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Friday, 23 January 2009

A few more things for my 'to do' list

The swing set I ordered a couple of weeks ago arrived yesterday (assembly required), but before I start putting it together I need to check how level the intended play area really is, start digging and levelling during this Australia Day long weekend, and order a load of topsoil to prepare the area for some new turf to be laid in the next week or two. The new pool fencing should also arrive sometime next week.

I ordered two sets of past year middle and upper primary level Math Competition test papers from the Australian Mathematics Trust a few days ago ($48) and they arrived today. Since DS1 enjoys mathematics and is quite good at it I'm planning of getting DS1 to do one of the test papers each weekend during Term 1. The answer sheets were provided, so it shouldn't take too long to mark the papers and work through any questions with him that gave him trouble.

I also paid $75 to PS146.com yesterday to get another two month "extension of time" (my third!) to complete the Diploma of Financial Planning course I started a couple of years ago. Since I'd already done most of the assessment items I figure I should be able to finish this off before my first MIT course for 2009 starts in late February. I faxed in the couple of reworked assessment items I had left for the first of the four DFP subjects (Financial Advice), and today got an email back confirming that I had now completed the requirements for that module. Next week I'll complete the last couple of assessment items for second module (Insurance) and schedule the telephone "role play" activity for my day off the following week. It will be good to finish this off and get the certificate, as otherwise the $2360 fee I initially paid for the DFP via distance education would be wasted. I might even do the "advanced" Diploma of Financial Planning at the end of the year (once my MIT courses have finished for the year) as the taxation and estate planning courses may be useful, even if I never become a professional financial planner. However, this time I'll enrol in each subject individually rather than try to complete all four courses in one hit.

Meanwhile the Australian stock market dived another 5% or so today - reaching a new 5-year low. My leveraged stock portfolio now has negative equity overall, so every point decline in the stock market index means an increase in how much I would owe on my HELOC (St George "portfolio loan") if I sold off my entire stock portfolio. Somehow this feels worse than when I was watching the net equity of my stock portfolio diminish.

Subscribe to Enough Wealth. Copyright 2006-2008

Thursday, 22 January 2009

The Citi wants to put my Redicredit account to sleep

I received a letter from Citibank yesterday advising that due to "security concerns" my Redicredit (line of credit) account would be closed if it remained inactive until 19 February. I doubt that there are really any security issues with keeping the account open - more likely Citibank is simply looking for ways to reduce the total amount of credit it has approved for it's Australian customers.

I haven't used the account much in recent years (apart from a couple of very low interest rate offers which I used to save interest on my margin loan accounts) but I don't want to lose access to the $55,000 credit limit as it could be very handy in case of emergency. It would also be hard to require as the maximum credit limit available for new Redicredit applications is currently only $25,000. So to avoid my account being closed I today wrote a cheque on my Redicredit account to pay the $46 that is due for the annual renewal of my hovercraft's registration with NSW Maritime. Compared to my usual payment via EFT from my credit union savings account this will only cost me an extra 50c (for a stamp), and a negligible amount of interest (less than 70c a month) - even at Citibank's exorbitant rate of 18%pa. I may pay off the balance in full when next month's statement arrives, or I might just pay the minimum so the account remains "active" for a couple of extra months.

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Monday, 19 January 2009

Stock Market Storm Sinks Life Savings

A brief report in the SMH outlines the horrendous impact of the bad investment advice dished out by Storm Financial, who advised many retirees to borrow against their mortgage-free homes in order to use margin loans to invest large sums in the stock market at the tail end of the bull market. While the self-serving (fee generating) "advice" provided by Storm seems completely inappropriate for many of their clients circumstances and actual risk tolerance, I'm sure that many of the investors rendered bankrupt have mostly themselves to blame. It's easy to cry "foul" and engage the lawyers when the market has plunged 40% or more and wiped out your investment portfolio, leaving you with massive loans secured against you home. But I suspect that a lot of these people were only too happy to sign off on dodgy loan applications (some with overstated income figures) and skim-read the fine print of the terms and conditions, when their "financial plan" projected massive gains if the market had returned another year of two of double digit performance. Those who play with fire get burnt - the tricky bit will be sorting out those Storm clients who eagerly grabbed the match box and lit their matches knowing the risks, and those "babes in the woods" would were handed a box of "safety matches" and told that there was nothing to fear.

It's interesting to compare how a Storm client who invested at the market peak in late 2007 would have fared if the market had gone up 15% in 2008, rather than dropping 45%:

Assume: Retiree/investor borrows 50% ($500,000) against mortgage-free home valued at $1,000,000, interest 8% ($40,000 pa interest)
Pays Storm 7% up-front fee on funds invested (ie. leaves $465,000 "capital" to invest after $35,000 in fees up front)
Invests in a stock portfolio using max 70% gearing, interest 10% (capitalised)
Dividend rate 3%
Margin loan amount = $1,085,000 (total invested in market = $1.55m)

If market had gone up 15%, at end of 2008 situation would be:
Debt: $500,000 (home loan) + $1.085m (margin loan) + $108,500 (interest) = $1.6935m
Int paid: $40,000 (home loan int only payments)
Income: $46,500 (dividends)
Cash flow: $6,500 "tax free" income (due to tax deduction for capitalised margin loan interest)
Portfolio value: $1.7825m (15% rise)
Unrealised capital gain: $89,000

I doubt that any of Storm Financial clients would have been complaining in that situation!

In reality, a 45% market plunge occurred, with losses only being realised in late 2008 when portfolios were liquidated to meet margin calls (where clients tapped into their remaining home equity to borrow to meet earlier margin calls - say up to the maximum 80% LVR for owner occupied home loans):

Debt: $800,000 (home loan) + $1.085m (margin loan) +$108,500 (interest) = $1.9935m
Int paid: $52,000 (home loan int only payments, assuming extra $300,000 borrowed during 2008)
Income: $46,500 (dividends)
Cash flow: -$5,500
Portfolio value: $852,500 (45% drop)
Debt remaining after portfolio liquidated: $1.9935m - $0.8525m = $1.141m

Since this is slightly more than the family home is worth, bankruptcy results!

The worst part of the advice provided by Storm (aside from the investment strategy not matching the clients real risk tolerance or level of understanding) appears to have been to continue borrowing against other assets (the family home or other real estate) in order to meet margin calls while the market dropped during 2008. If the investors had simply liquidated their stock portfolio to meet margin calls as they arose, they would have ended up taking a big loss, but not being bankrupted and losing the family home. However, it was all too easy in March 2008 to imagine that the market had bottomed out after a "normal" 20%-30% correction, and try to hang in there, rather than turn paper losses into real ones.

I wonder if there are any Storm clients who started investing in 2003 and liquidated their portfolios in late 2007 when Storm began their IPO process? They're probably sitting on their yachts sipping champagne.

Meanwhile, it will be interesting to see how the court cases against Storm Financial and the banks turn out. (Not to mention ASIC's role in all this)

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Sunday, 18 January 2009

Saving receipts for the education tax refund

For the past couple of years I've been saving receipts from our visits to the GP and pharmacy, as you can get a tax rebate for medical expenses (minus any medicare rebate) above the theshold. Last year a new tax refund item was introduced for claiming eligible education expenses - money spent computers, internet access, text books and study aids for one's primary or secondary age school children.

We visited the local shopping mall this afternoon while DS1 and DS2 went to the zoo with my parents, and I decided to buy a workbook of Year 7 Algebra practice problems for DS1 to do when his is at after-school care on Thursdays this year. Unfortunately, when I got home DS1 pointed out that it was the same book that I'd bought last year, and he'd completed it a couple of months ago! Luckily I'd get the receipt after entering the expense in Quicken, so I'll be able to take the receipt and book back next weekend and swap it for something he doesn't already have - perhaps the Year 7 Mathematics Study guide. DS1 is only in Year 4 this year, but he was in the "Math Extension" class last year and enjoys doing more advanced math problems.

For DS1 the education tax refund is capped at $375 (50% of $750 expenditure), but I'm not sure we'll reach the limit as a lot of things I spend money on for DS1's education aren't "eligible".

Eligible education expenses include:

* laptop computers, home computers and associated costs - including repair and running costs of computer equipment
* computer-related equipment such as printers, USB flash drives, as well as disability aids to assist in the use of computer equipment for students with special needs
* home internet connections - including the costs of establishing and maintaining computer software for educational use - including word processing, spreadsheet, database and presentation software, and internet filters and antivirus software
* school textbooks and other paper based school learning material - including prescribed textbooks, associated learning materials, study guides and stationery, for example pencils, pens, compasses and glue, and
* prescribed trade tools.

Expenses that are not eligible for the Education Tax Refund include:

* school fees
* school uniform expenses
* student attendance at school-based extra curricular activities such as excursions
* tutoring costs
* musical instruments
* sporting equipment
* school subject levies – for example, payment for consumables for particular subjects such as woodwork, art or home science.
computer games and consoles.

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Wednesday, 14 January 2009

More spending on house and garden

After we'd settled the purchase of our home six years ago and moved in, the final paperwork from our solicitor included a note that there was some council paperwork missing (a building compliance notice of some sort) because the wooden gate and fence around the pool didn't meet current standards. Since then the latch on the pool gate has broken off and some palings on the side have started to fall off.

So I finally bit the bullet and ordered some replacement metal pool fencing that I'll install myself over the next few weekends. The 10 panels (1.2mx2.5m) and three gates, plus posts and fittings, cost a total of $2,572.20, delivered to a Sydney depot from the factory outlet in Queensland. Aside from buying some bags of rapid-set concrete mix and a manual post-hole digger for around $80, I should have all the other tools needed to install the new fencing and gates. I'm not sure how much time and effort installing the fence and gates will take ;)

I bought the simplest fence design ("flat top") as it looks neat and simple and costs less than the more ornamental designs. Although the cheapest option is unpainted ($67 per fence panel) or standard satin black finish ($77), I decided on the "precious silver pearl" finish that was on special for $85 instead of the usual $99 per panel. The cost of the finish and design isn't a signigicant part of the total cost - the self-closing child-sage gates cost $242 each!

I could have replaced the existing wood fence sections and gate with just five panels and one (or two) gates, but the extra sections allow us to enclose the new swing set on a flat area of grass adjacent to the pool enclosure and street frontage. The boys will be able to play on the swing set without having to worry (too much) about them running into the street or falling into the swimming pool.

Unfortunately this won't be the end of the current round of required spending. Next spring I'll have to pay around $700 for a new pool filter as the existing filter has finally fallen to pieces. Without a working filter the pool isn't usable this summer, so I paid $66 for a three month weekend family pass to the nearby public swimming pool. Of course it would have been cheaper to just fill in and grass over the pool and use the public swimming pool, but I've always enjoyed having my own swimming pool (although the maintenance and costs are less alluring).

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Saturday, 10 January 2009

SMSF annual admin fee due

Our self-managed superannuation fund (SMSF) administrator, eSuperFund sent us an email notification that they had tried to direct debti the annual $600 fee for administration services, tax return and audit from our SMSF bank account on 2 January, but there were insufficient funds available. They'll try again next Tuesday and a second failed payment would result in a $50 late payment fee. The problem was due to our employer not processing any contributions since the monthly SGL and salary sacrifice amounts were paid early last November. At the time the payroll office advised that the employer superannuation payments would be made monthly this year, so I transferred the September contribution immediately into our Vanguard investment account, leaving just $100 in the SMSF bank account. Unfortunately they've now decided to go back to only paying Quarterly, so the Oct-Dec payments won't be processed until the end of this month.

I don't want to have to withdraw any of the SMSF investment with Vanguard, so I instead processed a $500 undeducted contribution from DW into the SMSF bank account. We were intending that DW would make an after-tax $1000 contribution this year anyhow, so that she'd benefit from the government's $1500 co-contribution.

We still haven't received the SMSF tax return for 2007/8 from the administrator. On the one hand I'd like to get the return soon, so I can check it for any errors in the allocation of contributions between DW and myself, investment income etc., and to be reassured that we will actually get a decent service from eSuperFund for our annual fee. On the other hand, soon after the SMSF tax return is lodged we will have to may the 15% contribution tax on last year's contributions plus tax on investment returns, and I was planning on keeping the Sep-Dec contributions sitting in the SMSF bank account to cover the tax liability.

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Thursday, 8 January 2009

A spending sort of day

After not spending a cent yesterday, today I ended up spending quite a bit. I got paid today, but that wasn't a factor as the money disappears straight into my credit union account and the balance doesn't really influence whether or not I decide to buy something.

Last night I fiddled around with my Dell laptop computer for a couple of hours and got it running properly after I reinstalled Vista from CD. However, the Laptop doesn't really have enough RAM installed to run Vista Home Premium (1 GB doesn't really cope), so I called Dell today to check on buying some extra RAM. 1GB of RAM costs around $165, and 2GB around $335, so I WON'T be buying any more RAM for my $580 Laptop just yet! Instead I'll just buy a 2GB SD card (for $20) and install it permanently as ReadyBoost - hopefully that might improve performance a bit. On the weekend I'll install OpenOffice 2.4 from Sun (it's free, and lets me work on my existing excel spreadsheets and word documents without paying a small fortune for Microsoft Office), and reinstall the FastStone image viewer shareware and see if any problems recur.

Having decided not to spend a couple of hundred dollars on RAM, I then went online and had another look at the children's play equipment available from kidsactivitytoys.com.au. I ordered a 2-seater swing set and slide, plus a two-person ride. The total cost will be around $1,200 including delivery. The kit should arrive in a couple of weeks, so I'll have time to start trimming some trees and making room in our garden. When we replace the pool fence I'll buy some extra fencing so the swing set can be enclosed in it's own play area.



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Monday, 5 January 2009

Blog Income 2008


Blog income for the year was around $760. The exact figure is hard to tell as there are accumulated amounts (with a minimum payout threshold) that haven't been paid out yet and may never materialise. Advertised revenue for clicks dropped off in Nov and Dec as shown in the attached chart, and monthly textlinkad sponsors had disappeared as well. I won't be bothering to track monthly income in 2009 as the amounts are too small to warrant the time spent gathering the data! If I'm lucky the income will be enough the cover domain name registration fees and pfblogs.org monthly "friends" fee. I'll be tidying up my blog layout to remove expired sponsor links, and probably remove the adwords code (it doesn't generate much income, and seems to aggravate Google Adsense - reducing pagerank and limiting ads being displayed. As my blogging is clearly now a hobby rather than a potential alternatee source of income, I'll won't be spending time and effort trying to come up with regular articles when nothing of interest is happening. My spare time will be better spent keeping my Quicken accounts up to date and maybe finishing off the units for my financial planner course.

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Friday, 2 January 2009

Insanity is repeating the same thing time and again and expecting a different outcome...

I just couldn't resist it. IPE dropped from $0.40 to $0.35 today, so I decided to place an after-hours order to buy 10,000 of them. If the order is filled on Monday it will increase my current block of IPE to 100,000 shares (the current 90,000 I hold were bought at $1.00 each). The company announces NTA figures each month, and they reported an NTA of around $1.04 at the end of October and $0.99 at the end of November. The 31 December NTA figure should be released around the 12th, and I expect it will still be in the high 90c region, given the overall stock market movement last month. Of course "Mr Market" must consider the NTA figures to be completely unbelievable for the price of IPE to be where it is, but I'm gambling that if the market recovers somewhat during 2009 the NTA figures will stay around $1.00 per share. In 2007 the NTA was around $1.35 when the shares traded around $1.05-$1.20, so if market confidence is restored the current NTA would indicate a possible market valuation of around 75c. Then again, the fact that the NTA has only dropped around 35% when the overall stock market has dropped by about 45% suggests there's something fishy about the NTA figures. The one good thing with my IPE investment is that Comsec has a 0% margin valuation for this stock - so my margin utilisation isn't affected by fluctuations in the price of my IPE holding. If the trade goes through on Monday I'll have to transfer $3,520 from my St George Portfolio Loan into my Comsec margin lending account to cover the settlement.

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Net Worth Update: December 2008

My net worth as at 31 December decreased by "only" -$10,773 (-1.61%) during the month to $659,775 (AUD). This month the decline was due to modest losses in both my geared equity investments (down by -$8,326 or -39.23% - the percentage figure is large due the the portfolio now being worth only fractionally more than the outstanding margin loan amount!) and another drop in the valuations of our real estate investments (down -$5,353 or -0.69%). The balance of my half of the mortgage was fairly constant, decreasing by $382 to -$367,926. The interest rate cuts over the past six months have had a significant impact on the interest being charged on the variable component of our home loans, and a few more rate cuts wil enable us to meet the monthly mortgage repayments without using our redraw facility.

The balance of my retirement account increased slightly this month, up by $3,288 (+1.36%) to $244,474, but this increase was mainly due to my monthly contribution of around $4,200 (SGL and salary sacrifice amounts) rather than investment performance.

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