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 Financial Happenings Blog 
Wednesday, April 30 2008

Fairfax newspapers are currently running their 4 week stock picking contest.  At the beginning of the 4 weeks, 8 contestants are asked to allocate $10,000 towards 10 stock picks, $100,000 in total.  The contestants include media commentators and stock analysts along with a random selection identified as the Dartboard.

The latest report (29th April) on the progress of the competition has the Dartboard as a clear leader, $9,000 ahead of second place David Potts - a financial journalist.  Four of the share racers are in negative territory.

This surely anything but a strong affirmation of the usefulness of individual stock picking!!

Regards,
Scott Keefer

Posted by: Scott Keefer AT 05:53 pm   |  Permalink   |  Email
Sunday, April 27 2008

In today's podcast, Scott Keefer looks at recent comments made by Warren Buffett to a group of 150 Wharton business students.

In the podcast Scott looks at the advice Buffett, arguably the world's most successful investor, has for investors.  In particular it suggests that non-professional investors should use index funds and buy into these over time.  Not to try to time markets or pick individual stock winners.  Buffett concludes his comments by stating that the only way an investor can get killed is by high fees or trying to outsmart the market.

Please click the following link to be taken to this podcast - Buffett's Latest Advice.

Posted by: Scott Keefer AT 08:19 pm   |  Permalink   |  Email
Sunday, April 27 2008

The Australian Financial Review ran a piece in Thursday's paper reporting on Warren Buffett's latest seminar with business students in the USA.  He holds such events some 15 times a year and he students get to tour one or two of Berkshire Hathaway's businesses and then proceed to Berkshire's headquarters in downtown Omaha.  While there Buffett provides the students with a two hour question and answer session. This time the sage of Omaha hosted 150 students from the University of Pennsylvania's Wharton School.  My wife's cousin is currently attending Wharton completing an MBA and I will be following up whether he grabbed hold of any other tips in a later blog!!

 

Buffett also invited along Fortune who reported on the event from which Barrie Dunstan in the AFR has based his comments.  A link to the Fortune article follows - What Warren thinks.

 

The article the AFR focus on the following comments made by Buffett:

 

"Well, if they're not going to be an active investor - and very few should try to do that - then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They're not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don't buy all at one time."

 

Buffett followed up these comments with these pearls:

 

"... you don't want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that (a) if you knew what was going to happen in the economy, you still wouldn't necessarily know what was going to happen in the stock market. And (b) they can't pick stocks that are better than average. Stocks are a good thing to own over time. There's only two things you can do wrong: You can buy the wrong ones, and you can buy or sell them at the wrong time. And the truth is you never need to sell them, basically. But they could buy a cross section of American industry, and if a cross section of American industry doesn't work, certainly trying to pick the little beauties here and there isn't going to work either. Then they just have to worry about getting greedy. You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that's too much to expect. Of course, you shouldn't get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that."

 

Two final answers from Buffett were reported:

 

"By your rule, now seems like a good time to be greedy. People are pretty fearful.

You're right. They are going in that direction. That's why stocks are cheaper. Stocks are a better buy today than they were a year ago. Or three years ago.

 

But you're still bullish about the U.S. for the long term?

The American economy is going to do fine. But it won't do fine every year and every week and every month. I mean, if you don't believe that, forget about buying stocks anyway. But it stands to reason. I mean, we get more productive every year, you know. It's a positive-sum game, long term. And the only way an investor can get killed is by high fees or by trying to outsmart the market."

 

Buffett's comments are very sound.  They back up what we have distilled from the academic / scientific research that has been conducted.  A summary of this can be found on Our Research Based Approach web page.

 

The only change for Australian investors is to exchange American business with Australian business and they are on a winning strategy.

 

Regards,

Scott Keefer

Posted by: Scott Keefer AT 05:18 pm   |  Permalink   |  Email
Wednesday, April 23 2008

The latest edition of our fortnightly email newsletter has been sent to subscribers.  If you would like to be added to the mailing list please click the following link to be taken to the sign up page - The Financial Fortnight That Was Sign Up Page.

The financial topic discussed this fortnight was the importance of scientific research.  The latest edition also contained the following Market Update:

Market News

 

Market Indices

Since our previous edition, Australian and global sharemarkets have experienced mixed movements over the past fortnight.  The S&P ASX200 Index has fallen 3.38% from the 4th to the 18th of April.  It is now down 12.94% from the same time last year and down 14.36% for the calendar year (2008) so far.  The MSCI World - ex Australia, a measure of the global market, has risen 1.29% over the same period.  The index is down 9.47% from the same time last year and down 7.52% for the calendar year so far.

 

Emerging markets have also experienced positive movement with the MSCI Emerging Markets Index rising 2.38% since the 4th of April.  It is up 14.95% from the same time last year but down 6.68% for the calendar year so far.

 

Property trusts have lost some of the upward momentum since the 4th of April with the S&P ASX 200 A-Reit Index (formerly known as the Property Trust Index) falling by 4.35%.  The index is down 32.25% from the same time last year and also down 20.99% for the calendar year so far..  The S&P/Citigroup Global Real Estate Investment Trust (REIT) Index, a measure of the global property market, has fallen 0.40% over the same period.  It is down 19.74% from the same time last year but now only down 0.48% for the calendar year so far.

 

Exchange Rates

As of 4pm the 18th of April, the value of the Australian dollar had risen since the 4th of April with the Aussie dollar up 2.93% against the US Dollar at .9384.   It is up 12.21% from the same time last year and up 6.64% for the calendar year so far.  Since April 4th the Aussie has risen 2.47% against the Trade Weighted Index now at 70.5.  This puts it up by 4.14% since the same time last year and up 2.62% for the calendar year so far.  (The Trade Weighted Index measures The Australian dollar against a basket of foreign currencies.)

 

General News

Since our last edition the Australian Bureau of Statistics has released the latest employment data with the unemployment rate rising to 4.1% in March.  Participation rates have remained stable at 65.2% with employment growing by 14,800 over the month.  The ABS has also released that Australia's population has risen to 21,097,100 by the end of September 2007, an increase of 1.5% over the year.

 

Regards,

Scott Keefer

Posted by: Scott Keefer AT 12:30 am   |  Permalink   |  Email
Monday, April 21 2008

Our approach to building investment portfolios is based on scientific / academic research.  We believe this is crucial as this research has stood up to the rigours of a peer review process, whereby the research is assessed for its quality before being published.  This scrutiny works to ensure that the research can be relied upon when making important investment decisions.

 

To help provide an insight into our approach, we have set out the core research that we use.  Many of the papers on which we base our philosophy are freely available on the internet so we have also provided links to these materials for those who are interested in delving deeper.

 

Please take a look at our newly developed set of web pages - Our Research Based Approach.  If you have any comments or thoughts do not hesitate to get in contact.

 

Kind regards,

Scott Keefer

Posted by: Scott Keefer AT 10:14 am   |  Permalink   |  Email
Sunday, April 20 2008

In today's podcast, Scott Francis looks at the topic of longevity risk.  He refelects that as we all are tending to live longer it is a risk that needs to be seriously considered.

In the podcast Scott looks at the strategies that need to be considered - having a greater exposure to higher volatility - higher expected returns assets, focusing on the income that is being produced by investments and the use of the superannuation environment providing tax free investment earnings in pension mode and tax free pension payments after the age of 60.

Please click the following link to be taken to this podcast - Planning for Longevity Risk.

Posted by: AT 10:50 pm   |  Permalink   |  Email
Sunday, April 20 2008

This morning I received my regular email update highlighting the feature articles in this month's edition of the AFR (Australian Financial Review) Smart Investor.  I was particularly drawn to an article written by Tony Featherstone which was marketed as follows:

 

"Even when markets are falling, there are always companies that are a law unto themselves. Tony Featherstone uncovers six stocks with the competitive advantages to survive a crisis."

 

The six stocks highlighted in the article included Brambles (BXB).  For those of you who have been closely watching the movements in the market, you will be aware that Brambles fell more than 10% on Friday.  To be fair, at the time of writing this blog BXB has gained 1.56% but even this is less than the market averages for what has been a strong start to the trading week.  The ASX 200 was up 2.68% at the same time.

 

For the year so far to Friday, Brambles is down 26.22% (including dividend) while the ASX200 is down only 14.36%.

 

In defence of the article, at its conclusion it does suggest a buy and hold approach and it may well be that Brambles picks up and is a winner in the longer term.  However, if you bought the stock on Thursday you may have some doubts.

 

The real issue for me is that this example highlights the difficulty (and danger) in trying to forecast and pick winning markets yet alone winning stocks within those markets.

 

A well diversified, buy and hold strategy stacks up a whole lot better.

 

Regards,

Scott Keefer

Posted by: Scott Keefer AT 09:33 pm   |  Permalink   |  Email
Thursday, April 17 2008

The New York Times in March reported the researched being conducted by Professor Ken French - "Can You Beat the Market? It's a $100 Billion Question".  There is no hiding that we are a big fan of past work by Ken French in combination with Eugene Fama in developing the Three Factor Model, a major part of how we build investment portfolios.  He is an astute researcher who is highly regarded academic.

 

In one of his latest research projects Professor French has been looking into how much is being spent by Americans to identify market beating investments.  His finding is that investors collectively are spending US$100 billion a year trying to beat the stock market.  Mark Hulbert of the New York Times concludes that this is a huge price tag and helps explain why beating a buy-and-hold strategy is so difficult.

 

In the study, French has taken into account the fees and expenses of US mutual funds (including ETFs), investment management costs paid by institutions, fees paid to hedge funds and the transaction costs paid by all traders (including commissions and bid-ask spreads).

 

From this amount he deducted what investors would have paid if they instead had simply bought and held an index fund the difference being what investors as a group pay to try to beat the market.  The total difference was $99.2 billion for the 2006 year.  This equates to 0.67% as a percentage of market capitalisation.

 

The research highlights one of the problems with active management - the cost involved with research.  The flip side is that buy-and-hold strategies are benefitting from all of these costs as they are assisting the efficiency of markets.  In a sense, index or whole of market funds are sitting back while the active managers are out their busily researching.  Through their trading based on their research, asset prices reflect this research thus ensuring that they efficiently reflect all of the information available at a particular point in time.

 

In conclusion, it must be highlighted that this is an American study but has some general application in the Australian context.  As the article concludes:

 

"The bottom line is this: The best course for the average investor is to buy and hold an index fund for the long term. Even if you think you have compelling reasons to believe a particular trade could beat the market, the odds are still probably against you."

Posted by: Scott Keefer AT 05:50 pm   |  Permalink   |  Email
Wednesday, April 16 2008

During their Wednesday evening program Channel 9's Brisbane Extra presented a segment on the MBF merge with BUPA. The program provided viewers an analysis of the decision that needs to be made by current MBF members who have a right to vote on the merger plan. Scott Francis was interviewed for the program to provide some brief analysis of the financial implications of the decision.

For a copy of the transcript of the program please click on the following link to the Nine's Brisbane Extra website - MBF Merge.

Posted by: AT 05:39 pm   |  Permalink   |  Email
Wednesday, April 16 2008

In his latest article written for Alan Kohler's Eureka Report, Scott looks at how some fund managers are classifying hedge funds within the defensive allocation of a portfolio.

He looks at the two main arguments for making this classification and concludes that hedge funds do not belong in the defensive allocation of a fund or portfolio.

Click on the following link to read Scott's article - Prickly Hedges

Posted by: AT 05:27 pm   |  Permalink   |  Email
Monday, April 14 2008

In the lead up to the end of financial year, we are starting to see a few media stories providing advice on how to prepare for the end of the "income tax" year.  At the same time we continue to see reports about the negative returns on equity markets with the red ink being pulled out of the drawer for the first time in a number of years for managed funds, including superannuation.

 

My guess is that many investors will be thinking that there will not be any nasty tax issues in their managed fund portfolios due to the negative performance figures being reported on websites and statements.  They might actually be hoping for some tax losses from these funds to write off against their other forms of income.  Unfortunately, the bottom line returns of managed funds hide the real story.

 

Many of the major managed fund providers report ongoing performance figures through their websites outlining the capital growth of the fund along with the distributions that have been paid out to unit holders.  Unfortunately not all providers provide this breakdown throughout the year and some have yet to provide the data up to the end of the March quarter 2008.  The broadest set of data available is up to the end of February 2008.  This sample is far from representative but provides anecdotal evidence of what is going on in terms of managed fund returns and distributions.

 

Fund

Growth

Distribution

Total Return

AXA Australian Equity Growth Fund

-20.10%

19.80%

-0.30%

AXA Equity Imputation Fund

-26.30%

25.90%

-0.40%

BT Australian Share Fund

-11.41%

12.28%

0.87%

BT Imputation Fund

-4.42%

5.06%

0.64%

Challenger Australian Share Fund

-14.66%

6.88%

-7.78%

MLC Australian Share Fund

-14.70%

11.60%

-3.10%

MLC Vanguard Australian Shares Index

-5.20%

3.30%

-1.90%

Suncorp Australian Shares Fund

-21.42%

15.87%

-5.55%

 

The dividend yield across the ASX200 at the end of February was 4.3%.  If we use this as a proxy assume the best case scenario that all of this dividend yield is fully franked and is received by investors on the 30% marginal tax bracket, this part of the distribution quoted above would be received free from tax.

 

By implication, this means that the remaining part of the distribution is a capital gain that has been realised by these funds.  If we again assume the best case scenario that these capital gains are from assets held for greater than 12 months, and thus receive the 50% discount on capital gains, this would leave the following level of distributions to be taxed at an investor's marginal tax rate:

 

Fund

Distribution after removing franked div

Taxable distribution

AXA Australian Equity Growth Fund

15.50%

7.75%

AXA Equity Imputation Fund

21.60%

10.80%

BT Australian Share Fund

7.98%

3.99%

BT Imputation Fund

0.76%

0.38%

Challenger Australian Share Fund

2.58%

1.29%

MLC Australian Share Fund

7.30%

3.65%

MLC Vanguard Australian Shares Index

0.00%

0.00%

Suncorp Australian Shares Fund

11.57%

5.79%

 

Only MLC Vanguard Australian Shares Index (an Index fund) would not be passing on any (or very little) taxable distributions to investors.  It is interesting to note that this is the only index fund amongst the list.

 

In all likelihood, the MLC Vanguard Australian Shares Index would be passing on some taxable distributions as well but it would be significantly less compared to the other funds.

 

If we take this analysis to next level and reduce total returns by the tax on the taxable distributions (assuming a marginal tax rate of 31.5%) it provides the following data

 

Fund

Total Return before tax

Taxable dist

Reduction in return at 31.5% tax rate

Total Return after tax

AXA Australian Equity Growth Fund

-0.30%

7.75%

2.44%

-2.74%

AXA Equity Imputation Fund

-0.40%

10.80%

3.40%

-3.80%

BT Australian Share Fund

0.87%

3.99%

1.26%

-0.39%

BT Imputation Fund

0.64%

0.38%

0.12%

0.52%

Challenger Australian Share Fund

-7.78%

1.29%

0.41%

-8.19%

MLC Australian Share Fund

-3.10%

3.65%

1.15%

-4.25%

MLC Vanguard Australian Shares Index

-1.90%

0.00%

0.00%

-1.90%

Suncorp Australian Shares Fund

-5.55%

5.79%

1.82%

-7.37%

 

An already disappointing investment result just became that bit worse.  It is really this after tax return that is most important to investors as it provides the return that is actually going into (or in this case out of) their pockets.

 

The same type of analysis is relevant to the superannuation environment; however the impact is not as great due the maximum 15% tax rate for income produced within a superannuation fund.

 

At this point some may be saying hang on, what about the capital loss (negative growth) that has been reported by the funds.  Unless investors sell their units held in the fund on or before the 30th of June, these losses would not be realised and therefore not be able to be claimed as a write-off for tax purposes.

 

I openly admit this is a fairly simplistic approach to the data, but definitely provides some anecdotal evidence of the impact of an active approach to investing in terms of tax consequences.

 

Regards,

Scott Keefer

Posted by: Scott Keefer AT 10:34 pm   |  Permalink   |  Email
Sunday, April 13 2008

Investment philosophy and performance is one of many important aspects for people to consider before signing up to work with a financial advisor.  However, the choice of investments should not be the first consideration to be made.

The first task a good financial planner should be doing is ensuring that a client is achieveing any relatively "risk-free" savings such as the reduction of tax and access to government payments.  From here, once a decision has been made to invest, the next step a financial advisor should be taking is to ensure that the asset allocation across a client's entire portfolio is suitable in relation to their income needs and risk tolerance.  Only then is it time to help clients choose the relevant investments that should be used in order to maximise the returns from the particular asset allocation that has been defined as necessary.  In the same instance advisors should also be identifying the best method of purchasing those investments to minimise costs and risks.  Once all these decisions have been implemented a financial advisor should be following up with regular and relevant reviews.

The service "A CLear Direction Financial Planning" offers clients exactly follows that path:  strategy first, then asset allocation then investments and how to invest followed up by regular reviews.

All this being said, investment strategy and performance is important.  We build investment portfolios for clients based on the best available academic research.  Take a look at our Building Portfolios page for more details.  In our view, this research compels us to use the three factor model developed by Fama and French.  In Australia, the most effective method of investing using this model is through trusts implemented by Dimensional Fund Advisors (www.dimensional.com.au).  We do not receive any form of commission or payment from Dimensional for using their trusts.  We use them because they provide the returns clients are entitled to from share markets.

However, academic theory is nothing if it can not be implemented and provide the returns that are promised by the research.  Therefore we want to provide the historical returns of the funds that we use to build investment portfolios.  They clearly show the existence of the risk premiums (small, value and emerging markets) that the research tells us should exist.  Please click on the following link to be taken to a list of graphs - Dimensional Fund Performance Graphs.

Regards,
Scott Keefer

Posted by: Scott Keefer AT 07:29 pm   |  Permalink   |  Email
Monday, April 07 2008

The latest edition of our fortnightly email newsletter has been sent to subscribers.  If you would like to be added to the mailing list please click the following link to be taken to the sign up page - The Financial Fortnight That Was Sign Up Page.

The financial topic discussed this fortnight was value investing.  The latest edition also contained the following Market Update:

Market News

 

Market Indices

Since our previous edition, Australian and global sharemarkets have experienced strong upward movement.  The S&P ASX200 Index has risen 9.60% from the 21st of March to the 4th of April.  It is now down 7.83% from the same time last year and down 11.36% for the calendar year (2008) so far.  The MSCI World - ex Australia, a measure of the global market, has risen 5.52% over the same period.  The index is down 9.09% from the same time last year and down 8.69% for the calendar year so far.

 

Emerging markets have also experienced positive movement with the MSCI Emerging Markets Index rising 7.41% since the 21st of March.  It is up 14.92% from the same time last year but down 8.85% for the calendar year so far.

 

Property trusts have continued to experience positive movements since the 21st of March with the S&P ASX 200 A-Reit Index (formerly known as the Property Trust Index) rising by 8.19%.  However, the index is down 28.41% from the same time last year and also down 17.39% for the calendar year so far..  The S&P/Citigroup Global Real Estate Investment Trust (REIT) Index, a measure of the global property market, has risen 5.70% over the same period.  It is down 19.83% from the same time last year and now only down 0.08% for the calendar year so far.

 

Exchange Rates

As of 4pm the 4th of April, the value of the Australian dollar had fallen slightly since the 21st of March with the Aussie dollar down 0.40% against the US Dollar at .9117.   It is up 12.28% from the same time last year and up 3.41% for the calendar year so far.  Since March 21st the Aussie has fallen 0.15% against the Trade Weighted Index now at 68.8.  This puts it up by 3.77% since the same time last year and up only 0.15% for the calendar year so far.  (The Trade Weighted Index measures The Australian dollar against a basket of foreign currencies.)

 

General News

Since our last edition the board of the Reserve Bank of Australia have decided to keep official interest rates at 7.25%.  In a brief statement the Governor of the RBA, Glenn Stevens, informed that the decision was made because the tightening of financial conditions, including RBA monetary policy, had been substantial since the middle of 2007.  This tightening is working to foster a moderation in demand growth that will take pressure off inflation.  He suggests inflation should decline over time, provided demand slows as expected and as a consequence the current level of the RBA policy interest rate was appropriate.

Posted by: Scott Keefer AT 07:23 pm   |  Permalink   |  Email
Monday, April 07 2008

In his latest article written for Alan Kohler's Eureka Report, Scott looks at the possible use of margin lending to build investment portfolios.

He outlines the basics to using margin loans and discusses the pros and cons of such a strategy.  Scott concludes that a thoughtful approach must be taken in weighing up the risks and rewards of using a margin loan to invest.

Click on the following link to read Scott's article - Margin loan? Think again

Posted by: AT 03:51 am   |  Permalink   |  Email
Thursday, April 03 2008

The latest news from the Opes Prime saga, scandal might be a better phrase, sees the ugly impact of trailing commissions raising its head.  The Australian reports today - How Opes snared its rivals' clients - that brokers were offered trailing commissions of 0.75% by Opes Prime to encourage clients to hand over shares to Opes.  This is in comparison to commissions offered by conventional margin loan operations of between 0.25 to 0.65% for books of more than $10 million.

 

Opes Prime claim that the major attraction of their service was the ability to get finance to enable the purchase of shares in small to medium sized companies.  Even if this was the case, the perception could easily be reached that brokers were recommending their services to clients because of the improved returns for them as brokers.  As I have grown to realise, a person's perception is their reality.

 

This case provides another example of where trailing commissions are not in the best interests of investors.  When the result is that advisers, in this case brokers, choose a particular service or product based on the money they will receive back from that provider rather than a pure consideration of which service is best for the client, client's are losing out.  Unfortunately in some cases, let's never forget the Westpoint disaster as another example, the impact on investors is much worse than the small percentage of trailing commissions that are being paid.

 

Regards,

Scott Keefer

Posted by: Scott Keefer AT 07:21 pm   |  Permalink   |  Email
Thursday, April 03 2008

An interesting article was published on the News.com.au website today written by Kate Perry - Women Scared of Investments.  Kate looks at the lack of confidence on the part of women to tackle investment decisions.  Of course this is a broad generalisation but it is based on a report released by the Financial Literacy Foundation - the Women Understanding Money report.

 

I wonder whether there may actually be a cultural dimension to this discussion.  My wife has a Chinese heritage with her family living in Indonesia for a couple of centuries.  Two of her Aunts, from her mother's side, are very much the investors in their families.  One is actually what might be referred to as a day trader.  From my brief involvement with the Chinese community in Indonesia and Australia, Chinese women are not particularly shy in making investment decisions.

 

However I digress, I wonder whether the issue might actually be that investment scenarios, especially in terms of non bricks and mortar decisions, are not appropriately developed or explained to women in Australia and it is this explanation that is the key to their hesitancy.

 

There seems to be a lot of bravado / ego in investment circles.  I imagine that this is a function of investors looking for that next best investment and the belief that they have found the answer.  My sense is that women don't respond as well to this bravado but would much prefer to have investment decisions accurately and carefully set out based on hard facts not hopes or dreams.

 

Some of us mere males might suggest that we can see the female approach to decision making when it comes to their  domain - shopping.  Why does it take so long?  Why do we have to check out every single store before making the decision?  Just pick up the .... and let's get going!  When it comes to purchasing decisions, women are very calculating and want all the information and possibilities on the table before making their choice.  Or at least that's what they tell us.

 

On this point, I actually think women also want to see value for money in all transactions that they make.  The level of fees charged by some financial institutions can make it difficult for that value to be identified.

 

Anecdotally, my business partner and I often comment when we meet with couples that it is the female that seems to get our philosophy before the male. (Another broad generalisation)  We have an investment philosophy that is based on academic research clearly setting out what investment returns have been through history and how best to capture those returns in an investment portfolio. I think this is what women in general are looking for rather than the "trust me, I am an expert" line.

 

Regards,

Scott Keefer

Posted by: Scott Keefer AT 06:08 pm   |  Permalink   |  Email
Tuesday, April 01 2008

Today's edition of The Australian's Wealth lift out has its focus story about retiring in style.  No matter where you are in life's journey, I am confident that the concept of retiring in style is appealing.  So how best do we prepare for this time of our lives?

 

When planning for retirement I believe the first key is to try to identify what level of income / expenditure will be required in retirement.  No easy task!!  A useful starting point is to check out the Association of Superannuation Funds of Australia (ASFA) website.  ASFA provides some really useful guides to consider.  They, together with Westpac, produce a report on retirement living costs.  In that report ASFA break down budgets for various households (single & couple) and living standards (modest & comfortable).  The latest report, up until the end of the September quarter 2007, provides the following summary of these budgets (assuming home ownership):

 

 

Modest

lifestyle

single

Modest

Lifestyle

couple

Comfortable

lifestyle

single

Comfortable

Lifestyle

couple

Housing - ongoing only

$65.07

$67.30

$86.45

$88.67

Energy

$11.95

$14.24

$13.08

$15.37

Food

$64.76

$138.40

$130.44

$183.89

Clothing

$14.62

$25.21

$30.86

$56.28

Household goods and services

$48.58

$51,45

$86.34

$91.34

Health

$12.03

$22.68

$50.68

$99.66

Transport

$71.78

$72.58

$109.55

$110.34

Leisure

$44.40

$73.51

$142.04

$203.93

Personal care

$25.23

$39.77

$25.23

$39.77

Gifts and/or alcohol and tobacco

 

 

$21.86

$43.72

Total per week

$359.44

$505.12

$696.52

$932.98

Total per year

$18,742

$26,339

$36,319

$48,648

 

This is a very useful guide, but only a guide.  We all have different approaches to expenditure and someone planning for retirement should take this into consideration before identifying a target level of income.  However, the table above provides a good starting point.

 

After determining the required level of income, the next step is to determine what level of assets will comfortably provide that level of income.  Our approach, as set out in Scott Francis' Eureka Report article - Tap your super, but how much? - is that assets, if effectively invested in retirement, can be drawn down at a rate of up to 5.5%.  As an example, if you thought you would require $55,000 per annum in retirement you would need financial assets of at least $1 million in today's dollars (i.e. taking out the impact of inflation between now and retirement) to be able to produce this level of income.  Our approach looks to keep retirees from selling down assets but rather living off the income provided by assets.  This is particularly important during times like now where volatile asset prices such as Australian shares, international shares and property (even direct property in the opinion of some) are falling.  In retirement you do not want to be forced to have to sell assets at such times in order to produce the cash you need to live.

 

Once the level of financial or investment assets needed has been determined, the next step is to determine how best to get to that magical figure.  Strategies will be heavily dependant on your current stage of life and circumstances.  This is where a financial adviser should really earn their keep by ensuring that their clients squeeze every last risk-free dollar out of their situation.

 

The next step is to look at the best set of investments to achieve the goals that have been set while taking on as little risk as possible to reach the intended goals.  We have a particular approach to this stage set out in our investment philosophy.  Check out our Building Portfolios page for more details.  Just as importantly though, a financial adviser will work to ensure that their clients don't suffer severe "hiccups" along the way by investing in products that may destroy wealth and in doing so destroy that "stylish" retirement.

 

Unfortunately, you can't sit back just yet and start dreaming of retirement, the strategies need to be regularly revisited and updated to reflect changing circumstances.  Plus you need to keep from "mucking" up the strategy along the way.

 

A great financial adviser will be able to help put all these pieces together plus provide ongoing support and discipline to keep to the plan.  If you would like more details or just want to discuss your planning for retirement please do not hesitate to get in contact - scottk@acleardirection.com.au

 

Regards,

Scott Keefer

Posted by: Scott Keefer AT 10:16 pm   |  Permalink   |  Email
Tuesday, April 01 2008

Each year ASIC awards the "Pie in the Sky Award" to the most outrageous financial scheme that's too good to be true.

 

Previous winners include:

 

2007 - Ponzi scheme operated by Guiseppe Mercorella that offered people between 3 and 6 % per month.  The illegal scheme received $216.9 million from investors who ultimately lost $76 million. Mr Mercorella is now serving a five year jail term on ASIC charges.  Many of the investors were from South Australia, and many from the local Italian community who became aware of the scheme through family and friends. This is typical of how many people become involved in ?Ponzi' schemes. Some investors mortgaged their homes to invest with Mr Mercorella.

 

2006 - An illegal investment scheme promoted through wealth seminars throughout Australia. Operated by Mr Craig McKim, Pegasus Leveraged Options Group (Pegasus) lured approximately 90 unsuspecting investors and raised $3.7 million. Over $2.1 million of the funds raised were lost in personal gambling and other personal expenses by Mr McKim.


In the case of the Pegasus scheme, the NSW Supreme Court found investors were promised returns of up to 8% a week - figures described by the Court as 'astronomical'. Investors were even issued with a Certificate of Guarantee by a fictitious ?International Investment and Securities Commission'.  Mr McKim was jailed in October 2005.

 

And the winner for 2008:  A disturbing 'advanced fee fraud' scam.

 

This email scam pleaded with people to help a Togo barrister access US$17 million from the estate of a man who along with his family was killed in the Boxing Day tsunami three years ago. This outrageous offer was just too good to be true.


According to the offer, people could get a share of the wealth by claiming to be the deceased's next of kin. To claim the wealth, you would need to respond to the email. The nature of this type of fraud is that you would need to pay a fee before you would receive the money. This is an advanced fee fraud where you would pay to receive nothing.


Of course there is no $17 million estate, and people were being scammed for the upfront fees', said Ms Delia Rickard, ASIC's Acting Executive Director of Consumer Protection.

 

Runner Up for 2008: In Step Super

 

Instep Super was advertising on television, radio and online offering returns on investment of superannuation funds between 8 and 20 %.  The advertisements also claimed Instep Super was ?the best performing superannuation fund in Australia'.  Instep Super did not have an Australian financial services licence.  ASIC concluded that Instep Super did not have any reasonable basis for claiming to be the ?best performing superannuation fund in Australia'. As a result the Instep claims were found to be misleading and deceptive. Fortunately, no one invested in Instep Super.

 

3rd place getter for 2008: Electroharvest

 

This device supposedly recycled 'ambient electromagnetic radiation back into usable household energy' promising to cut ordinary Australians' power bills by 37 per cent.  Investors were invited to invest up to $40,000 with 'guaranteed' returns of at least 30 per cent per annum.  ASIC launched this fake scam on April Fool's Day in 2007 to educate investors about how to identify and avoid financial scams. Anyone who tried to go ahead and invest was led to a page with advice about how to research investment offers and who to contact for help.  The fake website, www.electroharvest.com, has attracted more than 75,000 hits since it was launched in April 2007.

 

Check out ASIC's FIDO Pie in the Sky Award website for more details.

 

Regards,

Scott Keefer

Posted by: Scott Keefer AT 12:00 am   |  Permalink   |  Email
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