If your investment budget is in the range of $700k and 800k, should you invest in an investment-grade apartment in a blue-chip suburb or a house further away from the CDB (or in a regional town)?Of course, my commentary and suggestions below are general in nature and may not apply to your financial situation. Therefore, it is important to obtain independent financial advice. Here are a few considerations that you must take into account:Apartments are susceptible to the impact of future developmentThe number of houses in a blue-chip suburb are somewhat fixed. That is, typically, there is no more than one house per block (excluding the odd townhouse development which is rarer in high land value, blue-chip locations). However, the number of apartments in a geographical location can change significantly over several years. All you need is one or two large developments and that can dramatically impact the supply of apartments. Whilst new-build apartments are vastly inferior assets from an investment perspective, their existence can retard capital growth.The advantage of investing in a house is that supply is relatively fixed. This ensures that the imbalance between supply and demand (in an investment-grade location) remains in the investors favour. That is, if supply is fixed and demand is increasing, you will typically benefit from price appreciation.If you have multiple assets, you have more flexibilityThe advantage of investing in two apartments as opposed to one house is that you have greater flexibility in the future, particularly as you get closer to retirement. For example, if you invest in two apartments at age 45 (which might be 15 years prior to your planned retirement) then you will be able to sell one apartment after you have retired and use the cash proceeds to repay the debt on the other apartment. This may result in you retaining one apartment with no (or very little) debt thereby generating a good income stream to supplement your super.Spread your eggs across many basketsAnother advantage of owning two apartments as opposed to one house is that you can diversify geographically. Different geographical locations and micro-markets will perform differently at different times. Tying a lot of your wealth up in one asset creates a lot of concentration risk which might not be a prudent thing to do.One of the greatest advantages of direct property is controlOne downside to investing in an apartment is that you have less control over the asset. That is, common areas are managed by an Owners Corporation. The Owners Corporation makes important decisions by vote at an annual general meeting. Some motions require a unanimous resolution meaning all owners must agree – which can be difficult to obtain. Some examples of challenges that investors have endured include not being able to maximise the value/use of the land (surplus car parking could have been sold but agreement could not be reached), updating the title type to improve the property’s marketability and value but agreement could not be reached, etc.The best way to mitigate this risk is to undertake good due-diligence prior to investing and ensure the Owners Corporation is functioning effectively and the property is in an optimal state (i.e. nothing needs to be changed).Different levels of incomeHousing will generally have a lower rental yield than apartments. In Melbourne, houses will attract a yield of between 2% and 3% of the property’s value – depending on condition. Apartments however will generally attract a yield of 3% and 4%. Therefore, you could maximise your investment income by investing in two apartments as opposed to one house. The difference could amount to approximately $300 to $400 per week (e.g. a house might rent for $600-700 p/week versus two apartments for $400-500 p/week each).Capital growth differentialCompounding capital growth is a very powerful investment attribute and is the simplest and easiest way to build wealth. Therefore, investing in assets that provide the highest amount of long-term capital growth will help you build substantial wealth.When we prepare financial plans, we assume that investment-grade property will appreciate at an average long-term rate of 7.5% p.a. (assuming the inflation rate is 2.5% p.a. – so the growth rate excluding inflation is 5% p.a.). However, the observed growth rate over the past 30-40 years is often a lot higher than that (we’re being conservative).I picked a few houses that have sold recently at random. I compared an investment-grade house in a great street of Prahran (Melbourne) with a couple of houses in a well-established part of Geelong (Newtown is arguably the most “investable” suburb in Geelong – I know the area well as I grew up there – Go Cats!). Essentially, I wanted to see if there was evidence that a regional city provided lower growth than a capital city.Donald St, PrahranBased on sales data, the property at 59 Donald St, Prahran has appreciated in value by 10.4% p.a. over the last 37 years. Over this time, we have seen many changes including interest rates, governments, tax rules (CGT, GST, negative gearing), population, housing supply and so on. Given the population growth rate, the demand for this location will be higher in the coming 40 years than it has in the past 40 years – so, arguably, growth should repeat itself.Buckingham Rd & Cairns Ave, NewtownAgain, based on sales data, 69 Buckingham Rd has appreciated at a rate of 7.8% p.a. over a period of 13 years and 37 Cairns Ave (superior location) has appreciated at a rate of 8.8% p.a. over a period of 30 years. Both houses are older-style (so mostly land value) properties located in quiet streets.ConclusionAnecdotally, it makes sense that a house in prime, blue-chip suburbs of Melbourne will appreciate at a higher rate than a house in a regional city – mainly due to higher sustained levels of demand. From my basic observation above (acknowledging that the sample size is statistically unreliable), it appears the growth gap is in the range of 1.5% and 2.5% per annum. Based on my experience and observation over the past 15 years, this is what I expected to see.Apartments may perform like regional houses but…It would be reasonable to assume that investment-grade apartments will not generate the same level of capital growth as houses (although you are partially compensated with a higher rental income as discussed above). The reason for this is that houses tend to have a greater land value proportion.Intuitively, I think it is reasonable to assume that capital growth cap between investment-grade houses and apartments to be in the range of 1.0% and 2.5% per annum depending on the quality of the apartment. Of course, there are exceptions and some apartments demonstrate similar growth rates.Ostensibly, an investment-grade apartment in Melbourne and a well-located house in an excellent street in Geelong for example might have similar investment return attributes (i.e. similar rental yields and growth rates) in the long run. The main difference is that an apartment in Melbourne is a much less risky investment because demand is more robust and sustainable. Melbourne’s population is close to 5 million compared to circa 200k in Geelong. Why take the risk when investing several hundred of thousand of dollars?What other investments do you have?How much do you have in super? What other investment assets do you have? If you already have accumulated wealth across various asset classes, then investing in a house might be acceptable (because you will still have reasonable diversification). However, if you have little investment assets then investing in a house might result in too much concentration risk (all your eggs in one basket) and you might be better off spreading your investment dollars across a few assets.Investing in adjoining suburbsPeople ask me whether it’s worth moving further out to get a house. For example, a $800k budget won’t buy an investment-grade house in Melbourne (but will be enough for an apartment). However, if you consider non-investment-grade suburbs that are 20-30kms out from the CBD, it might allow you to buy a house.In this situation, at best – if your execution is perfect, you may achieve similar investment returns as an investment-grade apartment, but it is unreasonable to assume that you could achieve the same growth as an investment-grade house. Therefore, taking this approach might achieve the same results but you are taking a higher risk (again, demand in outer suburbs is less then inner suburbs – similar to the Geelong example).In short, moving further out just to get a house is a higher risk strategy. It's not to say that it can't work (or hasn't worked in the past) but we cannot fool ourselves into thinking the investment is of equal quality. And quality will determine your investment returns.Sorry. There’s no simple answerAs you can appreciate from the above discussion, there is no ‘one-size-fits-all” answer. It really depends on your personal financial situation, risk profile, goals, budget and overall financial plan. However, hopefully the above has highlighted some of the issues you need to consider.If you need advice, make sure you seek it from a financial advisor that is completely independent and has the requisite knowledge and experience in property investment (and all investment asset classes for that matter).
I wrote this blog in February suggesting that I thought investment-grade apartments were intrinsically under-valued. Well, according to Jarrod McCabe, director of Wakelin Property Advisory, “the investment-grade apartment market in Melbourne is showing signs of growth this year”.My view that apartments are intrinsically under-valued has become even stronger over the last 6 months and I would like to share a few reasons why.House prices have appreciated significantly over the past 5-10 years and maybe that’s changingAs this chart suggests, house price growth has become significantly stronger than apartment growth over the last nine years. The median house price appreciated by 6.8% p.a. on average over that period compared to 4.1% p.a. for apartments.Since citing this chart in February, anecdotally, it would appear that demand for investment-grade houses in Melbourne’s blue-chip suburbs peaked towards the end of 2017. Buyer demand in this sector of the market has been less buoyant in 2018. This suggests that perhaps this growth cycle (all markets move in cycles) has ended. Maybe the trend will turn around and apartments will generate stronger growth than houses?Tightening credit means people can borrow lessThe credit environment is very tight (as I have noted many times previously) and that has put downward pressure on people’s borrowing capacities. I estimate that most people’s borrowing capacities has reduced by between 20% and 40% (sometimes more) over the past few years. This means more people will be priced out of the housing market (in prime locations) and be forced to consider invest in a one or two-bedroom apartment instead.Supply of new-build apartmentsThe supply of new-build apartments will have an impact on overall median data and supply-demand fundamentals. However, the geographical concentration of new developments is what you must consider. Capital city data is less meaningful.For example, in Melbourne, there has been a lot of new apartment development in Prahran and South Yarra but that seems to be slowing down now. However, suburbs such as Richmond and East Melbourne currently have a lot of large construction projects in progress and this will likely have a negative price impact on established, investment-grade apartment prices in those locations in the shorter-term.Property price growth is rarely linearThis week, I was reviewing the performance of a property that a client has invested in recently. The property is located in Richardson Street, Carlton North. The chart below tracks its sales transactions from 1975 through to 2018, some 43 years of data.You will notice that over this time there have been three growth cycles. The first cycle lasted 18 years and generated 12.9% p.a. of growth. After that period the property didn’t do very much for 11 years. And then the most recent growth cycle has been for 14 years generating 12.7% p.a. This property may continue to appreciate for a few more years to come – maybe this cycle hasn’t ended – no one knows.Importantly, the overall appreciation of this property over the last 43 years averages out to be 9.6% p.a. – which is what you would expect from a quality investment-grade property. In the long run, I think it is reasonable to assume that this property will continue to generate similar returns over the next 43 years.However, my point is that property prices very rarely move in a perfectly linear fashion. They move in cycles. And whilst this is only one property and, admittingly, isn’t enough data to make a statistically compelling case, it does demonstrate this concept perfectly. It is difficult to prove this concept with a reliable volume of data/statistics as median price data tends to smooth out these asset-specific variations.The change we are experiencing now is not newCredit is certainly a lot tighter today than it was 5 years ago, and this has put a temporary dampener on the property market. However, think about all the changes that the Richardson Street property has endured over the past 43 years. The introduction of capital gain tax and temporary abolition of negative gearing in 1985, interest rates of 18% p.a. in the early 1990’s, three economic recessions, the introduction of GST in 2000 and a couple of massive share market crashes to name a few.There’s always going to be changes and challenges, but these tend to have short term consequence. The immutable laws of supply and demand always dominate in the long run. This current “credit crunch” will be no different. Quality properties with all the right fundamentals will generate quality returns in the long run. Stick to the fundamentals.Mean reversion is an undeniable long-term trend in all marketsThe quality of any investment-grade asset (be it a share or property) always shines through in the long-run. Put differently, the long-term return on investments tends to always revert to its average return in the long run (called mean reversion). This means that a period of sideways (or no price) movement will be typically followed by a period of very strong growth and vice versa. Therefore, it is a reasonable assumption that if you invest in an asset or sector of the market that has delivered below average returns for an extended period of time, that you can reasonably expect that a period of above average returns will present itself sooner rather than later.The difficultly is that no one in the world has a proven model to reliably predict when these cycles will occur. Therefore, for now, all you can do is invest in fundamentally sound assets and have patience. That said, I believe that there is growing anecdotally evidence that the investment-grade apartment market in Melbourne is closer to a period of “above-average” growth. I just don’t know exactly when that period will begin.This blog is a prelude to next week’s topic. Because next week I am going to write about whether you should invest in an apartment or house i.e. which makes a better investment.
Some interesting information and data has been released this week which I would like to discuss with you.Variable mortgage rates will probably rise soonInterest rates that apply to interbank lending have increased significantly since the beginning of the year. These benchmark rates are used to set the banks borrowing costs. This benchmark rate has increased significantly compared to the RBA’s cash rate as depicted in the chart below (from Montgomery). Essentially, this means it costs more for the banks to borrow. Between approximately one quarter and one third of the banks mortgages are funded through facilities that are linked to these short-term indicator rates. Therefore, it has been estimated that the banks cost of funds have increased by circa 0.10% p.a.Various second tier lenders such as ING, BoQ, IMB, Citibank, Bank SA, and ME Bank have already increased variable rates.Pressure will be on the Big 4 banks to follow. However, I suspect that they haven’t increased yet because they are worried about the inevitably bad press that it would attract – particularly for the bank to move first. That said, if these higher costs persist then they might have to lift variable interest rates sooner rather than later (probably by around 0.10% p.a.).Can you afford principal and interest repayments?There has been a bit of press lately about a possible looming credit risk i.e. interest only loans converting to principal and interest repayments which might put negative pressure on borrowers cash flow.If you have a loan on interest only repayments that is approaching its expiry date, you have a few options. You should consider whether you are better off with principal and interest repayments – see this blog. If not, speak to us and we can investigate whether you can roll over to a new 5-year interest only term with your existing or a new lender. Do it sooner rather than later to avoid the risk of being caught by any future changes or credit tightening.The Reserve Bank (RBA) and interest ratesThe main thing holding back the RBA from increasing the cash rate is the rather ‘benign’ inflation rate – including the very low wage inflation rate. The inflation (CPI) numbers for the June quarter were released yesterday and, whilst inflation is only just within the RBA’s target band of 2% and 3%, the main driver of the recent increase was petrol prices. Overall, there’s nothing in the CPI numbers that suggests the RBA will increase interest rates this year or possibly next year.The best performing super funds for the 2018 financial yearResearcher, Chant West this week released its list of top-performing super funds for the 2017/18 financial year.I have been very pleased with the performance of the low-cost, indexed model portfolio that we use to invest our clients super. It has retuned 11.52% p.a. over the past year after investment fees.The median returns by industry funds was 10.3% p.a. compared to 9.0% p.a. for retrial funds. This confirms the Productivity Commissions findings that retail super funds (such as AMP, Colonial, BT and MLC) are typically characterised by higher-fees and lower-returns. If your super is invested with a retail fund, then my advice is to find a better super fund (but get advice before you do as you must consider exit fees, timing, insurance and any other benefits that you might forgo)!How to pick a super fundIt is tempting to get seduced by one-year returns. However, picking a fund based on its short-term results is fraught with danger. For example, UniSuper ranks number one based on the last 10 years of returns but tenth for the last financial year only.To pick the best fund, you need to consider the following:1. Past performance – is there a track record of delivering strong investment returns compared to market and peers?2. Fees – fees are certain, returns are not. Therefore, you reduce your risk if you reduce your fees.3. Will history repeat itself – to assess this there needs to be a lot of transparency and accountability with the way money is invested. This will allow you to assess if returns have been the result of random good luck or does the fund employ a proven, rules-based, evidence-based investment approach that is repeatable?Interestingly, the industry funds’ indexed options have performed poorly. HostPlus’ Indexed Balanced option returned only 7.03% for the year to 31 May 2018 and AustralianSuper’s Indexed Diversified has returned 9.41% to 30 June 2018. The problem with these options is that they tend to be very basic in their construction and only use one type of indexing (market cap indexing). They are designed to fail in my opinion. If your super is invested with an industry fund, I think you would be better off investing in its actively managed (growth or balanced) option – even though this approach contradicts the data (i.e. all the evidence suggests that passive mostly beats active investments).Of course, if you need help with this decision, don’t hesitate to reach out to us.
Are you a spender or saver? Do you find it hard to stick to a budget? Do you find it difficult to save towards a goal? For some people, saving money comes easy to them. For others, it’s like pulling teeth. You might need to adopt a different investment strategy depending on your answers to the above questions.Success requires some incomeSurplus cash flow is oxygen for any financial strategy. Without it, no financial strategy can survive. As I have said in the past, it is critical that you contribute a certain amount of your income towards building your financial future every fortnight, month and year. It is virtually impossible to build wealth without surplus cash flow. Therefore, if you are spending as much as you earn, you cannot expect to get ahead financially.Basic stepsMost people are smart enough to realise that wasting money is stupid. The problem however, is that if you don’t know where your money is going how do you know if you’re wasting it or not? And that is the most common mistake that people make – not knowing where their money is going. Worse still, I find that most people consistently underestimate how much they spend. If you’re underestimating how much you spend, then possibly you’re also underestimating how much money you’re wasting. You cannot manage what you do not measure. Therefore, at an absolute minimum you must sit down every six months to understand exactly where your money is going – even if it’s at a high level. In my new book Investopoly, I have dedicated a full chapter to helping people improve their cash flow management. I provide a screenshot (click to enlarge) of page 34 below which sets out how to review your last three months of expenditure.If you’re a spenderThere are a couple of investment strategies that spenders will find it easier to stick to. The key theme in all of them is to do what Warren Buffett tells us to do which is to “invest first and then spend what’s left over”.Idea 1: Make additional super contributionsOne thing you can do is contact your payroll department and ask them to deduct a certain amount of money from each pay and contribute that into super (as a concessional contribution). This is also a tax effective strategy as any contributions are taxed at 15% instead of your marginal tax rate (for people earning less than $200,000 per annum).Technically, depending on your age and financial position, it may not be a high priority for you to make additional super contributions. For example, maybe it’s more important for you to repay your home loan. However, if the reality is that you would just spend the money that you could have otherwise contributed into super (and not make extra home loan repayments) then perhaps making additional super contributions is a good thing for you to do i.e. forced savings mechanism.Consider this case study to demonstrate how effective it can be:Susie is a 30-year-old earning a salary of $100,000 a year. Therefore, she is already contributing $9,500 per annum into super (i.e. her employer’s contributions). If Susie contributed an extra 3.5% p.a. of her gross salary (i.e. $3,500 p.a. or $67 per week), by age 60, her super balance would be 32% higher ($965,000 versus $1.27 million). That is a big reward for a relatively small sacrifice that will probably go unnoticed i.e. no adverse impact on your standard of living.Idea 2: Borrow to invest in propertyBorrowing to invest is a good forced savings mechanism. I’m not suggesting that people go out and borrow money without having any regard to their ability to meet the loan repayments. However, from my own personal and professional experience I know that there is merit in forcing yourself to enter into such a commitment (mortgage) – particularly if you’re a spender.If you borrow money to buy an investment property, it is likely that the net rental income will be less than the interest expense. Therefore, you will have to use some of your cash flow to meet the investment property’s holding costs. As long as the property is investment-grade, your monthly cash flow contribution will eventually translate into a significant amount of equity (as a result of capital growth).Idea 3: Convert loans to P&IIf you already own an investment property and feel that you’re not as disciplined as you could be with your cash flow management, then perhaps converting your investment loan repayments to principal and interest (P&I) might provide two benefits. Firstly, it will significantly reduce your interest costs and secondly, it will force you to reduce your debt.Idea 4: Delink your offset account from Internet bankingThe saying “out of sight, out of mind” rings true when it comes to financial management. One strategy that employs this approach involves establishing an offset account (linked to one of your loans) and using it purely for savings. You then ask your payroll department to deduct a regular amount from each salary and deposit that amount directly into this new savings offset account. You can also remove this offset account from your Internet banking profile so that it is out of sight and out of mind. Automating the process (via payroll) together with this ‘set and forget’ style arrangement will likely make this strategy successful.Spenders aren’t bad peopleJust because you’re a spender doesn’t necessarily mean you’ll be unsuccessful with building wealth and having a secure financial future. Instead, it just means that you probably need to employ a slightly different approach to savers. The key thing is just to be realistic about the level of your financial discipline and seek independent financial advice.
Employers must contribute 9.5% of your salary (up to a maximum of $20,050 p.a.) into super. But should you make additional super contributions? This is a question I’m asked regularly.Of course, like many financial planning matters, the answer does depend on your individual circumstances. However, there are some fundamental concepts that help us understand whether additional contributions are going to help you achieve your financial goals.The power of starting earlySusie is a 30-year-old earning a salary of $100,000 a year. Therefore, she is already contributing $9,500 per annum into super (i.e. her employer’s contributions). If Susie contributed an extra 3.5% p.a. of her gross salary (i.e. $3,500 p.a. or $67 per week), by age 60, her super balance would be 32% higher ($965,000 versus $1.27 million). That is a big reward for a relatively small sacrifice.Compare this to someone who starts a lot later in life. Matt is 50-years-old and his super balance is $400,000. Matt’s salary is $150,000 per annum so his employer is contributing $14,250 per annum into super. If Matt makes additional contributions so that his total contributions equal the concessional contribution cap (i.e. the maximum you can contribute – currently $25,000 per annum), by age 60, Matt’s super balance will only be 13% higher ($845,000 versus $955,000). I think you’ll agree that that’s a relatively small reward for a significant amount of additional contributions (approximately $100,000 in additional contributions over 10 years).The above two examples demonstrate that making additional contributions is a relatively ineffective investment strategy unless you begin making them when you’re in your 30’s. That is not to say that you shouldn’t make them as it is a good force-savings plan. However, it means that you probably need to think of other investment strategies that you can implement in addition to super contributions.Worried about locking your money away inside super?Some people choose not to make additional super contributions because they are worried that the government will change the rules on them and they won’t be able to access their savings to fund retirement. Whilst it is inevitable that the government will continue to tinker with the superannuation rules, it doesn’t mean that we should ignore super altogether. The superannuation environment provides some taxation benefits – so ignore them at your own peril. I believe that super should play a material role in most people’s retirement strategies. Of course, we need to be careful about being to super-centric – particularly for people that are more than 10 years away from being able to access their super. Suffice to say that ignoring super in totality is probably not in your best interest.Repay your home loan, invest in property, or super?It is important that you invest in the right order – as I explain in this video. For some people in their 30’s, making additional super contributions might not be the right priority. It might be more important to repay/reduce their home loan to reduce their interest rate exposure. There is no “one size fits all” solution – it really depends on your individual situation.What else can you do to boost your super?Firstly, there are three things you must optimise to maximise your super balance by the time you retire – as discussed in this video. Assuming you have done these three things correctly, what else can you do to boost your super balance? Probably the most effective strategy (and one that becomes even more attractive now that the government has reduced the concessional contribution cap to $25,000 per annum) is to use some of your super as a deposit towards investing in a property. Your super fund can then borrow the remainder of the funds to purchase said investment property. Gearing inside super is a powerful strategy for two reasons:1. There is more pressure on the government to reduce the tax benefits that higher income earners receive from making contributions into super. As such, tax-effectively diverting wealth into super (via contributions) will become more difficult to do. Borrowing mitigates this. 2. For many people superannuation is a very long-term investment (20 years and beyond as most people won’t exhaust their super balance until they’re in their 80’s). This long-dated investment horizon lends itself well to a borrowing strategy (if you’ll excuse the pun) because it’s a long enough time to enjoy the immense benefits of compounding capital growth.
Of course, there are non-super investment strategies to consider as wellThe point of my article is not to discourage you from making additional super contributions. On the contrary, it is never a bad idea to save/invest monies for the future. However, what I would invite you to consider is that superannuation and any contributions thereof should be only one of many things (tactics) that you are doing to build wealth. Put simply, a balanced approach typically yields the best outcomes (i.e. not being too focused on super and not ignoring it altogether either).If you have any questions about what I have discussed above, I would invite you to contact us.
Over the past two years lenders have been incrementally increasing interest rates on investment loans and loans with interest only repayments (as opposed to principal and interest). As the chart below illustrates, the average interest rate margin between a principal and interest home loan and an interest only investment loan is now 1.04% p.a. As recent as January 2016, interest rates for these loans were virtually identical.This begs the question, should you switch your investment loan to principal and interest repayments to save approximately 0.47% p.a. in interest costs (i.e. difference between 1.04% and 0.57% in the chart below)?The conventional wisdom for interest only repaymentsThe conventional wisdom has always been to set up investment loan repayments as interest only. The rationale for this is it allows you to have better control and flexibility over your cash flow and capital. That is, it frees up more cash flow which you can direct towards the repayment of non-tax-deductible debt (i.e. home loan) or invest in other assets for example. But you could always make principal repayments at any time.This approach had strong merit whilst interest rates for all loans and repayment types were virtually equal i.e. there was no penalty for repaying interest only compared to principal and interest. However, now this has changed, does it still make sense to have interest only repayments?Our rule of thumbI have financially modelled the long-term impact of setting up an investment loan with interest only repayments compared to principal and interest (for people that still have a home loan). Obviously, if you set up your investment loans as interest only, you have more cash flow to repay non-tax deductable debt, as despite the interest rate being higher, the repayment does not include a principal component (only interest).Here is the rule of thumb that I have determined:If your total investment debt represents 40% or less of your overall debt, set up your investment loans on interest only repayments. However, if your total investment debt represents 40% or more of your overall (total) debt, then set up your investment loan repayments as principal and interest – subject to the exceptions mentioned below.The reason this rule of thumb works is because if your home loan is relatively small (compared to your overall debt) then any savings resulting from making extra repayments (i.e. if your investment loans were on interest only it gives you more cash flow to repay your home loan) will be less than saving 0.47% p.a. on all your investment loans.It is very important to note that as interest rates rise, the dollar value difference between an interest only repayment (at a higher rate) and a principal and interest repayment (at a lower rate) reduces. The table below sets out the monthly repayments for a loan for $750,000.Interest ratesP&IInterest onlyDifferenceCurrent rates (say 4.60% for P&I and 5.07% for IO)$3,845 p/mth$3,169 p/mth$676 p/mthCurrent rates + 1.5%$4,545 p/mth$4,106 p/mth$439 p/mthExceptions to the rule of thumbThere are two important exceptions to the above rule of thumb.Firstly, you must consider how important it is for you to acquire more investments. Sometimes, it is worthwhile to set up investment loans on interest only repayments to allow you a greater capacity to service more debt and/or invest in more assets. This would typically apply to anyone that hasn’t yet acquired the amount of assets required to fund retirement yet – unless they had a substantial income. However, if you do not need to invest in anymore assets and are in a ‘consolidation’ phase, then switching to principal and interest repayments might be the way to go.Secondly, if you lock yourself into principal and interest repayments now, you must consider the impact of future rate changes. At the moment, you save 0.47% p.a. by having an investment loan on principal and interest repayments compared to interest only. However, what if that savings differential evaporates but, due to tightening credit, the banks will now allow you to switch back to interest only repayments? There’s one thing that never changes, and that is changes in lending policies and interest rates. Just don’t be seduced into making a short-term decision.If you do switch to principal and interest, it might be worthwhile resetting your loan term to 30 years to minimise the repayment amount. Otherwise, the repayment will be calculated on your remaining loan term.Here is a decision tree to assist you with assessing your own position (click to enlarge):Get professional credit adviceIt is analysis and insights like these that could save you a lot of money!Sure, finding the lender that will offer you the lowest rate is a good, short-term fix. However, finding a credit advisor(mortgage broker) that gives you advice and insights as well as comparing and negotiating interest rates will save (make) you substantially more in the long run. As always, play the long game.
Tax is most people’s largest lifetime expense! Therefore, it is not difficult to understand how taking proactive steps to minimise your taxes can produce significant financial benefits. Different taxes will impact you at different stages of life depending on the wealth you have accumulated i.e. types of investments, amounts and ownership structures used.The common mistake that people make is that they are too short-term focused. That is, they focus on reducing taxes immediately, with little regard for the longer-term repercussions. Instead, it is prudent to employ a more balanced approach. There are four main taxes you need to consider.Income taxObviously, whilst you are working, income tax is a significant expense. Therefore, looking for ways to reduce your income tax expense is very important. There are several strategies that we can draw upon such as negative gearing, super contributions, shifting income and deductions between spouses in different tax brackets, tax-effective business income structures and so on.Future expected changes in employment income also need to be considered.It is also important to consider what your tax position might be in the future too, particularly in retirement. It might be great for one spouse to own all the investments assets prior to retirement (to enjoy the best negative gearing savings) but that might result in a very uneconomical distribution of taxable income in retirement.Finally, there is a common theme of income tax brackets flattening around the world with the top rate of tax in both the US and UK being under 40%. Therefore, it doesn’t make sense to be too convoluted with your tax planning/allocations as a small change in rules might eliminate any expected savings.Capital gains tax (CGT)You may need to sell investment assets at some point to reduce/repay debt or fund retirement. After all, you can’t take them with you when you die! Assuming you have been an Australian tax resident for the entire time you have owned the investment (and have owned it for more than 12 months), you should be entitled to the 50% CGT discount. This means that your effective CGT tax rate will be a maximum of 23.5% of the total net gain (being 50% of the highest marginal rate of 47%).If you invest in quality assets and hold them for a long period of time, any capital gain is likely to be considerable (in dollar terms). Therefore, the ability to share such a gain with other taxpayers (e.g. via family trust distributions) would save a reasonable amount of money. Tax payable on a $1 million gross capital gain in one taxpayers name would amount to $235,000. However, if you could share this gain equally across four taxpayers (e.g. you, your spouse and your retired parents), the total tax payable reduces to approximately $145,000 (or 14.5%) resulting in a $90,000 saving.If your financial plan includes divesting of assets at some point, you need to consider the tax outcomes.Land taxLand tax is payable if you own land (other than your home) that exceeds the tax-free threshold, which is different for each state in Australia. It is an insidious tax as it tends to be minimal when you first invest in property and then becomes more expensive at a time when you need to minimise your outgoings… i.e. in retirement.The tax-free thresholds are per individual so, from a pure land tax perspective, you and your spouse are better off owning one property each – if you own two properties, for example.Land tax rates between states vary significantly. Also, most states levy a higher rate of tax for property owned by a discretionary (family) trust. To illustrate this, the table below (reproduced from page 148 of my book, Investopoly) illustrates the different land tax liabilities for land valued at $1 million when held in different states and via a trust versus personal name.Annual land tax on $1m of land value: Family trust versus personal name NSWVICQLDPersonal name$7,316$2,975$4,500Trust$16,000$6,438$12,500Superannuation taxSuperannuation is a very tax-effective environment. Whilst you are in accumulation phase (i.e. pre-retirement), investment income is taxed at a flat rate of 15% and capital gains at 10%. When you enter pension phase (i.e. when you are retired and over the age of 60), your super fund’s investment income and capital gain tax rate falls to zero (if your total super balance is less than $1.6 million). You can’t get better than a zero tax rate can you?Many people are discouraged by the fact that the government is constantly changing the super tax rules. Whilst this is frustrating, the tax advantages of super are just too good to ignore. And it’s a reasonable assumption that it will always be concessionally taxed.Who do you see? A financial advisor or accountant?As a financial planner that is also a registered tax agent (and chartered accountant), I appreciate how important it is to consider the tax consequences when developing a financial plan. Too many accountants don’t have enough financial planning knowledge and experience. And too many financial planners don’t understand the tax laws. This is a problem and the best solution is to have a balanced approach between both financial planning and tax planning.Ultimately, your goal should be to maximise your wealth after all taxes. To achieve this, you must ensure that your wealth strategy is tax-effective and that your tax strategies allow you to maximise your wealth. Many accountants focus on tax without any consideration of its impact on wealth. Therefore, make sure that your wealth and tax advisors are aiming at achieving the same goal i.e. maximising your after-tax wealth. To achieve this, they need to have a close working relationship.Want to learn more? Join me for a live stream seminarOn 24 July I am hosting a live stream seminar on all things tax. The aim of this presentation is to help investors minimise tax in a way that doesn’t hamper their ability to build wealth. You will be able to watch the live seminar from the comfort of your home (desktop, tablet or phone), interact and ask questions. All attendees will also get a copy of our recently updated eBook, Tax Busting Structures.
Financial stress is a terrible thing. I’m sure everyone reading this blog has stressed out about money at some point in their life. But the thing is, stressing about money doesn’t change the outcomes. Instead, it just ruins your day.So, am I suggesting that you should never worry about money? Not really. I believe that if you are doing all the right things then it will all work out well in the long run. And worrying about it in the interim won’t help. Taking all the rightactions and still worrying about money is a complete waste of emotional time and energy.Here is a list of things/actions that you might need to worry about.Spend without any consideration for the futureDo you think before you spend? Or do you consistently adopt the attitude that “you only live once and could be dead tomorrow” so I may as well buy it?Everything in life is about moderation. I know it sounds really boring, but it’s true. I believe that we shouldn’t continually deny ourselves the things we enjoy. Investing is a journey and it should be enjoyed as much as possible. However, by the same token, we can’t always buy everything we want either. Sometimes we must make sacrifices and compromises. That is, live comfortably within our means.If you regularly deny yourself some of the things you desire, then you probably have nothing to worry about.Have no idea how much you spend on general living expensesDo you know how much you spend on general living expenses (i.e. tell me an actual amount)? I don’t mean ‘guess’ or ‘estimate’. Have you actually sat down and worked out what that number is?Probably 80% or more of prospective clients I meet cannot tell me (accurately) how much they spend on general living expenses (i.e. everything excluding mortgages, investments, school fees and holidays). I would like to make two important points about this:1. You cannot manage what you do not measure. How do you know if you are spending too much if you don’t know how much you are spending? How can you make any plans or commitments without a clear picture of your cash flow? 2. Most people materially under-estimate how much they spend. The problem is that there are probably 30+ items in everyone’s budget that consist of several small transactions. These small expenses can add up. Often people are surprised by how much they spend.
Just knowing how much you spend is usually enough. You will find that you naturally become more careful with your expenditure. And you can proactively eliminate the expenses that don’t give you any pleasure or you can do without.If you know how much you spend on general living expenses, then you probably have nothing to worry about.You don’t regularly contribute a percentage of income towards investment or debt reductionThe old adage of “pay yourself first” is very good advice. Or as Warren Buffett puts it, “Do not save what is left after spending. Spend what is left after saving.”Everyone must commit to an annual savings amount. An annual savings amount is a sum of money that you will contribute towards securing your financial future. This could be directed towards the accelerated repayment of debt, additional super contributions, servicing an investment loan and so on. Where you direct your annual savings amount might differ from year to year. But the most important thing is that you are regularly diverting a portion of your income towards activities that strengthen your financial position in the long run. The key here is consistency and discipline i.e. year after year you invest the same (or increasing) amount of income into your financial future.The benefit of committing to an annual savings plan is that you can then enjoy some guilt-free spending. That is, if you know that you have already made a significant contribution towards your financial future and you still have some money left over, then you can spend that money on a holiday, new clothes or something else you enjoy – without feeling any sense of guilt that it’s the wrong thing to do.If you are regularly contributing towards securing your financial future, then you probably have nothing to worry about.You don’t have a long-term planYou don’t need a map until you have a destination. Therefore, you need to decide at what age you would like to retire and how much money you will need to enjoy a comfortable standard of living. Then, once you have a clear ‘destination’ you can develop a plan (your map).If you don’t have a long-term financial plan, how do you know if you are investing enough and/or have the right assets? The answer is that you can’t. The risk is that you haven’t invested enough or invested in the wrong assets and you are wasting precious time by not taking corrective action. Until you do some long-term planning, it is difficult to identify these errors. One thing you can never make up for, no matter how smart you are, is lost time. Time is the most critical ingredient in any low-risk, successful investment strategy. With less time you must accept either higher risk or lower returns.If you have a clear, long-term financial plan, then you probably have nothing to worry about.You are doing all the right things, so you have nothing to worry about?If you are prudent with your expenditure, know where your money is going, regularly contribute towards your financial future and are working towards a long-term plan, then what do you have to worry about? Worrying won’t change anything. Only actions will. And you are taking all the right actions so relax and be confident that it will all work out.There is typically very little you can do to influence income or expenses in the short term. Your current financial situation is the consequence of all your past decisions/actions. The only way to change it is to charge your actions starting today.If are aren’t taking the right actions (as above) and you don’t worry about money, then perhaps it’s time to start? In my experience, the ironic thing is that the people that tend to worry about money are the ones that probably don’t need to. And the ones that don’t worry, are probably the ones that should!Financial stress is avoidable. Worry is a choice.If you ever find yourself worrying about money, re-read this blog.
Over the past couple of years there have been many changes that have dramatically reduced your borrowing capacity. The Financial Services Royal Commission, government has put pressure on the banks to reduce investment lending and a directive to tighten lending standards just to name a few. If you are unable to borrow then your only alternative is to invest your after-tax income/savings… and that is a much slower path to wealth.But don’t despair. You can still leverage your assets and income to build wealth. It’s just that some of the rules have changed.Be more proactive and plan aheadGone are the days when clients would buy an investment property on the weekend and ring us on Monday requesting us to organise a new loan. It just too risky to do that these days (then again, arguably, it’s always been too risky). It is important to plan ahead as credit is much tighter these days and credit polices are changing regularly. This will help you project your future borrowing requirements thereby allowing your mortgage broker and you to work out the best time to make any required applications. You must be more strategic.You must maximise borrowable equityIn a constantly changing credit market it becomes even more critical to maximise your borrowable equity. Borrowable equity is the amount of unused loan facilities that you have access to. Maximising your borrowable equity requires you to proactively increase your credit limits to 80% of your property/s current market value.The three common benefits of maximising your borrowable equity include:(1) To fund future investment(s) and/or other uses such as home upgrade, renovation, etc.(2) To maximise your loan buffers in case of any unforeseen changes or expenses – the more access to credit you have, the lower your overall risk as you have adequate financial resources to weather most storms.(3) In case your borrowing capacity changes in the future e.g. start a family and go down to one income, change employment, move overseas, property values decrease, credit policy changes, etc. We never know what is around the corner.Watch this 5 minute video that I recorded last year to learn more.Start early and don’t waste timeBuilding wealth is more of a marathon than it is a sprint. Becoming financially independent takes time. And in an environment where money is more difficult to borrow, it becomes more difficult to be able to “catch up” i.e. if you are starting your wealth journey a little later in life. Therefore, do your best to avoid procrastinating. The best time to start investing was yesterday. The second-best time is today.There are usually three ‘windows of opportunity’ in most people’s lives when building wealth is the easiest:1. When your career is established but before you start a family – as this is typically when you have a high surplus income; 2. When your kids are in primary school but before they get to secondary school – as most parents will be able to return to work in some form (so income is higher) and your expenses will normalise e.g. no more child care, etc. If you plan to send your kids to private secondary school, then you need to start investing before those higher costs materialise; and 3. When the kids are close to finishing secondary school, especially if they are in private schools as your education expenses will dramatically reduce and you can divert that cash flow into investments.
If you are in one of these ‘windows’, it might be prudent to make the most of it before the window closes.More now than ever, its quality, not quantity that will ensure your successIf we agree that everyone’s borrowing capacity has reduced by 20% to 50% over the past year (it has), then we must acknowledge that our capacity to invest has also reduced accordingly. This means that there is less room for error. That is, all investments must perform.Simple logic and sound investment fundamentals command that the quality of the assets we invest in will dictate the returns. If we want above-average returns, we must invest in above-average assets. Therefore, I suggest that you should have even greater focus on ensuring your existing assets are working hard for you:* all property investments are investment-grade assets and have a high probability of working; * if investing in the share market, ensure you employ a low-cost, indexed (rules and evidenced based) approach – not trying to pick stocks or actively managed funds; and * ensure your super is in a low-cost environment.
Work with an integrated teamOk, so, I admit that I have a vested interest in making this next comment; an integrated team works best. That is, a team that can provide impartial financial, tax and credit advice – because all these things are important to consider when formulating advice.I have a vested interest in saying this because that’s exactly what we do at ProSolution. But I have built my business in this way because I know that it’s in the best interest of our clients. That is, we can offer holistic advice and not leave any stone unturned.
Over the last few weeks we have been working closely with our advisory clients assisting them with end of financial year tactics. I provide a list below of some of the tactics that we have been implementing. It is worth taking a couple of minutes now to see if you can benefit from any of these.Additional tax-deductible super contributionsIf you are under 65 and generate some taxable income (i.e. working), you can make up to $25,000 of tax-deductible superannuation contributions per year (if you are aged between 65 and 74 you must meet the work test). This is called the ‘concessional contributions cap’ (“CCC”).Included in the CCC is any contributions that your employer has made on your behalf (i.e. the mandated Superannuation Guarantee Charge of 9.5% p.a.). If you have any insurance policies which are owned inside super and you pay for the premiums personally, then this amount is also included in the CCC (if in doubt, speak to your insurance adviser).This year (2017/18) is the first year that both employees and self-employed persons can make a personal super contribution from their personal savings and then claim a tax deduction for this contribution in their personal tax return. If you do this, you will need to complete a ‘notice of intent’ and give it to your super fund.For example, if you expect employer will contribute say $12,000 into super for the year ending 30 June 2018, then you can make an additional contribution (from personal savings) of $13,000 and claim a tax deduction for it. If your income is less than $200,000, then this $13,000 contribution will only attract tax at the rate of 15% within super (thereby possibly saving you 32% or over $4,000 in tax – which is the difference between the super fund tax rate and your marginal tax rate).Getting some more wealth inside superIf you are under the age of 65 (or between 65 and 74 and meet the work test), it might be worth contributing some of your savings (in your personal name) into super. This is called a Non-Concessional Contribution (NCC). The NCC cap for people with less than $1.4 million of super is $100,000 per year or $300,000 in one lump (bring forward the next three years cap).Super is obviously a very tax-effective environment (nil tax whilst in pension phase). Therefore, if you are approaching retirement, often it makes sense to shift wealth into super. Obviously, this depends on the value of other investment assets that you may have – you probably shouldn’t put everything into super.Prepaying interest in adviceIf you expect that your taxable income will be substantially lower next financial year (2018/19) and you have investment loans, then perhaps pre-paying next year’s interest in advance might help reduce your tax burden this year. You will need to switch your loan to a fixed rate product (banks normally offer discounted fixed rates for this).But make sure that you do your sums to ensure its worthwhile. Many people over-estimate the benefit of pre-paying interest. Contact us if you which to discuss this further.Spousal contributionsIf your spouse will earn less than $40,000 this financial year then you might consider making a contribution of up to $3,000 into their super account. If you do this, you can obtain a tax offset of up to $540 (it’s a tax offset, not deduction, which means whatever tax you are liable for is reduced by up to $540). See here for more information on this.Did you make any capital gains during the year?If you crystallised a taxable capital gain during this financial year then you might consider whether you should sell any under-performing assets that are in a capital loss position to reduce your capital gain. This is particularly relevant with shares and managed investments. June is a good time to sell any investments that haven’t turned out as well as you had hoped.Prepaying any tax-deductible expensesConsider pre-paying any tax-deductible expenses such as interest on investment loans, insurances, repairs to investment properties, tax-deductible fees, rent and so on. Again, this is valuable if you expect your taxable income to be lower next financial year.Trying to even up your and your spouse’s super balancesIt may be advantageous to try and equalise your and your spouse’s super balances to maximise the chances of you staying under the new $1.6 million pension cap. To do this, the spouse with the higher super balance would draw a pension from their super. And the spouse with the lower balance would contribution the amount drawn into their super account as a non-concessional contribution. Essentially, shifting super from one spouse’s account into the other.You can only consider doing this if you have reached your preservation age (which is between 55 and 60 if you were born before 30 June 1964 – or 60 if born after this date). Also, if you are still working, you need to consider whether the recent changes to the ‘transition to retirement’ rules render this strategy inefficient.If you operate a business, buy any equipment that costs less than $20,000The government will allow small businesses to write-off the cost of any equipment that costs up to $20,000 (instead of depreciating it). Therefore, if you need any plant or equipment, buy it before 30 June 2018. See here for more.Wills and power of attorneys are up-to-date?This isn’t strictly an end-of-year issue but I like to sneak this one in because so many people don’t have a will!Not having a will makes things more difficult for anyone that you leave behind. If you have some monies to leave to your beneficiaries, you can do that very tax-effectively with the right will. Also, if you have children, guardianship will need to be addressed in your will.If you need help, contact our office for a referral to a pragmatic lawyer that will make the whole process of arranging a will as painless as possible (same guy that I use personally).Make sure you get personal (independent) adviceI am sure that you understand that the above is a summary only and these strategies may or may not be appropriate for you. There are just too many considerations and variables that you need to take into account to list in this blog. Therefore, it is very important that you do not act on this information without first getting professional (independent) advice. Of course, we’re here to help.
The Productivity Commission released its draft report this week into the efficiency of the Australian superannuation system. Its findings are concerning, and all Australians must take an active role in choosing the most appropriate superannuation fund for them. If you don’t, the Productivity Commission suggests it could cost you between $61k and $407k, depending on your age.What the productivity commission foundThe productivity commission found that many superannuation funds recommended by employers failed to deliver adequate investment returns. They described it as a bit of a lottery. That is, if you’re lucky enough to land in a good fund, chances are you could be several hundred thousand dollars better off.Also, they were critical of the fees scales that the superannuation industry is charging. They noted that whilst the industry has grown significantly in size, that that growth hasn’t translated to economies of scale.Finally, another key finding was that many Australians have multiple superannuation accounts which attract separate fees and erode retirement savings.So, how do you know if you’re in the right fund? Let’s have a look at your options.A retail fund is not a good optionA retail superannuation fund is one that is operated by a for-profit business such as MLC, AMP, ANZ (OnePath) and the like. These products are almost always more expensive and deliver inferior investment performance (as noted by the Productivity Commission).If you’re in a retail superannuation fund, typically, my advice is to move your super into a better option. Of course, before switching your super you must understand the repercussions of doing so as it could impact your benefits, insurance and so on. The best thing is to get independent advice.A Self Managed Super Fund (SMSF) is probably not a good option eitherSMSFs are the largest sector of the superannuation industry representing about one third of superannuation savings. I believe, SMSFs are over-recommended by accountants and financial planners.Assuming that you don’t have complex financial affairs, significant wealth, estate planning challenges or any other complexity, the only reason you would need a SMSF is if you wanted to invest in direct property. If you don’t want to invest your super in direct property, then there are superior lower-cost and simpler solutions for your superannuation.Many prospective clients that I come across that have a SMSF are typically under invested. That is, the SMSF holds a lot of cash that is yet to be invested. This is a good indication they set up the fund without a clear strategy. Therefore, before you establish a SMSF, make sure you have a clear investment strategy in mind so that you can maximise your super fund’s performance.Industry super fundIndustry super funds are not-for-profit businesses. However, I feel a more apt description of them is not-for-productivity. Whilst industry super funds are typically a better option than retail and SMSFs, I do have some concerns with their transparency and productivity. The Productivity Commission also shares similar concerns to me.In the past, I have written about the industry funds lack of accountability in reporting and comparing investment returns. In addition to these concerns, the problem with a not-for-profit business is that the absence of a profit motive is worthless if there is no focus on productivity.For example, it is common knowledge in the financial services sector that industry super funds tend to pay a higher salary compared to the salary that would be offered by the corporate sector for the same role. In fact, a recruitment executive that I have known for many years and trust, admitted to me that one of his clients (an industry fund) intentionally offers a salary 20% higher than the market rate.Another indication that productivity enhancements can be made is the number of people employed by each industry super fund. One industry fund that manages $44 billion employs approximately 330 people. Another industry fund that manages $65 billion employs 750 people. By comparison, low-cost index fund manager, Vanguard would only need to employ 25 people to manage $65 billion (as it employs 16,600 people worldwide and manages $6.4 trillion). Of course, it’s not meaningful to make a straight comparison but you understand the theme of my argument.Industry super funds are heavily influenced by the unions and as such, I doubt they will optimise employee numbers any time soon.A more transparent solutionTypically, we invest our clients’ super using a wrap platform. The benefit of this approach is that it is very transparent. Firstly, it allows us to invest in low-cost index funds that employ various index strategies (which I written about previously). This means we can see exactly what each investment manager is charging us and their performance. Investors also pay an administration fee to the wrap platform provider and this fee is separately identifiable. Finally, as a fee-for-service advisor any fees that I charge for my advice are also separately identifiable.Therefore, using this solution a client can very clearly see what we are investing in, how we are investing (methodology) and what fees they are paying and to whom. Transparency and accountability ensures there is nowhere to hide. In many cases, it is considerably cheaper than an industry fund.The ‘holy grail’ of a solutionI believe that the solution mooted by the Honourable Peter Costello makes the most sense. That is, the government should establish its own super fund for all Australians and that fund should become the default fund for all workers.The Australian government has a proven track record for managing a large amount of money. For example, the Future Fund turned 10 years old last year. It’s investment return for the 10 years ending 30 June 2017 was 7.8% p.a. That compares favourably to AustralianSuper’s (the largest industry fund) return of 5.56% p.a. A government operated fund would provide the much-needed competition to encourage the industry super funds to focus on productivity.So, what should you do?If you have multiple super accounts, you must consolidate them (its not difficult or time-consuming to do).Whilst I have reservations with industry super funds, they are typically a better solution than retail fund and SMSF. However, if you have more than $200,000 invested in super, there is merit in engaging the services of an independent financial planner if you desire greater transparency and accountability.
The ultimate aim of investing is to build wealth. Current and future tax liabilities can have a significant impact on your ability to build wealth. Simply put, the less tax you pay, the more money you keep for yourself. Therefore, taxation is a major consideration.That said, tax consequences should never drive investment decisions alone. Tax is one of many considerations so its important to not become too tax focused. Balance is the key here.Income versus capital gainMost growth assets provide a combination of income and capital growth.Income is taxed at your marginal tax rate (which is 39% for people earning between $87k and $180k p.a. or 47% if you earn more than $180k p.a.). However, only 50% of any realised capital gains are taxed at your marginal rate (because if you own the asset for more than 12 months you are entitled to reduce the net capital gain by 50%).Therefore, capital gains attract half the tax than income does.Compare asset classesThe chart below sets out the proportion of income and capital gains you can expect from investing in residential property, an index fund (ASX200), an actively managed fund and cash. Residential property provides most of its total return in capital growth and therefore is more tax efficient.Other advantages of capital gainsThere are some other advantages of investing in assets that provide most of their return in capital (not income) including: You only pay capital gains tax when you sell the asset. However, income is taxed in the financial year it is received. This means that you get to reinvest the gross capital gain each year and avoid paying any tax until you sell it. * This chart below demonstrates that you will enjoy more than four times* more growth (in dollar terms) in the fifth 5-year period ($1.1m) comparted to the first 5-year period ($237k). This illustrates the power of compounding capital growth. Quality assets require time and patience. Its that simple.
Excerpt from Investopoly (page 48 & 49)Let’s compare income assets to assets that generate an overall return of 10 per cent pa each. The only difference between the two investments is the components of the return – one asset produces more income (and, therefore, less growth) than the other. As you can see from the following table, the investment that generates less income results in a lower tax expense and, therefore, a 1 per cent pa higher after-tax return. However, most importantly, the higher capital growth rate for asset two makes a massive difference on the value of the assets over the long run. Asset one is projected to be worth $1.45 million in 20 years, whereas asset two is projected to be worth $2.33 million – some $880,000 more. The point is, all things being equal, it’s very valuable to substitute less income in return for more capital growth.
Asset oneAsset twoIncome4.5%2.0%Capital growth5.5%8.0%Tax on income @ 40%(1.8%)(0.8%)After-tax total return8.2%9.2%Value of asset in 20 years@ 5.5% pa growth: $1.45m@ 8% pa growth: $2.33mNote that the preceding table only includes the impact of income tax. It does not include the impact of capital gains tax, which, of course, all investors will pay on any capital gains they make when they sell the investment.The following table sets out the after-tax returns produced by each asset after paying for income and capital gains tax. The amounts shown represent the after-tax income plus capital returns. It is important to note that asset two produces a 21 per cent higher return (at $400,000 more).
Asset oneAsset twoTotal after-tax returns after 20 years (minus income + capital gains tax)$1.88m$2.28mI’m not pro-property and anti-sharesThe purpose of this blog is not to promote the advantages of investing in property and suggest it’s much better than other asset classes. Not at all. I believe in a diversified approach.The point of this blog is to help you understand how different asset classes behave differently. Like in golf, you need to select the right club for the right shot. For example, inside superannuation, Australia shares are great investments because of imputation credits and the low tax rate (15%). In your personal name, property works best (particularly whilst you are working) because its more tax efficient.Success lies in investing in the right asset class for your stage of life, financial position and ownership structure.
In this episode I discuss some of the financial life hacks that my blog subscribers have shared with me. A list of these life hacks and related links are contained on this page: https://www.prosolution.com.au/financial-life-hacks-list/
I know. You have probably seen lots of news about the Royal Commission and the financial advice horror stories. I don’t plan to rehash anything that’s already been said.The only thing I will say is that the publication of these horror stories is a very positive thing. At a minimum, it encourages people to educate themselves about their advice options and maintain a healthy level of scepticism (not blindly trust). At best it will force the industry to change.The point of this blog is to help you understand who you need to seek advice from, when and what fee (remuneration) arrangements are acceptable. In short, to give you the lay of the land. This will help you navigate the financial industry and put the Royal Commission commentary into context.Important: There are two types of financial or investment advice1. Strategic financial advice will tell you what and how much you need to invest in to achieve your financial and lifestyle goals. 2. Asset-class investment advice will tell you how to invest in a certain asset class.
It is very important to understand what type of advice you are looking for. The mistake that many people make (which gets them into trouble) is that they seek strategic advice from someone that is only able to provide asset class advice.
https://www.prosolution.com.au/royal-commission-who-to-trust/
A few clients this week have asked me if it’s a good idea to invest a large sum in the share market at the moment (for a variety of reasons e.g. as super contributions, a gearing strategy and so on). I told these clients that I have some real concerns with it – not because I don’t have faith in the stock market – but because of the difference between actual versus compound returns.As these charts demonstrate, the US and Australian stock markets are close to their peaks since the GFC hit nearly a decade ago. Whilst I’m cautious of not falling into the trap of trying to predict how the market will perform in the short term, I know that markets are risky when they are at their peak.I also know that large losses and/or volatility can take a while to recover from (mathematically). That is why Benjamin Graham taught Warren Buffett that there are only two rules to investing:* Rule # 1: never lose money; and * Rule # 2: refer to rule number one.
Average versus compound returnsConsider this example: you invest $100,000 in a share market managed fund that delivers the following returns over 5 years:Year 1 -22%
Year 2 2%
Year 3 40%
Year 4 -10%
Year 5 25%The average return over the 5 years is 7.0% p.a. However, the compound annual return is only 4.6% (i.e. your initial $100,000 investment has increase to $125,307 after 5 years).Why?If you have $100 and lose 50%, you will have $50. If you make 50% back the following year, you will have $75, not $100. So, you need to make a 100% return just to get back to where you started. That is why Benjamin Graham taught Warren Buffett how important it is to never lose money.What does this all mean?There are two main learnings we can draw from this basic yet imperative concept:1. Take whatever steps necessary to avoid losses. Don’t put your eggs in one basket. Instead, put your eggs in various baskets – which includes (for example) investing in multiple asset classes, diversify amongst various passive (index) share market methodologies, diversity architecturally and geographically with respect to property, invest gradually over time (which is referred to as dollar-cost averaging) and so on. The strategy should be to invest in such a way that you can make money in any market.
2. Understand and appreciate that high volatility reduces investment returns. Don’t get seduced by advertisements promoting high average returns. Instead, make sure you look at the compound return as it takes into account the negative impact volatility has.
Some of the most important investing concepts are beautifully simple. In fact, their simplicity fools people into thinking that they aren’t important. That is a big mistake. Despite how complex our world is becoming, abiding by these simple concepts becomes increasingly more crucial.
You loan structure can have a big impact on your success as an investor. How you structure your loans can influence on your interest rates, borrowing capacity, cash flow, taxation liabilities and so on. Four years ago I wrote this blog which included 7 loan structuring tips and I wanted to update you on a few matters.In this podcast I discussed:1. Funding a property owned in one spouses name only 2. Loans in join names typically are not a problem 3. Cross securitisation and maximising your borrowing capacity 4. Interest only versus principal and interest
https://www.prosolution.com.au/updated-loans-structured-correctly/
I am a big believer in having balance when it comes to managing money. That is, it makes no sense saving ever dollar and always “going without”. After all, none of us know how much longer was have on this planet so we must make the most of every day. However, by the same token, it’s equally silly to spend all our income without any thought towards saving for tomorrow. We need to do both. It’s about finding a balance between spending some money today and save some for tomorrow.It can be very rewarding having a holiday house from an emotional and lifestyle perspective. It is a great ‘escape’ from the city and a wonderful opportunity to relax with family and friends.
This podcast investigates the “true” cost of buying a holiday home versus renting. I suspect you’ll be surprised by the results – I was!
https://www.prosolution.com.au/holiday-homes/
In this episode I discuss how do you get better value for money from your income protection insurance?I discuss:* the importance of cover * the key features of a contract * why agreed value is better than indemnity value * why I don’t recommend getting cover inside super (be warned) * How to select a provider * Why “quality” is so important and what quality refers to * Some tips to reduce the cost of cover.
If you are an investor, then its likely you need some level of income protection. It is important to ensure you will get what you are paying for i.e. value for money.For more, go to - https://www.prosolution.com.au/income-protection-insurance/
We have all read the horror stories in the newspapers or seen them on television: Mum and Dad put their trust in a financial advisor. The advisor ‘sells’ them an investment that paid him a substantial commission. The investment was poor quality. Mum and Dad subsequently lose their life savings and the advisor goes unpunished. A new story like this comes up every few months. It’s frightening and very upsetting!I propose you can only do one thing to eliminate 99.9 per cent of all these stories occurring: remove all and any conflicts of interest. Once all conflicts of interest have been removed, working out if you should and can trust a particular advisor becomes a lot easier. In that situation, it simply comes down to whether the advisor has enough experience, knows what they are talking about and has a track record of producing good results.Let me put it this way, would you be comfortable if your doctor (GP) was employed by a pharmaceutical company? Absolutely not! And that is why laws in Australia prevent pharmaceutical companies from owning and operating medical practices. I believe that we should have similar laws in the financial services industry (but I suspect the banks’ political lobbying power will prevent this from happening). How do you choose which GP you visit? You make an assessment of whether the doctor knows what they are talking about, the results they produce and whether you feel comfortable dealing with them.Therefore, before concluding that all financial advisors are crooks, I invite you to recognise that two types of financial advisors exist: independent advisors and conflicted advisors. When you read the next horror story in the newspaper ask yourself whether the advisor was independent or conflicted. I’ve no doubt you’ll find they are always conflicted. The golden rule here is that you should always avoid conflicted advisors. To be truly independent I believe the advisor needs to satisfy five conditions1. Take no investment commissions, referral fees or kickbacks2. Offer fixed fees3. Have no investments to sell you4. Be privately owned with an AFSL and with no links to banks or investment providers5. Demonstrate deep knowledge of all asset classes (especially property and shares)https://www.prosolution.com.au/what-is-an-independent-advisor-five-important-tests/
Evinced-based investing (EBI) is an approach that you can use to invest in either property or shares (and other asset classes). This process makes investing feel a whole lot more secure because its more transparent, you aren't making guesses and you have a lot more confidence that your investments are going to work!
Evidenced-based investing refers to the process of adopting a set of rules to guide the implementation of the investment strategies and tactics. The efficacy of these investment rules is typically supported by long-term empirical evidence and peer-reviewed academic studies. That is, there’s an overwhelming body of evidence that proves these rules work and, perhaps most importantly, why these rules work. It is important to understand what has driven the returns – not just take the returns on face-value. You only invest when an overwhelming body of evidence exists that demonstrates you will be successful.
For more information including examples of evidenced-based investment strategies, go to: https://www.prosolution.com.au/evidence-based-investing-reduces-risk-and-maximises-returns/
It stands to reason that not everyone needs a financial plan or relationship with a financial planner. There might be various reasons for this. However, perhaps the best way to answer this question, i.e. “who doesn’t need a financial plan” is to discuss what’s involved in a plan and then you can draw your own conclusions.
In this podcast I discuss:
• what’s involved in the financial planning process i.e. what outcomes will you enjoy
• how to set the two most important goals
• how to map out an action plan
• what a financial planner will do ongoing (each year).
This will give you enough information to decide whether its for you or not.
For more, check out my video here.
If you sell a dud investment property, you may have to pay capital gain tax (CGT), selling costs and then stamp duty again when you reinvest… it can be a very expensive exercise! And if you have owned the property for a while, it is probably putting money in your pocket each month (i.e. more than covering its expenses – not costing you anything) and the CGT could be significant – even more reason to not sell it, right?
This is what I would like to investigate in more detail. In particular, how bad does the property’s performance need to be to warrant selling?
A dud investment is any property that hasn't and won't appreciate in value by 7-10% p.a.
There are three costs you need to consider before selling being:
1. Selling costs - agent fees, marketing and maintenance
2. GST - the rule of thumb is to multiple your net gain by 23.5%
3. Re-purchasing costs (stamp duty and buyers' agent fees).
The chart below looks at how much the new property needs to beat the old property by (growth rate) for it to be worthwhile.
Mistake # 1: The absence of a methodology – most investors make ad hoc investment decisions. How can you expect to win the game if you have no game-plan?
Mistake # 2: Belief that they can make quick profits – too many people thing too short term.
Mistake # 3: No patience – invest in quality assets with a quality (proven) methodology and then have the discipline to ride through the volatility.
Mistake # 4: Almost no diversification – diversification is by far the biggest single necessary ingredient to winning the game of share investing.
What is the simple solution to these four mistakes?
The antidote to these four mistakes is very simple and available to all smart investors. Essentially you need to do three things:1. You need to adopt a proven, low risk methodology. I am a strong believer in the passive investment methodology. Its low-cost and very diversified and proven to generate higher returns.
2. You need to invest in a manner that you would be comfortable doing so for the next 10 years. You need to avoid the temptation of trying to predict market returns – “market forecasters will fill your ear but will never fill your wallet” – yes, another Buffett quote; and
3. You need to diversify markets and assets classes. This means that you should invest outside of Australia – particularly in the US market as it makes up over half of the world index and provides tech exposure as discussed above. You should also consider defensive assets such as bonds too.
Visit this blog for more information.
How you structure your loans can have a large impact on the tax you pay, your risk, your ability to build wealth, your cash flow and your general financial strength. Efficient loan structuring is a commonly overlooked and rarely understood topic but that’s not to say it’s overly complex. Like anything, you don’t know what you don’t know until you know it. Many people tend to carry a reasonable amount of (investment) debt throughout their working life so it’s especially important for you to ensure your mortgages are your servant, not your master. You can save a lot of tax by optimising your loan structure.Part 1Loan structure # 1: Always borrow the maximum and use an offsetLoan structure # 2: Always interest onlyLoan structure # 3: Minimise securityPart 2Loan structure # 4: Diversify lendersLoan structure # 5: Avoid cross-securitisationLoan structure # 6: Never mix business with pleasureLoan structure # 7: Stagger fixed rate expiryFor further details, read this blog
How you structure your loans can have a large impact on the tax you pay, your risk, your ability to build wealth, your cash flow and your general financial strength. Efficient loan structuring is a commonly overlooked and rarely understood topic but that’s not to say it’s overly complex. Like anything, you don’t know what you don’t know until you know it. Many people tend to carry a reasonable amount of (investment) debt throughout their working life so it’s especially important for you to ensure your mortgages are your servant, not your master. You can save a lot of tax by optimising your loan structure.
Part 1Loan structure # 1: Always borrow the maximum and use an offsetLoan structure # 2: Always interest onlyLoan structure # 3: Minimise securityPart 2
Loan structure # 4: Diversify lendersLoan structure # 5: Avoid cross-securitisationLoan structure # 6: Never mix business with pleasureLoan structure # 7: Stagger fixed rate expiryFor further details, read this blog
In my experience, novice investors can talk themselves into believing that an investment exhibits less risk than what it actually does. They think they are investing but in reality, they are closer to speculating than investing. The solution is to understand what evidenced-based investing is and how to use it effectively.
This podcast discusses the difference between investing, speculation and business - sometimes they overlap as shown below.
For more information, go to the blog page here.
https://www.prosolution.com.au/beware-wolf-dressed-sheeps-clothing/
Parents always want their children to have the best education. For some people, that means sending their kids to a private school. Of course, private schooling can be expensive and can have a big impact on your cash flow. But I’d like to suggest that the ‘cost’ is a lot more than the initial cash flow impact which parents should take into account - it can be more than 5 times the actual cash flow cost . And maybe there's a better alternative to consider that ticks both the 'education' and 'wealth' boxes.
For more information about this topic, go to https://www.prosolution.com.au/opportunity-cost-private-education-alternative-consider
To subscribe to my blogs, go to: https://www.prosolution.com.au/subscribe-blog/
In Melbourne, investment-grade apartments have not appreciated in value very much in the past three to five years when compared to houses – as illustrated in this chart
https://www.prosolution.com.au/time-to-buy-apartments/
I would like to explore why this might have been the case and share my opinion of whether this performance differential will persist.
When it comes to almost anything you buy, you have to weigh up three considerations: price, service and quality/features. Almost always, you can't have all three - choose the most important two . When it comes to financial advice, I believe that 'quality' is the most important consideration. There are 6 factors that you need to consider that will impact on the 'quality' of the advice you receive.
https://www.prosolution.com.au/pursuit-quality-advice/
Investment-grade properties should double in value every 7 to 12 years on a perpetual basis. This equates to a 7% to 10% annual compounding growth rate – assuming inflation is in the RBA’s 2% and 3% band.
https://www.prosolution.com.au/makes-proprty-investment-grade/
What is more important to do first? Contribute into super or buy an investment property? How will investing in property help you fund retirement? What can you do (invest in) to minimise the risk of running out of money in retirement? These questions all relate to your investment strategy.Most of these questions can be answered by acquiring an understanding of a typical investment strategy life cycle. Watch the 8 minute video below and I will take you through the order in which many successful investors build wealth for a comfortable retirement.https://www.prosolution.com.au/typical-investment-strategy-life-cycle/
I believe that very few investing mistakes are the result of random bad luck. Most mistakes are predictable and preventable. And there are some mistakes that are very common amongst novice investors.My belief is that if you can avoid these most common three mistakes then you will have a very high probability of being a very successful investor.
https://www.prosolution.com.au/top-3-mistakes-people-make-investing/
I’m sure you have seen the glossy ads espousing various benefits such as stamp duty savings, rental guarantees, discounts and incentives, state-of-the-art gyms, beautiful kitchen appliances, a concierge and the list goes on. As the title of this blog suggests, I strongly believe that off-the-plan apartments do not make good investments. And I put new-build townhouses and houses in the same boat. I’ll tell you why…
https://www.prosolution.com.au/avoid-off-plan-apartments-new-homestownhouses-like-plague/
When you compare the Australian market to the US, the difference is frightening. The Australian market is very concentrated (a handful of companies dominate the market), has nearly double exposure to risky ‘cyclical’ sectors and has almost no exposure to technology. I’m going to suggest (below) that you can solve most of these problems by investing in just two low-cost, index ETF’s to achieve better diversification
https://www.prosolution.com.au/share-market-diversification/