One term that differs slightly in everyday use from its specific meaning in relation to personal finances is "risk". In everyday parlance the expression "risk" is used to describe the chance of losing something of value - health, wealth, happiness and so on. However, this is slightly different from the meaning of the term risk when used to describe expected investment outcomes. The financial definition started out from the same point - the chance of losing one's money in making an investment - but this was then defined in mathematical terms relating to the chance of the actual investment return deviating from the expected outcome. This use of the term can produce some counterintuitive definitions of what investment or choice has the greater risk. For example, leading up to the '87 crash the market wasn't particularly volatile, but the crash involved some very large one day movements in the market index, which increased the value of market risk. This meant that, on paper, this asset class had higher risk after the crash, when prices were considerably lower.
Another good example of this confusion in the meaning of "risk" was described in Kevin Bailey's book "Your Money Guide". He provides the example of two people who skydive out of an airplane at great height. One is wearing a parachute, the other is not. Which one has the greater risk? The answer to this depends on your definition of risk.
Based upon the definition of risk as uncertainty of outcome the person with a parachute has a greater range of possible result - the 'chute may not ope, wind might cause landing in a tree or powerlines, or the landing could be safe. The person without a 'chute has less chance that the outcome will differ from what you may expect - a rapid plunge to a quick death. Hence in financial terms the parachutist is a speculator, and the person leaping out of the plane without a 'chute has greater "risk" in relation to the expected result.
Copyright Enough Wealth 2007
Sunday, 2 September 2007
Saturday, 1 September 2007
Retirement Myths, Lies and Traps
An interesting counterpoint to recent reports that people may be saving too much for retirement, is this video report that suggests that retirees may need a larger percent of their working salary as retirement income than is generally accepted. Personally I think you're better off doing a "retirement budget" that suits your planned retirement lifestyle and see how much retirement income this would require.
Copyright Enough Wealth 2007
Copyright Enough Wealth 2007
My SMSF finally Invested some of its Cash
The application form to invest $180,000 of our SMSF in the Vanguard High-Growth fund was successfully sent via eSuperFund to Vanguard. I received an email from Vanguard today advising the Biller code and Reference number to use to send our money to them. I had intended to start off with a $180,000 lump sum, and then dollar cost average (DCA) the remaining balance of our SMSF into the Vanguard fund over the next couple of months at the rate of $5K each week. However, when I went online to transfer some of the $330,000 I'd previously moved from the ANZ SMSF bank account into the trading account held by E*Trade I found out that funds transfers take 1 business day to process, IF you make the transfer request before 1pm. It was 4pm when I read this, so the $180K won't be back in our SMSF V2 bank account until next Tuesday. Meanwhile we only had a little over $6K available balance in the V2 account, so the initial BPay transfer to Vanguard was only $5,000. I'll transfer another $175K to Vanguard when the funds are available next week.
Meanwhile I finally managed to reconcile the amounts paid by our employer for SGL and salary sacrifice in July with the amount deposited into our SMSF in mid-August, so it looks as if everything is working fine from a contributions point of view. As no tax had been deducted from the contributions, I assume that the SMSF tax return next August will tell us how much to transfer to the ATO for this financial year. There will be 15% tax on our pre-tax contributions and any income, so I'm keeping track of how much to put aside for the eventual tax bill. I think it's better to leave this amount sitting in the ANZ bank account earning a reasonable amount of interest, rather than transferring the entire contribution amount to Vanguard each month and ending up having to make a withdrawal from Vanguard next August to pay the tax bill.
Copyright Enough Wealth 2007
Meanwhile I finally managed to reconcile the amounts paid by our employer for SGL and salary sacrifice in July with the amount deposited into our SMSF in mid-August, so it looks as if everything is working fine from a contributions point of view. As no tax had been deducted from the contributions, I assume that the SMSF tax return next August will tell us how much to transfer to the ATO for this financial year. There will be 15% tax on our pre-tax contributions and any income, so I'm keeping track of how much to put aside for the eventual tax bill. I think it's better to leave this amount sitting in the ANZ bank account earning a reasonable amount of interest, rather than transferring the entire contribution amount to Vanguard each month and ending up having to make a withdrawal from Vanguard next August to pay the tax bill.
Copyright Enough Wealth 2007
NuWire Investor Site
NuWire Investor has a website www.nuwireinvestor.com that offers free investment information. The website is attractive and easy to navigate, but the content scope is fairly restricted - concentrating on US and International real estate and some franchising.
The most interesting article I saw there was "Volatility Kills Compound Interest" which showed an example of six cases where the investment returns had an arithmetic average return of 6.00% over three years, but the more volatile the returns the lower the Averaged compounded return became.
Another interesting article on the site is "Investor Risk vs. Reward" which covers the relationship between risk (volality) and expected return, and why some risk must be accepted in an investment portfolio in order to achieve reasonable returns.
Copyright Enough Wealth 2007
The most interesting article I saw there was "Volatility Kills Compound Interest" which showed an example of six cases where the investment returns had an arithmetic average return of 6.00% over three years, but the more volatile the returns the lower the Averaged compounded return became.
Another interesting article on the site is "Investor Risk vs. Reward" which covers the relationship between risk (volality) and expected return, and why some risk must be accepted in an investment portfolio in order to achieve reasonable returns.
Copyright Enough Wealth 2007
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