Added some cash to my son's retirement account

DS2 has a "child superannuation account" I opened for him when he was two year old. It was initially invested 100% in the geared share option (which did very well for the first four years), but I switched it into 60% ungeared shares, 20% real estate and 20% bonds at the start of 2007 (I wish I'd done the same asset reallocation for MY investment portfolio!). So although the account has lost a bit of value in the past 12 months, it's performance over five years is still pretty good. I think it's too early to switch this account back into 100% geared stock investments (although I think that's probably a reasonable asset allocation for an 8 year old that can't withdraw the funds until retirement age in 50 years or so), but I decided to make a $1,000 contribution into his account yesterday while the stock market is "on sale".

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Interesting Times

The past month on the global stock markets has been interesting, to say the least. I'm expect I'll be telling my grand-kids about the global financial meltdown of '08. Just how amazingly bad the past four weeks have been is well illustrated in the chart below (snapshots taken from here), with markets around the world down 20%-60% in just FOUR WEEKS!

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A graph I wish I'd plotted a year ago

I've been trying to find some empirical evidence to support my hope that the current bear market is already "overdone" and we must surely be close to the mythical "bottom". I was thinking that now the market is back down to where it was four years ago it must be getting below "fair value" - after all, it wasn't considered to be too excessively priced in 2004, having just started to recover after the bust of the dot-con bubble. And since then the Australian economy has experienced continuous economic expansion. With the current view that Australia is liable to suffer an economic soft landing rather than a recession, that would mean that the listed companies (which are, after all, a large chunk of the economy) must be worth a bit more than they were four years ago.

Unfortunately (for my current peace of mind) I then looked up the stats on Australia's GDP (gross domestic product) and the ASX200 Index since the 1970's. As you can see from the graph below, all it shows is that the stock prices did get vastly inflated compared to the value of the underlying economy during the past decade, and the recent 45% decline has only now brought it back in line with it's "normal" ratio to the value of the Australian economy (GDP). I had a feeling during 2007 that the bull market had gone on for a bit too long, and considered either taking some profits or "insuring" my portfolio via Index Put Options. In the end I bought some put options that expired in Dec '07 but then didn't replace them with new ones! If I'd had this chart to hand last December I would have made sure I kept my portfolio insurance in place for another year. It's nice to say "live and learn", but I suspect that this is one lesson I've learned a little bit too late to be of any use.

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A taxing weekend

The Oct 31 deadline for Australian tax returns is fast approaching, so I took a day off work on Friday and spent this weekend working on our tax returns. I'm still struggling through my stock capital gains calculations (I hate it when a stock gets taken over, as it means dredging through the past 15 years of paper records to work out the cost basis), but at least I got around to lodging tax returns for DS1 and DS2 using eTax. DS1 did busking to earn some income, so he might be entitled to a government co-contribution based on the money he put into his superannuation account last year. In previous years only PAYG employees were entitled to the co-contribution, but I think that this year self-employed people are also eligible. There wasn't really much point lodging a tax return for DS2, but he did have a couple of dollars of franking credits due on his stock dividends so I decided to go ahead and spend ten minutes lodging a return for him.

Hopefully I'll finish sorting out my capital gains figures today and be able to lodge tax returns for DW and myself today - we should each be due for a refund as our rental property was negatively geared last year (due to having to cut the rent while the property was being repaired after a tree fell on the roof!) and my stock portfolios are negatively geared using margin loans.

I'm thinking of selling off most of my individual stock holdings this financial year and reinvesting the proceeds in Commonwealth Diversified Share Fund (CDF) shares. At current market prices my capital gains tax liability should be negligible, and after calculating all the capital gains figures for next year's tax return future returns will be a lot simpler with only a couple of dividends from CDF each year and no capital gains events due to individual stocks being taken over. A couple of decades of investing in individual stocks has proven that I don't have any great talent for picking outperforming stocks (to be honest I only spend a trivial amount of time researching stocks before I decide to buy or sell them), so I may as well just invest in a diversified portfolio of stocks via index funds (in my superannuation account) or CDF shares in my stock portfolio.

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My margin loan accounts are both in "the buffer"

The Australian stock market fell another 107 points (-2.7%) today - it was the third consecutive day of losses and helped push the market down 2.5% for the week. It is also the lowest close since November 23, 2004. My two biggest margin loan accounts, with Commsec and Leveraged Equities, both got flagged as being in the "buffer" today. This means that my loan balances are above 100% of the margin value (around 70% of the market value) of my stock portfolio. If the margin utilisation gets above 105% I'll get a margin call, which would mean doing something to bring the loan balance back down to less than 100% of the margin valuation of my portfolio. I transferred $10,000 cash from my savings account into each of the margin loan accounts today, which should prevent me getting a margin call on Monday. I'm still hopeful that we're close to finding the "bottom" of this current bear market - it's already much more severe than most bear markets, and Australian p/e ratios are getting absurdly low. Also profits will undoubtedly drop significantly this financial year due to a global recession, the Australian economy is still expect to achieve positive growth. On that basis the market would appear to be in a panic and oversold, simply echoing the plunging stock markets in the US and Europe, where the economies are likely to plunge into a severe recession this year.

If the Australian market continues to drop next week I'll have to start selling off my stock portfolios to meet margin calls - I'm rapidly running out of cash to inject into these accounts!

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Comsec Margin Lending Customer Service dives along with the market

Big Banks are often accused of treating their customers with contempt when chasing profits. Comsec Margin Lending just provided a fresh example of this. When I logged in to my margin loan account this morning to check how close I am to getting a margin call, I noticed this new notice appearing on the "welcome" page:

"Loan Summary:

If you trigger a margin call that is below $5,000, please expect an SMS text message as notification of that margin call. Failure to act on this SMS notice will result in a sell down of a portion of your portfolio to cover the appropriate margin call obligation.

It is your responsibility to provide us with your latest contact details. Failure to do so may result in you not receiving notification of a margin call. To update your contact details, simply click on ‘Profile’ under the ‘Quick Links’ section on the top left of the website."

In other words, since they don't have my mobile phone number on record (and it's often turned off anyhow), I may not get contacted before they start liquidating my investments to meet a margin call!

In contrast, I have a very small CFD trading account with CityIndex that I opened with just $100 (and got another $500 added to the account by CityIndex for opening an account after attending their seminar). I had created a portfolio of ten Australian stock CFDs in that account, and the market crash of the past two weeks saw it get a couple of margin calls, then get liquidated (I owe them just over $100 now to settle the account). However. even though the account was for a Small amount, and the margin call was only $100 or so, I received several liquidation warnings from CityIndex via email AND I received a phone call from a real human being to warn me that I had a margin call to meet to avoid my positions being liquidated.

Compared to that, the customer service at Comsec is really poor.

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When the going gets tough, the tough get saving

So far this month my net worth is down by another $100,000 or so, dropping below $800,000. Considering my net worth has now dropped by around 1/3 from it's peak at just under $1.2 million during 2007, any thoughts of early retirement have disappeared. I can't see my net worth regaining 50% to it's previous peak for many, many years. And rather than being well ahead of target with my retirement savings, I now expect I'll have to keep pouring 50% of my gross salary into my retirement account (via salary sacrifice) until I'm 65 if I'm to be reasonably sure of a comfortable retirement funded purely from my retirement account.

I can't do much about my investment performance, so for the moment I'll just focus on trimming any unnecessary expenses from our budget. Hopefully if interest rates continue to be slashed by the RBA the interest-only payments on our property loans will eventually be reduced enough for us to start making repayments of principal, rather than using the redraw facility while DW is working part-time.

If the market drops much further I'll have to seriously consider selling off my share portfolio and using the proceeds to clear my margin loan debts and establish some cash reserves. With the economy expected to contract, I don't want to be in the position of having large debts to service at a time when my employment could be downsized. For the moment I'm just hanging in there and hoping this is just another blip in the long-term performance of Australia equities...

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The market went up 5% - is it time to be fearful, greedy or complacent?

The Australian market was up 5% today, recovering a large part of last week's "Black Friday" plunge. That means the market is down "only" 40% from it's high last year, rather than 45%! Now, is it time to be fearful that this is just a temporary bounce and seize the opportunity to off-load some stocks and reduce my gearing? Or is it time to be greedy and assume we've seen the bottom of this particular bear market? As I'm fully invested in the stock market and already geared to the hilt, for me the "greedy" option is to be somewhat complacent and just maintain my current level of investment in stocks.

Today I'm inclined to be "greedy" (optimistic?) and stay invested in the market for the long haul (another 20+ years), however I may take this opportunity to sell off some of my individual stock holdings and reinvest the proceeds in an ETF such as Commonwealth Diversified Share Fund (CDF). Over the past 20 years I've decided my stock-picking ability is mediocre, so I may as well just invest in an Index Fund. Current prices provide an opportunity to sell out of individual stocks that I've owned for many years and offset the resulting capital gains with some losses realised by selling out of stocks I purchased more recently. This offers me the chance to simplify my stock portfolio without significant tax costs. A streamlined portfolio invested mostly in Index funds and ETFs will greatly simplify my annual tax returns in future years. I suppose every cloud has a silver lining.

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Annual Self-Managed Super Fund Paperwork lodged

I finally got around to scanning all the paperwork from ANZ bank and Vanguard regarding our SMSF investments during 2007-8 and emailing a zip file (2MB) containing the 52 files to our SMSF administrator. ESuperfund.com does all the annual compliance, tax return and audit paperwork for a flat $699 annual fee, and they have electronic read-only access to most of our SMSF accounts. However, the Trustees (DW and myself) are supposed to lodge a "checklist" by 30 September to help in the preparation of the SMSF's tax return (due by 31 October). Because I'd been overseas on holiday during August and September, I only just got around to completing the "checklist". The only information that eSuperfund probably needs to complete the tax return was the spreadsheet detailing what each contribution into the SMSF bank account was for. Because DW and I work for the same employer and are both making "salary sacrifice" contributions into our SMSF, the monthly employer contributions for both DW and myself were deposited into the SMSF bank account in a single transaction each time. Hopefully I'll get a copy of the SMSF tax return to check before it is lodged with the ATO at the end of this month.

It will be interesting to see if the annual member statements provide any "annual return" calculations, or just opening and closing balances and total contributions and earnings for 2007-8 (negative of course!). It's been a pretty bad year for our retirement savings. We "rolled over" about $380,000 (combined) into our SMSF last year, but the current value is just over $300,000 despite 9% of our salary going into the fund via the Superannuation Guarantee Levy, plus additional contributions via "salary sacrifice". Ah well, I've still got another 20 years or so to rebuild our retirement nest egg. Hopefully the "High Growth" fund will perform well over the longer term, and we don't get laid off in the coming recession...

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Sailing very close to the wind

Despite pouring $10,000 cash into my margin lending account with Leveraged Equities over the past two days, the market plunge this week saw my margin utilisation hit an all-time high of over 97% as at close of business on Friday. There is an extra 5% "buffer" allowed after hitting 100% margin utilisation before a margin call will be issued, but another substantial decline in the Australian market early next week would force me to start selling off some of my Australian stocks. The "at market" sale of Berkshire Hathaway "B" shares from my US portfolio went through on Friday at $3,000 per share. That was a pretty tragic result, as the stock was massively down at the open, but recovered to close at $3,780! With 20:20 hindsight I should have placed the order with a fixed price rather than "at market". As usual greed and fear brought me unstuck. I sold the stock because I wanted to free up some extra cash to avoid selling Australian stocks due to a margin call, and yet I was too greedy to place a limit order at a reasonable discount to Thursday's closing price. Trying to get a slightly better price by going "at market" ended up costing my about US$10,000! At the moment it seems that everything that could go wrong, is going wrong.

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Life on the Margins

The market crash of the past week erased most of the wriggle room I had left in my margin loan accounts. My most leveraged account (with Leveraged Equities coincidentally) needed a cash injection of $5,000 to keep it out of the 5% "buffer". As of last night my three margin loan accounts were all getting close to 100% margin utilisation:

St George Margin Loan ..................84.27%
Commonwealth Securities Margin Loan ....88.75%
Leveraged Equities Margin Loan .........92.86% (even after the cash injection!)

With the Aussie stock market down another 7% or so today, I transferred another $5,000 cash from my Credit Union savings account to the Leveraged Equities Loan account. That's just about tapped out my at call cash reserves, so I'll need some additional cash if the market continues to fall. I transferred the balance from my ING online savings account (around $500) to my credit union account, and I also placed an order with Comsec-Pershing to sell my 10 "B" shares of Berkshire Hathaway. Although BRK.B has dropped along with the rest of the US market, the plunge in the AUD vs USD exchange rate means I'll still get as much in AUD from selling today as I would have realised a couple of weeks ago. The trade won't settle for three business days, so I have to keep my fingers crossed that I don't get a margin call before the funds clear into my Australian bank account.

I had a look at selling off one of the less desirable stocks in my LE margin loan account (that has 0% margin value), however the stock had an offer price but no bid price! If I'm forced to liquidate some of my Australian portfolio to meet margin calls I'm likely to end up having to sell off the 'blue chip' companies as they have the best liquidity.

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Net Worth Update: Sep 2008

What can I say? Arghhhh! or perhaps, D'Oh! (wish I managed to roll over my index put options last December!)

My net worth as at 30 September decreased by another -$55,428 (-5.77%) during the month to $904,990 (AUD), due to the large losses in my geared equity investments (especially the 5% drop on the last day of the month!) and a drop in the valuations of our real estate investments and retirement account. The estimated valuation of my share of our real estate assets decreased by -$17,359 (-2.05%). The balance of my half of the mortgage increased by -$1,455 to -$366,839 as we continue to redraw some of our advance payments to cover the interest payments while DW is working part-time (until DS2 starts school in a couple of years). The recent cut in official interest rate by the RBA hasn't flowed on to a reduction in existing variable home loan interest rates. There is widespread speculation that the RBA may cut rates by another 0.5% at their next monthly meeting [since I wrote this post on 1 Oct the RBA has cut rates by 1%], but this probably won't be passed on in full by the banks due to the spike in overnight interbank cash rates due to the ongoing "credit crunch". Fortunately we have around half of our property loans at a fixed rate for the next 3-4 years, so we've avoided the full impact of increased home loan rates. But a cut in the interest rate on the variable component of our home loans would make life easier.

I've avoided any margin calls on my leveraged stock accounts so far during this bear market, but my margin utilisation is now over 90%. Continued market declines would force me to sell off some stocks and park the proceeds in a cash management account. Although I have a small amount of cash available at call, I can't reduce my margin loan balances at this time as I have fixed and prepaid the interest for this financial year.

The balance of my retirement account also decreased substantially this month, by -$8,293 (-2.81%) to $286,507, as it's now invested about 98% in the Vanguard Lifestages "High Growth" fund which is allocated mostly to domestic and international equities. I've now finished re contributing (via salary sacrifice) the $34,000 of undeducted, non-preserved contributions that I had withdrawn last year, so my ongoing salary sacrifice will start to boost my retirement account balance from now on.

The employer contributions of my salary sacrifice amounts for Feb, May and June were only processed in the last week of June, and therefore didn't appear as a deposit in our SMSF bank account until the start of the new financial year (July). I finally managed to get advice on this timing issue from the tax office (they had mislaid the private ruling application I had lodged on 30 June), and the news wasn't good. The delay in the processing of my employer's (tax-deducted) contributions means that my total "concessional" contribution for the 2007-8 financial year was well below the $50,000 cap, and the remainder will be counted this financial year (based on the date the deposits appeared in our SMSF bank account). As I've already made arrangements for close to the maximum $50K in concessional contributions to be made this financial year (SGL and salary sacrifice), I could easily exceed the "cap" if my employer processed all the contributions in a timely manner this year - resulting in an extra tax liability of 30% on the "excess" contributions! As I'm only saving around 15% in marginal tax rate via salary sacrifice this is very bad - not only am I tying up the sacrificed salary in my superannuation account for 15 years (until retirement), I could end up paying MORE tax! The possible "solutions" to this timing issue are all rather unpleasant:
1. Hope for the best, and if my employer contributions are processed on time this financial year I could end up owing a 30% tax penalty on around $8,000 of "excess" contributions = potential cost of $2,400.
2. Reduce my salary sacrifice for the remainder of 2008-9 so that the total "concessional" contributions can't exceed the $50,000 cap. This would increase my taxable income by around $8,000 and also impact family tax benefit calculations = potential cost of approx. $1,200+
3. Ask the payroll department to make sure the last 3 months worth of salary sacrifice aren't processed until the last week of June 2009, so they don't hit our SMSF bank account until next financial year. This will avoid any tax penalties, but will only defer the problem for another 12 months. I would have to continue finessing the timing of employer contributions indefinitely (until the concessional contribution cap is increased, or I decide to reduce my salary sacrifice in future). There is also the risk that despite making arrangements regarding the timing of employer contributions, they might be deposited before the end of the financial year.

At the moment I'm going with option #3, and will probably then reduce my salary sacrifice arrangements for the following financial year - changes to the way family tax benefit treats sacrificed salary (ie. will include it in "assessable" income calculations, even though it isn't part of "taxable" income) will lessen the cost of doing so in 2009-10. (Assuming the tax rules don't change before then!).

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Cut! Cut! Cut!

I think everybody (except those on the board of the Reserve Bank) were surprised when the RBA announced a massive 1.0% cut in the official interest rate. Nearly everyone in the media had been predicting that the RBA would follow up last month's 0.25% cut with another cut, but they were expecting the RBA would perhaps double their usual adjustment by making a 0.5% cut. The decision to cut by a massive 1.0% suggests a couple of things:
1. That the RBA, having only stopped INCREASING rates with last month's cut, was scrambling to "get ahead of the curve" now that the world economy looked like going pear-shaped in a hurry
2. That with the recent plunge in oil and commodity prices they are no longer worried about the inflation rate staying above the target 2%-3% band for long. There had always been a few that the RBA shouldn't have been too concerned about the part of the inflation surge that was purely extrinsic (caused by commodity and oil price spikes) as it was a one-off (like the introduction of the GST). Now it looks as if at least part of that inflation component will be unwound as commodity prices drop back to sustainable levels.
3. That they have started to worry about just how robust the Australian economy can be when the EU and USA are falling into recession. The view that the Australian economy would continue to grow due to the expansion of the Chinese economy assumes that the Chinese economy will continue to grow strongly even if the EU and USA are in a prolonged recession, due to domestic demand. However, domestic Chinese demand will surely slow as exports drop off and inventory starts to accumulate.

The big banks appear to be passing on around 0.75% of the interest cut, which will benefit our cash flow. We have around half of our property loans at a fixed rate for a few more years, but the half that is at variable rate will benefit from the rate cut. 0.75% interest rate cut will trim our interest payments by around $230 each month.

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Online businesses need more time than money

My annual domain name registration for a couple of my online business ideas fell due yesterday - FreeHeraldry.org and PickingBabyNames.com

I think both of them are worth keeping, so I stumped up the $13 or so renewal fee for each (Dotster is not the cheapest registration option around, but I can't be bothered trying to transfer them to another service). I've been getting a few hits on freeheraldry.org even though there is no content there as yet, so I think it has potential for generating some AdSense revenue if I load up the site with useful content. But the fact that I still haven't got around to doing anything with the site twelve months after I first registered the domain shows that it won't be easy to convert a good idea into a money spinner. At least I did take a lot of great digital photos of heraldy in various churches and castles while I was on holiday, so I now have some original content to upload! Now I just need to find the time to work on articles and artwork for the site...

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Dive! Dive! Dive!

It's a public holiday here in NSW, so I'm sitting at home getting my SMSF tax documentation organised and trying to ignore the jungle that replaced our garden while we were on holiday overseas. It's not a national holiday, so the stock market was still trading today, managing to post the lowest close for almost three years. The Aussie dollar has also plunged to a two year low (against the greenback!), and most commentators expect the Reserve Bank to cut the official interest rate tomorrow - possibly by 0.5% rather than the normal 0.25% move. With inflation still running well above the RBA's target of 2%-3% "on average", the RBA normally wouldn't be looking at cutting rates yet, but, despite the latest figures showing the economy is still growing and unemployment remains close to 20-year lows, the global financial situation gives the impression of Wiley Coyote running off a cliff. His legs are still running and his eyes are on the Road Runner, but the ground has dropped out from beneath his feet. The Aussie dollar had been strong on the back of the commodity boom, but commodity prices have started to come off the boil in the past couple of months. The Australian economy would be relatively unscathed by a recession in the US and the Eurozone, but, it would suffer from a slow-down in the Chinese economy. And since a US and Euro recession would impact the Chinese economy, the Australian economy will be affected by recent events in the US and Europe - it's just a question of lag.

Overall, the global financial crisis feels a bit like one of those submarine movies where something has gone disastrously wrong and the sub is plunging rapidly towards the abyss. All the ballast has been blown, and yet the submarine is still going down, maybe just a little bit slower. We're all sitting on the edge of our seats, wondering if things will level out before the financial system implodes.

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