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Sunday, 30 December 2012

Children's tax returns

I managed to finish off the kids' tax returns for the 2010, 2011 and 2012 financial years using eTax, although I had to print out the hardcopies to send in by mail (as it is too late to lodge the 2010 or 2011 returns online using eTax).

If DS1 and DS2 only had the few dollars of interest earned on their bank accounts as income it wouldn't be worthwhile doing their tax returns at all, but since they also have some shares (DS2) and a managed fund investment (DS1's paper round money), I have to lodge their tax returns for them if they are to get the franking credits etc. refunded.

Using eTax for simple tax returns like these was pretty painless, although eTax still makes you wade through a whole lot of irrelevant items if you only have a couple of items to complete. Perhaps a single page with yes/no check boxes could be used to skip items that aren't required?

The estimated tax refunds calculated by eTax are:

Year     DS1    DS2
2009/10  59.70  13.00 
2010/11  76.48  19.00 
2011/12  87.89  45.00 

Although the amounts aren't huge, it was still worthwhile spending a few hours filling in the returns so that the kids will get some extra money in their bank accounts.

Subscribe to Enough Wealth. Copyright 2006-2012

Monday, 24 December 2012

Plans are only as good as our assumptions

After updating my monthly net worth spreadsheet I had a look at the 'projection' graph I'd created pre-GFC (as shown below). One thing that stands out (apart from the impact of the GFC and EFC on my NW) is that my 'best case' projection of 13% pa ROI (it wasn't quite as silly as it now looks, since it included the effect of ~50% gearing on my 'high risk' asset allocation) was wildly optimistic (no surprise there), and that my 'worst case' projection of 7% ROI was nowhere near reality.


A true 'worst case' projection would have been a negative NW (all my assets becomming worthless and still owing money) - just consider the 'worst case' experienced by the Russian Zsar and his family - shot to death while wearing vests containing precious gems sewn inside them!

And while the 6% ROI seemed reasonable rate based on the 'typical' minimum ROI over any post-war 10-year period, a genuine 'worst case' scenario would have used the absolute minimum ROI relevant to my asset mix over the worst 10-year period EVER recorded. Which would have been a negative ROI. That might have given me some pause for thought regarding my 'conservative' levels of gearing. As it turned out, the size of the GFC impact on the values of my stock investments forced my to liquidate many of my stock holdings for less than I'd paid for them, to avoid getting margin calls.

Making plans in the mid-noughties it had seemed reasonable to assume that we'd never see another global recession anything like the great depression - after all, modern economies were supposed to be more sophisticated, with better risk management techniques, and more robust, as the 'global economy' was supposed to reduce the impact of a recession in one country. As it turned out, all the market had learned was new ways to boost returns by taking greater and greater risks, and that globalisation in fact meant that problems with one large economy automatically spread to other economies around the world.

I haven't bothered updating this chart with new projections, as I have no idea what a realistic 'worst case' is (there are some pundits who think we are waiting for 'the other shoe to drop' and the world may yet see another 'great depression' -- and while I don't expect that will eventuate, I don't think it as unlikely as I had pre-GFC), and I also don't know what the 'best case' might be. I have become somewhat more risk adverse than I was before, so I'll use the proceeds from my maturing capital guaranteed hedge fund investments to reduce my margin loan balances over the next few years. We may also use the proceeds from selling our rental property to pay off most of our home loan. In which case my levels of gearing will be much lower, reducing the potential upside of any future booms in the stock or property markets.

Overall, experience has shown that projecting the ROI of high-risk assets is pretty pointless. While estimates based on 'average' returns can produce pretty graphs and comforting projections of retirement income and so forth, in reality only no-risk assets (cash and capital-guaranteed deposits) have an ROI predictable enough to make such projections a useful tool.

If you want the POTENTIAL for higher returns than those provided by risk-free assets, you have to accept that, in reality, you are basically taking a gamble. While the odds of a decent return may be in your favour, there is no guarantee of any particular ROI, no matter what the historic data suggests.

As is often pointed out "All indications of performance returns are historical and can not be relied upon as an indicator for future performance.". Unfortunately, like the health warnings on cigarette packets, it is human nature to become blase about such dire warnings.

Subscribe to Enough Wealth. Copyright 2006-2012

Self-managed Superannuation Savings continue to boom

A recent article in the SMH reports that the SMSF sector now has about $440b in assets under management, with $26.5b going into SMSF each year. The reason people choose to manage their superannuation themselves are twofold - direct control (ie. freedom to choose any investment strategy and tactics, provided it is within the government rules applying to superannuation trustees) and lower fees compared with retail superannuation funds (the average expense ratio of SMSF decreased by around 20% to only 0.54% betweem 2008 and 2011).

With a combined SMSF fund balance of around $500,000 (DW and myself are the current trustees, with DS1 and DS2 to be added as a members/trustees when they each turn 18) and the annual admin fee charged by eSuperfund of only $700, plus the ATO SMSF annual fee around $150, we enjoy an even lower admin expense ratio of about 0.17%. On top of this of course are any fees charged by your investment managers - for example, we don't pay any management fees for our investments in ASX200 CFDs or cash sitting in our ANZ V2 cash management account, and the Vanguard Index Fund where we have about $410,000 invested charged 0.90% on the first $50,000, 0.60% on the next $50,000 and only 0.35% on the remaining investment balance - averaging about 0.4475% management fund. However, the investment management fees are the same whether invested via a SMSF or retail super fund (retail funds often claim that their higher admin fees are offset by the benefits of investing 'pooled' funds at wholesale management fee rates. However, the savings are often negligible - for example, the Vanguard High-Growth Fund has a wholesale fund (min investment amount $500,000) management fee of 0.37%), so the big saving is the minimal admin fee available via SMSF compared to fees of up to 1% or more charged by many retail superannuation funds.

As usual the article quotes 'analysts' as stating that investing via a SMSF is only cheaper for people with a balance of about $300,000, whereas using eSuperfund the minimum balance required to actually save fees could be as low as $100,000 (depending on what fee your current retail superannuation fund charges). Of course, eSuperfund is a 'no frills' fund administrator. There is a 'one size fits all' standard trust deed, some restrictions on investments (ie. which bank account is setup for deposits into the fund, and only Comsec for share trades, and none of the more exotic investments such as art and collectibles that some SMSF run via accountants have sometimes invested in). Unlike running a SMSF through an accountant, you also can't pick up the phone to chat about your SMSF - eSuperfund prefers all questions via email, which I haven't found to be a problem.

Overall, we're happy with our move from the default retail fund selected by our employer into a SMSF administered by eSuperfund. I estimate we are saving around $3,000 each year in admin costs, which is more than the annual SGL contributions being received by DW working part-time! As doing the required 'paperwork' (preparing an annual "checklist" for eSuperfund's use in preparing our tax returns, member statements and annual audit report) only takes a few hours each year, this is a worthwhile cost saving.

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Sunday, 23 December 2012

Net Worth Update: November 2012

The stock market dipped a little during November (it has already gone back up this month to new '12-month highs', still more than 15% below the 2007 high points), and the monthly valuation estimates for our two properties were also slightly down (and also recovered in the next month). The best performance was my retirement account, but that is entirely due to my employer SLG contributions and salary sacrifice amounts for three months being paid into our SMSF bank account in early November.

At the moment our big concern is the rental investment property - still no new tenants (after six months!) and no reasonable offers to buy the property although it has been listed for nearly three months. While I can simply fund the $2000 per month rent shortfall by drawing down on my portfolio loan account (which is secured against our equity in the two properties), it isn't a good idea to capitalise debt (a bit like only paying the minimum on a credit card each month - something I've never done).

Meanwhile I have some more repairs to do on the investment rental property - making the balcony more presentable by screwing some marine plywood panels on top of the existing decking, and giving it several coats of  decking finish.

Assets___________$ Amount
Stocks_*_________-$31,891
Retirement_______$425,884
Properties_______$870,655
Debts____________$ Amount
Home Mortgage(s)_$363,882
Net Worth________$900,766

 * the Stocks figure is portfolio value - margin loans. As my portfolio value (and margin loan debt) is around $500,000 relatively small movements in the stock market produce huge percentage swings in the net value of my stock portfolio each month.


Subscribe to Enough Wealth. Copyright 2006-2012

ATAR fever

The NSW Secondary School final exam (HSC) results came out yesterday, and the related university entry ranking scores (ATAR) came out this morning. As my oldest son (DS1) is only in the first year of high school (Yr 7) the hoop-la surrounding the release of results seems rather amusing. [It may not seem so funny in five years time when DS1 will be getting his results.] It was nice to see that the selective high school DS1 attends has moved up the 'rankings' and is now well within the 'top 10' schools in the state. As it now consistently ranks higher than Sydney Grammar I'm glad we eventually decided not to send DS1 there.

A lot of the media commentary about the "stress" surrounding the HSC exams, ATAR results are so forth seems like a beat-up to me. After all, the UAC says 17 per cent of students will receive an ATAR of 90 or above, 33.5 per cent will get at least 80, 49.3 per cent at least 70, and 63.8 per cent at least 60.00. There are many uni courses you can get into with an ATAR of 65 (eg. the University of Western Sydney has a long list of courses with an ATAR cut-off of 65 for 2013, and some diploma course have an ATAR cut-off of 50!), and although some courses that are in high demand have ATAR cut-offs in the high 90s, there are many 'good' degree courses accessible to most of the students who received an ATAR score. For example, the cut-off ATAR for the Lineral Arts and Science course at Sydney Uni was 70.05 in 2012, which means around half the students getting ATAR results today would qualify for this course. I suspect a lot of the angst is caused by students 'picking' a course (or courses) with a high ATAR requirement for entry, knowing that they don't have much chance of achieving the required ATAR score. Selecting a range of possible courses, including some that would be interesting to do but have a lower ATAR cut-off, would greatly reduce stress-levels. It is much more fun waiting for an exam result knowing that you are highly likely to get into an interesting course, and just waiting to see which particular course(s) you qualify for.

It may seem odd that 17% of students qualifying for an ATAR score got a "ranking" in the "top 10%" (ie. 90 or above), but that is simply due to the way the ATAR is calculated (basically it works out a student's ranking compared to ALL the students that were in school at the end of Year 10 (the old 'school leaving certificate' age), and the lowest ATAR scores (if they were issued) would belong to students who dropped out during years 11 and 12, and those that did vocational courses that don't count towards an HSC mark. A lot of the students that now continue in secondary school until Year 12 are those that in times past would have left high school at the end of Year 10 to start working or commence an apprenticeship.

These days around 30% of young people go on to tertiary study, whereas "in my day" (the early 80s) less than 10% went on to university studies. So, despite the media beat-up, it would seem that there should be less stress surrounding the HSC these days, as a much higher proportion of students will go on the university (unless, of course, students that have no realistic chance of getting in to uni via their ATAR results have been conditioned to believe that unless they get into uni they have 'failed').

One consequence of the large numbers of students now proceeding on to university studies appears to be that the 'value' of a bachelors degree has been eroded. These days a basic university degree is often viewed as routine, and to stand out in your field you need to have also done some post-grad studies (at least a post-grad diploma, or better yet a Masters).

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Wednesday, 19 December 2012

Personal Budget for 2013

I've updated last year's budget to plan for 2013's expected income and expenses. Most expenses are reasonably predictable on an annual basis, but may vary considerably from month-to-month (such as annual care registration and insurance payments, quarterly utilites bills and so forth). The category 'Food etc.' is subject to the most uncertainty, and could either 'blow out' or (far less likely) come in 'under budget', as it includes many miscellaneous items such as household cleansers, medicines and eating out, and the weekly grocery shopping currently includes a substantial amount of unplanned discretionary spending on snack and junk foods, softdrinks and so on.

The planned budget just matches overall expenditure to my employment income, and assumes I can avoid unplanned spending on discretionary items such as electronics, holidays and so forth. Based on my track record for 'spur-of-the-moment' purchases of electronic gadgets, books and stuff for the kids, this may be an unrealistic plan. The budget may also come under pressure from above-CPI increase in petrol costs and utility bills, as any pay rise next July is likely to be only a CPI-adjustment.

The 'Housing' budget item only reflects my cashflow into our Joint account. It doesn't include DWs matching contributions into the Joint account, and the Joint account funds both our home loan payments, investment property loan payments, and childcare payments.

The budget doesn't include any investment income streams or other investment loan interest payments. Our rental income (assuming we get a new tenant early in 2013!) flows into the Joint account and helps fund the combined interest payments on our home and investment property loans. And my share and mutual fund dividends are either re-invested automatically, or is deposited into a bank account that is used to help fund the interest payments on my investment margin loans. If there is insufficient funds available to meet the margin loan interest payments I 'capitalise' the interest using funds from my 'portfolio loan' account. Over the next few years some of my capital guaranteed hedge fund investments (that don't pay dividends) will mature, and I will use to proceeds of their liquidation to reduce the balance of my margin loans. The medium-term goal is for the non-reinvested dividend income to be sufficient to fund the interest charged on my margin loans.

I'll start tracking actual income and expenses each week against the budget forecast from January onwards, either using a spreadsheet I've prepared, or possibly using the old version of Quicken I already have. If I have the time (and inclination) over the holiday break I will setup the budget categories and projections in Quicken, and also setup records for my current shareholdings. If I can get the purchase history of all my remaining stocks recorded in Quicken it will make capital gains calculations much easier for my future tax returns. Unfortunately there will be a fair amount of work involved, as many of my share holdings were built up over time through multiple purchases, dividend reinvestments and stock splits, and have been reduced at various times through sales of part of my holdings. Working out the true 'cost basis' of my current share holding for each stock therefore requires checking through all my past tax returns to see what lots were nominated as having been sold in previous capital gains calculations. The process is also complicated by a few instances where a company was 'taken over' by another company, and I was issued with a mixture of shares and cash (and sometimes in 'odd lots' of shares in several differnt 'spun off' companies!).



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Sunday, 16 December 2012

A tale of two eBooks

Sometimes technology makes our lives easier and less expensive, while at other times it just seems like an excuse for price-gouging.

For example, I recently bought three ebook novels for my Nexus7 tablet. All were current paperback titles available for the usual (exhorbitant) 'hardcopy' price (around $16), but the ebook version was priced very reasonably (between $0.99 and $3.99) in comparison. Reading them on the tablet is generally a better experience than the harcopy (with the ebook providing automatic bookmarking, is easier to read in bed in dim light, and is lighter and smaller to carry around than a paperback) - the only problem is trying to read them in full sunlight. Considering the publisher's cost savings (no physical materials such as expensive paper, no shipping costs, and no storage cost), the price differential ($4 vs. $16) per book seems reasonable. And even I won't begrudge paying an author 1c per page for anything I'd want to read ;)

On the other hand, I also went shopping online for a text my uni supervisor recommended, thinking it might be cheaper as an eBook - wrong! The Australian 'co-op' bookshop lists only the Google eBook version (at A$109.12 for non-members, or A$103.66 for members), which seems a bit rich considering Google Books lists this eBook online for USD$94.66. And the kindle version available from Amazon.com is only slightly less expensive, at $93.92. These ebook prices might be reasonable if the text cost several hundred dollars in hardcopy, but these prices seem a total rip-off when compared to the hardcover version which has a list price of 'only' USD$98.86 (A$97.29) from Amazon.com.

In the end I decided to buy the hardcopy from Amazon.com for A$107.11 (including shipping to Australia). Getting a hardcover text to stick on my library shelf for only $3.45 seems a relative bargain, with the only downside being the estimated delivery date of 4 Feb.

I suppose textbook publishers would argue that selling eBook versions at a significantly lower price point that the hardcopy version would make it unprofitable to publish them. However, I would think that students would be more inclined to buy textbooks (rather than borrowing them from the library or buying older editions second-hand) if the eBook version was available at a more affordable price.


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Wednesday, 12 December 2012

Net Worth Updates: April-October 2012

With a bit of spare time between the end of my uni coursework degree and starting work on my research degree, I finally got around to checking the various monthly statements for my investment accounts and getting my 'net worth' spreadsheet calculations updated. Over the past six months my estimated new worth has increased by about 6% (or $50,897) to just over $900,000. The rise is mostly due to a recovery in the stock market since the EFC seems to have become 'old news'. This has boosted my stock investments, although I'm still "underwater" due to the substantial amount of margin loans I held going into the GFC. Because I had to sell off the better (least worst) stocks in my portfolio at the bottom of the GFC bear market in early 2008 in order to avoid margin calls, the subsequent recovery hasn't produced as much 'gain' as the previous 'pain'. The rising stock market has given my retirment fund (SMSF) a nice boost though, as we introduced some gearing within our SMSF post-GFC (by investing a small percentage of our capital in ASX200 CFDs "IQ") after the worst of the GFC had passed.

Unfortunately the Sydney real estate market hasn't improved much during 2012, after a weak 2011 -- at least not in our suburb. Judging by the lack of offers for our investment property since it was listed for sale a couple of months ago, and from the views expressed by our agent, my price 'estimate' (which is based on movements in the average sales price for houses in our suburb since we bought our property) may be 5-10% above what can be achieved in a weak market. With the property sitting vacant since our last tenant moved out in July, the lack of rental income is having a negative impact on my net worth. I am now having to borrow about $2,000 each month on my 'portfolio loan' to meet the interest-only payments on our mortgages.

The monthly movements in each asset class are shown below:


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Wednesday, 5 December 2012

Real Estate - asset or liability?

Our investment rental property is still vacant (the last tenants moved out at the beginning of July), and we also haven't had any realistic offers to buy the property, although its now been on the market for nearly two months. Meanwhile the lack of rental income has meant a cashflow shortfall of about $2,000 each month, which I'm having to meet by drawing down on our 'portfolio loan'. It is times like this, when real estate values are stagnant, if not declining, and mortgage interest charges are producing a negative cashflow, that real estate seems more like a "liability" than an "asset".

Depending on whether or not we get a new tenant, or get a good offer to buy the property, we may either continue to rent it out for a couple more years (while we decide whether or not to build a new house on the block and move there ourselves), or else just sell it and use the net proceeds to pay off the mortage on our current home.

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Tuesday, 4 December 2012

More 'study' next year

Although I was originally intending to proceed from the Master of Astronomy degree to a professional doctorate in Astronomy at JCU (with the possibility of 'transferring' to a PhD subject to satisfactory progress), the unexpected closure of the astronomy department by JCU earlier this year left me wondering how to proceed after completing the MAstron course. It now looks like I'll be starting a research MSc next year at a local university ("SU" = 'Some University', situated about 4km from where I work!), as I received a 'conditional offer' of a place last Friday (the 'conditions' were simply to provide certified copies of some of the supporting documents I'd included with my application to enrol in their PhD program).

Although I didn't get offered direct entry into the SU PhD program (as the JCU Master of Astronomy was deemed to be a coursework degree, rather than a 'research' masters - which has to be at least 2/3 research), I will be able to 'upgrade' my enrolment to PhD candidature after a year or so --providing I make satisfactory progress with my research project.

As there is no free parking available close to SU, I've bought a 16" push scooter and will experiment using it to speed up the commute from work to uni one afternoon each week, which should mesh nicely with my plan to loose more weight and get fitter in 2013 (although riding around Sydney on a push scooter I'll probably look like a real dork). At least there's a suitable precedent in astrophysics...



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Finished my MAstron degree

The results for my final subject in the Master of Astronomy course came out this morning - I managed to get another HD, so my overall GPA was 6.5 (out of 7). This is just enough to be 'eligible' for the university's academic medal for a masters by coursework, but I probably won't know if I get one until graduation day. Initially I wasn't going to bother travelling from Sydney to Townsville for the graduation ceremony next March unless I was sure I was going to receive a medal (I didn't bother attending my last couple of graduate diploma ceremonies, just got the testamurs mailed out to me), but in the end I decided I might as well take DS1 to Townsville for a four-day 'holiday' as he is in the second year of selective high school and may find the university graduation ceremony interesting. In any event, spending several days snorkeling at nearby Magnetic Island or taking a day cruise out to the inner reefs of the Great Barrier Reef will be fun for him. The return airfares are about $500 for the two of us, and four nights accomodation in a 'family room' costs about $600 - I've invited my parents to travel to Townsville to attend my graduation and share the room for the four days. As they are both about 80 years old I can't assume that they will be fit enough to attend my next graduation, if I eventually qualify for a PhD in 5-6 years time (doing a PhD part-time is a s-l-o-w process!).

By happy coincidence one of my nieces is also be graduating at the same ceremony (with a first class honours science degree majoring in marine biology), so my eldest sister may also be there on the day.

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