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Financial Happenings Blog
Thursday, March 29 2007

Reporting on interest rates has become a big part of the work of the financial media.

Every month there is breathless speculation about whether or not the Reserve Bank are going to increase interest rates, keep them on hold or decrease them.  Interest rate watch has become a big deal.

The futures market, where forward expectations of financial movements can be traded, is showing an almost 100% certainty of an interest rate rise within the next 6 weeks.  With a rise possible as early as next week.

So why are interest rates so important?

Interest rates can be best thought of as the 'cost of money' in the economy.  As money becomes more expensive, people become more reluctant to spend money and companies become more reluctant to borrow money for new projects.

There are three parts of the economy that are affected by interest rates:

  1. The amount of surplus money that households have available to spend
  2. The cost of future borrowing becomes higher, making people more reluctant to spend
  3. Companies have to pay more to borrow money, making them more reluctant to borrow for new projects and investment

All three of these factors tend to slow economic growth and demand when interest rates are increased.  Which is exactly what the Reserve Bank of Australia is trying to do when they raise interest rates.  They are trying to keep inflation - which can be thought of as a measure of demand for goods and services - at a rate of between 2% and 3%.  When inflation is getting too high they will raise interest rates to decrease spending.  When inflation is getting too low they will lower interest rates to increase spending.

Something that the media rarely mentions is that interest rate rises can actually be good for some people in the economy.  Consider retirees with a portion of their money invested in cash accounts.  As interest rates rise they receive an increase on their cash account earnings - which works out well for them!

The reserve bank meets on the first Tuesday of each month (next Tuesday) and then announces their decisions on the following Wednesday morning. 

Posted by: Scott Francis AT 06:08 pm   |  Permalink   |  Email
Wednesday, March 28 2007

Sweeny Research and Grey Global group put together a report entitled 'Eye on Australia'.  Details from this report were published in today's Courier Mail.

The report looked at Australian's attitude to various parts of life, including work life balance. 

What I found interesting were these responses.  80% of people reported that life is getting more stressful.  75% said that they would like to live at a slower pace.  BUT 75% said that they would not take a lower paid joy to be less stressed.

It is always interesting to reflect on these type of figures - they provide a glimpse at what we would like to value and how we react around this.

In this case the chase for the almighty dollar will not be traded by people for a less stressful existance - even if they need it.

E-mail Updates: - We have been thrilled at the level of subscription to our free fortnightly e-mail update program.  To subscribe, click here.  The more the merrier!


Scott Francis

Posted by: Scott Francis AT 06:17 pm   |  Permalink   |  Email
Thursday, March 22 2007

International shares are an important part of all of our investment portfolios.

Why?  Because over the long term they have delivered very similar returns to Australian shares.  By investing in both Australian and international shares your portfolio still has the same expected return, however the 'ups and downs' of the portfolio should be smoothed out a little.  When Australian shares are performing poorly, international shares may be performing better and smooth the overall portfolio returns, and visa versa.

Currency changes are an important part of this investment process, and indeed why international share investments have generally performed poorly over the past 5 years.  During this time the Australian dollar has risen to its current level of above US 80 cents. 

All else being equal, you want to buy international assets with a strong Australian dollar, as it is now, and well them with a weaker Australian dollar - increasing your profits in Australian dollar terms.  So, even though there have been a number of weaker years of returns from the international shares, now is not the time to turn your back on that asset class given the strength of the Australian dollar.


Scott Francis 

Posted by: Scott Francis AT 06:01 pm   |  Permalink   |  Email
Wednesday, March 21 2007

As most readers of this blog would be aware, we favour index funds as cost effective, tax effective investment alternatives. There is also a tremendous body of academic evidence that supports this style of investing.

Index funds are funds that, rather than try and pick and choose which companies are going to perform better than others, simply holds all the investments in an index.

So to the headline - when does an index fund outperform a direct share portfolio by $120,000 a year? For the answer we only have to look at Senator Santo Santoro, who lost his $120,000 a year job through inappropriate direct share holdings and the lack of appropriate disclosure.

I bet if he had his time again Santo would be choose the index fund investment approach - and would be so much better of because of it!

Best regards,

Scott Francis


Posted by: Scott Francis AT 01:21 am   |  Permalink   |  Email
Sunday, March 18 2007

There has been much talk about the superannuation changes that are now awaiting Royal Assent to be passed into law.

A lot of the talk has focussed on the fact that after age 60 all superannuation withdawals are tax free.

However one aspect of the changes that have been overlooked just a little is that of the change to the Age Pension assets test.  From September this year a homeowning couple will be able to have up to $780,000 in assets, and still receive a part age pension.  At the moment that cuts out at just over $500,000 of assets.

This is potentially a positive for:

  • Those people who are retired with less than $780,000 in assets who will start to receive some age pension
  • People thinking about ways of funding their upcoming retirement

For this last group, and if they are over 55 now, there are special income streams that they could start - even if they are working - to half the value of the assets in these income stream.  The most common of these income streams is a 'Term Allocated Pension'. 

Have a look into this as a matter of urgency - it could be a bit help to you.




Posted by: Scott Francis AT 06:34 pm   |  Permalink   |  Email
Sunday, March 11 2007

Over a little while we have been quietly putting together a regular e-mail program.  Every two weeks we send out an e-mail with some financial happenings, a blog and come commentary about how we are navigating financial markets and situations.

The response has been really positive.  If you think you may be interested in receiving a free fortnightly update on financial topics click on the 'sign up for e-mail updates' button at the top of the page.  The most recent e-mail update is on the page, so you can see what you get.

It's an easy way to keep in touch with what's happening!



Posted by: Scott Francis AT 10:25 pm   |  Permalink   |  Email
Sunday, March 04 2007

Today's courier mail included a quote from Catriona Lowe, CEO of the Consumer Action Law Centre. 

She was talking about mortgages and made the comment that, 'Most claims to reduce your mortgage involve paying more money - it's as simple as that'.

She is, of course, correct.  Consider for example the first commonly promoted way of reducing your mortgage - halve your monthly payment and then pay it fortnightly. There are 12 months in a year and 26 fortnights, so by doing this you are effectively making an extra months worth of repayments.  Or consider the strategy of paying your income to your home loan, then putting your expenses on a credit card that is paid off from your home loan.  All you are really doing is putting more money toward your home loan sooner.

A home loan is simple maths.  Interest accrues on the balance.  The balance is reduced by your payments.  If you want to get ahead you must make extra payments.  It's not really rocket science.

It is a great personal finance strategy too, make extra repayments early to reduce your loan and get rid of any potential 'interest rate stress' if rates ever rise.


Scott Francis

Posted by: Scott Francis AT 07:47 pm   |  Permalink   |  Email
Thursday, March 01 2007

A small segment broadcasted on the ABC's Midday Report, Thursday 1st March, gave an interesting insight into the psychology of investors.  The report focussed on a recent US study which found that investors tend to sell better performing assets to meet cash flow needs and hold on to poorer performing assets.  The theory goes that investors do not like admitting failure and hold on to poor / negative performing assets in the hope that the results of these assets will turn around in the future and at least beat the price that they were bought for.  Sound Familiar!!!


Actually, the investor would be better off holding strong performing assets and cutting their losses and running from poor performers.  This is not only on the basis of future performance but also on the basis of tax.  Selling poorer performing assets will have a smaller or even negative capital gains implication for the current year  Sounds easy in hindsight but who can be sure whether poor performers today will be outperformers next year?


What do we say at A Clear Direction?


If there is a need to get extra cash flow then hopefully an amount of cash has been left aside to cover this scenario.  If not, then we are not in the business of picking asset winners and losers, rather selling down  across a client's portfolio to maintain what we together have decided as the right mix of assets.

Posted by: Scott Keefer AT 09:02 pm   |  Permalink   |  Email
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