This article here, referred to me by Travis Morien, director of Compass Financial Planners PTY LTD (and whose website is an outstanding resource for financial information) is well worth a read.

The article highlites, of all things, Dilbert's 9 step plan as 'a unified theory of everything financial'.  It is pretty good.  In fact, I think it is outstanding.  The author of the article calls for a nobel prize to be awarded based on the simplicity of the theory.  The unified theory is contained in the following  9 point theory - 129 words!  In Australian points 4 and 5 can become 'make additional contributions to superannuation, so they will help fund your lifestyle after age 60'.

1. Make a will
2. Pay off your credit cards
3. Get term life insurance if you have a family to support
4. Fund your 401k to the maximum
5. Fund your IRA to the maximum
6. Buy a house if you want to live in a house and can afford it
7. Put six months worth of expenses in a money-market account
8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio

It really is simple!

When setting up an investment portfolio, deciding on the correct asset allocation is an important part of that process.

Over time, however, the balance of the portfolio will change as some asset classes perform above expectation, and some below expectation.  What should you do about this?

I attended a seminar yesterday that looked at exactly this question. 

While the simplistic answer is that once the asset allocation gets out of line with your expectations, you should bring in back into line, we have to keep in mind that there are costs associated with such a move.  The most significant cost is capital gains tax.  Selling assets in the part of a portfolio that has performed strongly will mean that capital gains tax is realised.

The most effective way to rebalance a portfolio is to use the portfolio income and additional portfolio contributions to bring the portfolio back towards you preferred asset allocation.  That way you are not selling assets and realising capital gains tax.  You are simply using the portfolio income and contributions to strategically increase the exposure to asset classes that are underrepresented in your portfolio.

Of course, once a person retires, they are more than likely going to be spending the portfolio income and no longer making additional portfolio contributions.  What about their situation?  In Australia, once a superannuation fund has started to pay an income stream, the fund becomes completely tax expempt.  In that case there is no need to worry about capital gains tax when rebalancing.

A large part of our annual review process focusses on forming a plan for the best use of the portfolio income and future contribution to the portfolio - ensuring that they are invested in such a way as to keep the portfolio true to your asset allocation, and your overall financial goals.

I can't really get excited about the Telstra float.  Any time that you buy shares in a company, you effectively become part owner of the company.  And I can't get too excited about:

• A company where the biggest shareholder (the Government - even after the float) is at loggerheads with the company board and management.
• Where the ACCC stops the company soley benefiting from its own investments (ie it makes Telstra share its infrastructure with other telcos)
• Where the recent history of the company has been declining earnings
• You don't know the final price of the shares - that will be set after you decide to purchase
• Commentators suggest that the final price is likely to be in the range $3.50 to $3.70 - Telstra shares were trading at $3.40 not too long ago and, even with the installment receipt and bonus share on payment of the second installment, $3.40 is looking like better value
• The Government still owns a huge slice of the company in the 'future fund', which it may well sell off over time, and which will depress the share price when that sell off happens

So why, at the last minute yesterday, did I go online to register for Telstra shares?

As much as anything it is the lure of waiting to see the shares list, seeing what price they first traded at.......the excitement of a float really.  Which is a terrible reason to make any investment.  In the end it looks like I was too late with my payment, so I will miss out on all the excitement.

In terms of have I missed out on a great investment, my judgement is that I don't really think so.  My guess is that they will list at a bit of a premium to the price that they were issued at.  In three years time I don't think I will be looking back and kicking myself for missing the T3 float.

Interest rates went up today to 6.25%.  This is not good news for home owners with mortgages.  It is good news for people with investments in cash management accounts.

The official announcement from the Reserve Bank of Australia is here.

Adjustments to interest rates in an economy are known as 'monetary policy'.  The aim of monetary policy in Australia is to keep interest rates at between 2 and 3%.  This is alluded to in the Reserve Bank statement.  Raising interest rates gives people less money to spend, and less inclination to borrow and spend, and so decreases the demand for goods.  In turn, this decreased demand decreases the likelihood of inflation.

The board made this statement about their deliberations: "The Board judged this to be an environment in which the risks of inflation exceeding 2-3 per cent over the medium term remained significant."

This is the third interest rate rise this year, each by 0.25%.  What is interesting is that early in the year the forecast was for interest rates to fall, not rise.  It shows how tough it is to forecast these things. 

Keep in mind that as interest rates rise, asset prices (such as property) tend to rise.  There is a lot of talk about how attractive superannuation is as an investment - and it is true - however I think that the first goal of people should be to pay down enough of their mortgage so that they can cope with any unforeseen and significant jumps in interest rate comfortably (say to 18% - it has happened in the past).  The worse scenario would be defaulting on a mortgage with interest rates high, having the property sold while it has fallen in price and having to finish paying off a mortgage in the future.

Last night Alan Kohler, the economics presenter on the ABC news, presented some interesting statistics relating to some Australian spending habits.  Australians spend, per capita, $17.50 per week on gambling - mainly on pokies, scratchies and casinos. 

This is an extraordinary amount of money - about 5% of the average weekly wage spent on gambling.

You know what every financial planner does next: if this amount ($17.50 a week) of money is invested into growth assets that return 10% a year, then after 40 years the value of the portfolio will be $485,000. 

40 years is an interesting time, as it represents about a person's working life - from age 20 to 60.  Imagine having $485,000 next to your superannuation at retirement, you would be in great shape to enjoy retirement.

Isn't it ironic, that the habit associated with financial hope might actually stand in the way of financial success achieved through the discipline of investing regularly in growth assets over time!

A lot of financial planning focuses on important decisions that have to be made about 'financial planning strategy' (eg salary sacrifice contributions to superannuation) and 'investment selection' (eg index funds vs actively managed funds vs direct shares).  Perhaps not enough focuses on the simple disciplines that lead to a person becoming wealthy over time.  Outlined is a 5 step guide to how you can become wealthy over a life time - a 'get rich slow' recipe.  We are starting to see in the media that the Henry Kaye style 'get rich quick' property seminars and the 'get rich quick' share trading programs don't work.  The power of this get rich slow recipe is that it has worked for many people, and it will work for many more.

1/ Spend less than you earn.  As simple as this sounds, clearly many people don't get past this first rule.  Statistics on the level of debt that we have in Australian show that it is reaching record levels, no longer measured in billions of dollars, it is now measured in trillions. 

Most of us face an average tax rate of about 25%.  That means that we are working the first 25% of the year - 3 months - just to pay our tax bill.  The last thing anyone should be doing is taking on consumer debt, so that part of our future income is promised away in the form of repayments to finance companies as well as the tax office!

2/ Invest the surplus in growth assets (Australian shares, international shares, listed property trusts).  All these asset classes have expected returns of about 7% above inflation - say 10% in the current 3% inflation environment.  This is better than the expected return from cash, which is about 3% above inflation (6% total).  Earning a long term rate about 7% above inflation increases the purchasing power of your investments over the long term.

Investing in a portfolio made up of all three growth asset classes helps smooth the overall volatility of the portfolio.  If one investment asset class has a terrible year, the returns can be smoothed by the returns from the other investment classes.  Sure, some years they will all have bad returns, accept that as part of investing.  Some years - such as in recent years - they will all have great returns, accept that as part of investing as well.

3/ Do this over a long period of time.  Make this a habit.

Investing additional money regularly over time is very powerful.  As markets go up you can say, 'great, my investment returns are strong and are creating wealth for me'.  As markets go down you can say, 'great, here is an opportunity to invest more money at lower prices'. When markets turn and go up again - and they will - you will be in great shape.  

Regular investing lets you benefit when markets rise or fall.  You simply can't go wrong.

4/ Accept that part of the strategy is investing in growth assets is that while they have a higher expected return than investing low risk cash investments, they also have a greater volatility: that is there will be periods of ups and downs.  Don't try and outguess these ups and downs, just accept that they are the reason you will get a higher overall return, and accept that there will be volatility.  This is the biggest mistake that people make - trying to pick and choose when to buy and sell in and out of asset classes.  There is overwhelming evidence that professionals can't do this.  If the professionals can't, then we should not be so arrogant as to try. 

Dalbar, a US research company, track the actual returns that investors get from US managed funds against the overall market return.  For the 25 year period to the end of last year they found that they average US share investor made 4% a year, while the market return was 11%.  This was because investors' panicked and sold investments when they went down in value, and got excited and bought more when they went up in value.  Don't try this and get left with these terrible returns.  Accept the ups and downs as part of the strategy, and don't let this distract you.

Don't dismiss the importance of this rule.  Trying to 'time' markets is the number 1 mistake investors make.  Don't make this yourself.

5/ Remember that compound interest is a very powerful force.  However you won't see the real benefits of compound interest for some time - don't expect too much too soon, or you will be disappointed.  (Compound interest is the effect where as your investment earnings increase, these investment earnings will return their own investment earnings, and these earnings will have more investment earnings and so on.  It is very powerful effect in a portfolio; however it takes quite a few years to really see it happen.)

I often wonder how often investors read or hear about the power of compound interest, get very excited about the examples offered, but never actually realise that the power of compound interest happens at the back end of an investment strategy.  Compound interest is exciting, it is powerful, however it takes a while for the effect of investment earnings on investment earnings on investment earnings to kick in and be visible.  So don't be discouraged when you don't see this happening in the first 5 or 7 years - stick with the plan over time.

So there you have it.  You now know how to become wealthy.  It's not that hard and you can start today.

The key partner that we use in building investment portfolios is Dimensional Fund Advisors.  We use them because their investment solutions are grounded in the reality of how investment markets function.  And their investment solutions work.

They focus on applying the latest in academic research to building investment portfolios.  This includes the '3 factor model', which identifies that small companies and value companies are sources of higher expected returns. 

Over the 5 years to the end of October 2006, the returns of the Australian Dimensional Fund Advisor trusts has been:

Large Company Fund (which is very similar to the ASX100 index) 15.35% a year.  Keep in mind that very few funds ever beat this index return.

Value Company Fund (which invests in the 30% of the market with 'value characteristics') 21.53% a year.

Small Company Fund (which invests in companies outside of the ASX100) 21.18% a year.

These are truly impressive returns.  They don't come from the 'skill' (or 'luck') that most fund managers profess to have in being able to pick stocks that will perform better in the future - they come from studying the reality of how investment markets work, and investing accordingly. 

Moreover, the Dimensional approach focusses on tax effeciency, so the after tax returns of the funds remain strong.  This contrasts with most managed funds where there is significant underlying trading that means a lot of capital gains tax is passed on to investors over time.

Dimensional Fund Advisors have recently produced a brochure entitled 'The Science of Investing' that explains their philosophy.  It is well worth a look.

In this article in the Sydney Morning Herald, published on Saturday, the following quote was attributed to the IFSA (Investment and Financial Services Association):

'Commissions allow people to access advice and pay for it over time via their savings," IFSA says. "Commissions also tie the interest of the consumer and the financial planner, and give an incentive for the planner to maximise a consumer's savings'

I simply can't stand to see such a ridiculous comment go unchallenged.  In my opinion commissions do exactly the opposite.  For starters, a financial planner who relies on a commission model will only recommend financial products paying a commission.  Secondly, the size of a commission is capable of distorting the advice given by a financial planner - just look at the Westpoint Collapse where financial advisors were accepting high commissions to put their clients into ridculously high risk investment 'products'.

More than anything, commission payments make financial planning a sales game.  I don't believe this aligns the interest of financial planners and consumers at all.  Indeed, consumers go to a financial planner looking for advice, not to be sold to.

Every other profession charges for its time on the basis of a fee - this is the model of what a profession is.  Any suggestion that taking an ongoing trailling commission from a product recommendations is a more professional fee structure is, in my opinion, rubbish.

This transcript of an ABC radio interview provided some recent, and grave, statistics about the level of household debt in Australia.

Debt topped the $1 trillion mark.  Assuming that there are about 10 million people working, that equates to about $100,000 for every working Australian. 

With a rate rise on the first Wednesday in November looking increasingly likely, the pressure will be felt by consumers.

Yesterday I walked past a car advertising a lending business.  It's slogan was 'We Lend Against Anything!'.  In my opinion, that's not an exciting promise to consumers, that's a threat.

At the start of the year there were some people predicting that the next interest rate movement would be down.  We have had two rises, with the strong possibility of a third.  What does this mean for thoughtful investors?

1.    Always be sure that there is room in your budget to increase interest repayments if interest rates rise

2.   Consider using a fixed rate mortgage.  Sure, you won't be happy if rates fall, however you have certainty that you will be able to meet your repayments if rates rise.

3.  Be like a business in that using some borrowed money is good, however you don't want to use so much that there is any chance that you end up with some financial distress.

4.  Focus on paying debt down to a reasonable level quickly.

There has been much talk over the past 24 hours about the very low level of superannuation that most Australians have.  An ABC article here is an example of this. 

The crux of the stories have revolved around quotes like this (from the ABC report) 'The Centre for Social and Economic Modelling has found on average women aged 45-60 are retiring with just $8,000 in superannuation whereas men retire on an average of $30,000'.

$8,000 or $30,000 in superannuation is chump change - almost not worth having.  The age pension for individuals is about $13,000, a little less for each member of a couple, and this is what people these people will be relying on in retirement, unless they have substantial assets outside of superannuation.

Amongst all the bleak commentary on low superannuation balances, some other realities have been missed.  The first is that it is quite easy, with a few years of extra savings, to increase your superannuation balance.  Superannuation remains the most tax effective investment environment that is around - it you use it well, it is very effective.  The second aspect that has not been commented on is that amongst the proposed superannuation changes the centrelink assets test will be relaxed.  This means that retirees will be able to have a higher level of assets and still receive some part pension to supplement the investment earnings from their superannuation and investment assets.

Superannuation remains the most tax effective investment environment.  The things a successful investor will do to take advantage of this include:

• Making some additional contributions to superannuation early in their working life (if they are eligible)
• Use the Government Co contribution if they earn less than $58,000 a year
• 10 years from retirement start making extra superannuation contributions - using the tax effectiveness of salary sacrifice contributions
• Don't lose track of superannuation funds, roll small funds into one good superannuation fund so that you are keeping all of your assets in the one place.