Monday 30 April 2007

How I Added $10,000 to my Net Worth Today (maybe)

Amid all the hoo-ha about the changes to "Simpler Superannuation" from July 1 this year are some less-pleasant, little-know aspects. For example, from 1 July all payments made out of superannuation will be treated as a mixture of undeducted and deducted amounts per the overall mix across all your superannuation accounts with a particular trustee. For example, if you had a total balance of $400,000 and $100,000 of this was due to "undeducted" contributions, any withdrawal after 1 July will be deemed to be 25% undeducted and 75% deducted.

What does this matter? Well, some people will have amounts within their superannuation accounts that they can withdraw at any time. Called unrestricted, non-preserved amounts, I think these are generally undeducted contributions made into superannuation prior to 1999. (All contributions after then are preserved until retirement age). Currently, if you decide to withdraw an unrestricted, non-preserved amount you can nominate how much of the withdrawl is to be from the deducted and undeducted components of your superannuation account.

For example, of the $335,000 in my superannuation account, $55,000 is an unrestricted, non-preserved amount that I can withdraw at any time. My undeducted amount is $34,000, so under the current rules I can withdraw $34,000 as an unrestricted non-preserved amount and don't have to pay any tax on that amount. If I withdrew the maximum possible ($55,000) I'd have to pay some tax on the $21,000 "deducted" component (which was contributed into the fund out of pre-tax salary).

However, if I withdrew the same $34,000 unrestricted amount after the new rules come into force on 1 July, the amount would be treated as roughly 90% (34K out of 335K) "deducted" and only 10% "undeducted" - and I'd have to pay around 20% tax on the $31,000 undeducted component. So, withdrawing this $34,000 after 1 July would cost me an extra $6,000 or so in tax!

But wait, there's more...

Another other benefit of withdrawing $34,000 tax-free from my superannuation account before 1 July is that I could then use this amount over the next two years to replace around $48,500 of my taxable income (with a marginal tax rate of 30%), and I could therefore afford to salary sacrifice an extra $24,000 pa [1] into superannuation without reducing how much cash I have available to pay my bills. The benefit of doing this is two-fold. Firstly, the salary sacrificed amounts will only be taxed at the 15% superannuation contribution rate, rather than my expected marginal tax rate of 30% (which applies to income between $25K-$75K). The second benefit is that be doing this large salary sacrifice my taxable income should be reduced from around $55,000 to around $30,000 and I'll then be eligible to get a government co-contribution of up to $1,500 if I make a $1,000 undeducted contribution into my superannuation account.
Current Situation If salary sacrifice an
extra $24,000 pa
Taxable Income $55,000 $31,000
Salary Sacrifice $10,400 $34,400
SGL contribution $ 7,400 $ 7,400 [2]
Income Tax due -$11,850 -$ 4,650
Super Tax due -$ 2,670 -$ 6,270
Super co-contrib $ nil [3] $ 1,300
(if make a $867 undeducted contribution)
Total after tax $58,280 $63,180

This means I'd end up with an extra $4,900 pa (tax saving and co-contribuction) by making the increased salary sacrifice. However, this is only possible as I have the extra $34,000 tax-free withdrawal from my superannuation account to supplement my income for the next two years. Otherwise my after-tax "take-home pay" would have been reduced from $43,150 to only $26,350.

By making these arrangements I'll end up with the following over the next two years:
Current Situation New Situation
Super Balance $335,000 $301,000 (withdraw $34,000)
Take-home pay $43,150 $31,000 (salary sacrifice)
Super withdraw nil $17,000 pa (split over 2 years)
Total cashflow $43,150 $48,000
Super contrib. $17,800 pa $43,100 pa
Super tax. -$ 2,670 pa -$ 6,270 pa [4]
Super balance $365,260 $374,660
after two years (ignoring earnings)

The only material impact of thisarrangement will be that the ratio of undeducted:deducted money in my superannuation account will be higher if I withdraw $34,000 of undeducted funds and recontribute via salary sacrifice (deducted funds). However, as all pension payments made from a superannuation account after you retire (and are over 60) are tax-free under the new "Simpler Super" rules, this shouldn't have any real effect in the long run.

[1] Under "Simpler Super" there will be an overall cap of $50K pa in deducted contributions - so you have to make sure your total of salary sacrifice and employer SGL amounts doesn't exceed this.
[2] My employer calculates the required 9% superannuation contribution levy based on my original salary (ie. before salary sacrifice is deducted). Legally it is possible for an employer to only contribute 9% of the actual salary paid (ie. after deducting the amount salary sacrificed). So it's important to check this with your employer before making salary sacrifice arrangements.
[3] The government superannuation co-contribution (up to $1500) is available on a 1.5:1 basis for undeducted contributions made into superannuation by employees with incomes up to $28,000. For incomes above $28,000 the maximum amount reduces until for incomes over $58,000 you're not eligible.
[4] There's no 15% contribution tax on the government co-contribution

DISCLAIMER: I'm not a financial planner, accountant, tax lawyer or in any position to give advice. This is just information about what I'm currently planning to do, and what I *think* the implications are. I checked my superannuation details (unrestricted non-preserved balance and undeducted component) with my superannuation fund, and I asked the Australian Tax Office "Simpler Super" help line about whether the new rules treating all withdrawals as being in the same undeducted:deducted ratio as the overall account would apply to unrestricted, non-preserved amounts. The ATO help line rep didn't know, and he had to go ask a "specialist" in this area to come back with the opinion that yes, this rule seemed to apply to all withdrawals by persons under age 60. As the ATO only gives binding private rulings about income tax questions and not superannuation, this seems about as definitive an answer as I can obtain. You could get professional advice from a financial planner, if so make sure that they really know the answer (since the ATO wasn't even sure!).

Enough Wealth

Sunday 29 April 2007

Dow and All Ords to Rise 25%

With the US and Australian stock markets at, or near, all time highs, many pundits are predicting an imminent plunge. The fact of the matter is that the market will always be hitting "all time highs" as it follows its long-term uptrend over the centuries. The question is whether or not a particular high is associated with the excessive exuberance, or if it is supported by fundamental values, profitability and projected continued economic growth.

Alan Kohler had an interesting article outlining the case for viewing current market levels as reasonable, and even provides a rationale for a further gain of 25% or more in the next couple of years:

In 1987 the trailing price-earnings ratio of the Australian market was 20.4, which produces an earnings yield of 4.9 per cent. The 10-year bond yield was then 12.5 per cent. Today the earnings yield is 6.4 per cent and the bond yield 5.9 per cent.

As we stand here with the Dow at 13,000 and the ASX S&P 200 at 6150, shares are cheap.

It is now equivalent to about December 1986. History never repeats itself exactly of course, but if it did, the Australian index would hit 13,000 next January - before crashing spectacularly.

The point is that the sharemarket has not yet had the price-earnings multiple "blow-off" that usually marks the end of the bull market.

The 1987 blow-off took the average P/E ratio to only 20.4 because inflation was 8.5 per cent and the bond yield was 12.5 per cent - more than double what it is now. But that P/E was double the then 10-year average.

Now the trailing P/E is 18 times, but inflation is 2.7 per cent and the bond yield 5.9 per cent (3.2 per cent real versus 4 per cent real in 1987). Times change, but in my view people do not. At the end of a long bull market, with abundant cash and rampant optimism, people tend to go nuts. They start extrapolating existing growth forever and price assets accordingly.

So far that has not happened: share prices have merely kept pace with earnings as they are now, not what optimistic forecasters think they might be.

While I don't necessarily think Alan is right, it's nice to read that your stock market portfolio could increase another 25% by the end of next year. Of course, if it did increase that much, I'd be even more tempted to abandon my long-term asset allocation and lighten up on my stock holdings in an attempt to "time the market". The only justification for such a radical change of investment strategy would be that having experienced many years of exceptionally high growth, my net worth would be well above where I need to be to attain my retirement and investment performance targets, so I could shift to a lower-risk, lower-return asset mix and have greater certainty of reaching my original goals. The alternative would be to stick with my original asset allocations, and hope that the returns reverted to average performance which would result in my final outcome exceeding my initial expectations.

Enough Wealth

Saturday 28 April 2007

Intelligence doesn't lead to Wealth

A little while ago I wrote that I'd be interested to see any research on whether or not wealth is correlated to intelligence. Well, a recent study, has found that there is no link between how intelligent people are and their net worth. Although income is related to intelligence this doesn't translate into wealth. Having a big income doesn't guarantee wealth if you spend more than you earn, and it seems that the discipline and motivation required to accumulate wealth isn't related to intelligence.

Enough Wealth

Adventures in Day Trading - day 7

Yesterday's second trade was looking good for a while - the AUD had dropped from 0.8265 to 0.8250 USD. I thought about closing out at that point and making a $150 profit, which would have more than made up for the earlier $110 loss. However, as is always a danger, I got greedy and changed my mental exit point to 0.8240, as the trend seemed to be continuing. Of course the AUD then changed direction and I ended up watching it ever so slowly drift up, with occasional dips to give me false hope, until I gave up and sold out at 0.8264, netting a minimal $10 profit.

Today DW had made three trades before I got home from work, each one placed just before an apparent trend reversed direction. Her fourth trade was a more successful and she managed to claw back most of today's losses before calling it quits. I then logged in to my account and was going to also buy the AUD and hope the strong uptrend continued, but by the time I logged in there was a pause and a slight drop in the AUD. I should have waited a while and watched what happened next, but instead I decided it was likely to be a pullback, so I sold the AUD at 0.8306 instead. It then resumed it's uptrend and I intended to wait a while and see if it peaked and started to drop as expected. Unfortunately I decided to bail out when it reached 0.8334 (a $280 loss!), and then sat by the uptrend did finally peter out and it started to drop.

By this time my account balance was below my intial A$1000 level, so I could no longer trade A$100,000 on 1% margin - I instead sold A$50,000 and am sitting here hoping that this time the expected correction will materialise and I make a small profit on this trade... It does appear to be dropping slowly at this time, unfortunately with a A$50,000 position opened at 0.8323 I'd only make back about 1/3 my loss if it retreats back to the level I initially sold at this evening.

If I lose my entire A$1000 trading stake I'll call it quits and do paper trading for a while.

Enough Wealth

Friday 27 April 2007

So THAT's how to Blog!

Today's Dilbert is apropos

Enough Wealth

A Home Wi-Fi Network of my new Dell PC

The Dell PC I ordered a couple of days ago is "expected" to be delivered next Wednesday. It will have a wireless keyboard and mouse so I can sit in comfort in our lounge room, with the 20" LCD screen sitting next to our TV (which also happens to be a modest 20" CRT TV). I had been thinking of moving the current cable modem box from my computer table in the next room (where it's currently attached to my Toshiba Satellite notebook) into the lounge room, and then running an ethernet cable from the desktop PC to the notebook. However, I've decided to have a go at installing a wireless network, as there are some instructions on how to do this on my ISP's website (Optus), and Dell offers a Belkin wireless router and USB adapter, so they must be compatible with the PC I've ordered.

I was going to check if I could add the router and adapter to my existing order (as the Dell website says that accessories are shipped separately anyhow, and if they're not part of a computer system order they get charged shipping). However, I didn't have my order number with me at work today, so I searched the internet for an alternate supplier (and to check pricing), and found that I could order a package deal of the Belkin router and a USB adapter for less money ($101 plus $11 shipping) from Mitec.

I ordered the Wi-Fi router this afternoon (payment using a Paypal eCheque from my linked ING online bank account), and it should ship in 4-5 days, so will probably arrive around the same time as my Dell PC. I worked as a computer systems administrator several years ago, and networked PCs and macs using thin ethernet cabling, so hopefully setting up the Wi-Fi and getting the cable modem to work with the new PC and being accessible via the USB network adapter on my notebook PC won't be too much of a hassle.

Ideally I can use the desktop PC while relaxing in the lounge (ie. I can keep an eye on my forex trades while watching the cricket or "Lost" on TV), and can also use the notebook at my computer desk for uni assignments, or even while sitting next to the pool or having breakfast in bed. ;)

Enough Wealth

Adventures in Day Trading - day 6

DW has been on a trading hot streak since she opened her own account. She is now up almost 100% in just a few days. However, nine trades isn't a statistically valid sample - I'll reserve judgement on her trading "knack" until she's been at it for a couple of months.

My forex trading has been a disaster these past couple of days. Each time I've taken a position in what appears to be an established trend, then next few ticks are a major reversal. I'm now back to the starting capital, and every time I drop below $0 available margin with my $1,000 open position I get an automatically generated margin call email. Luckily I can just ignore these as I'll have a positive balance when I close my position (I wouldn't let it run to more than -$200 margin). The margin call emails warn that if I don't add in additional funds to bring my account back into the positive they may close out my open positions - I've no idea how large a negative margin would be required to trigger this. Perhaps if a went to -$1000 margin, so my overall account balance was $0, I'd automatically be closed out. Hopefully I'll never be in this position. At the moment I'm short the AUD with an apparent down trend underway - we'll see if this time my luck changes and the trend continues for a while, rather than reversing as soon as I've taken a position!

Current Trading Portfolio Status

Enough Wealth

Wednesday 25 April 2007

Day Trading Performance

I'm tracking my forex trading with a google spreadsheet. It includes some stats on the ration of winning:losing trades, % winning trades, avg. amount gained in winning trades, and avg. amount lost in losing trades. I'll insert the spreadsheet in this post and link to this post if future updates about specific trading activity.

Enough Wealth

Tuesday 24 April 2007

Real Estate Appears to be Picking Up

Owning our own home plus an investment rental property (albeit with large mortgages) means that my net worth is dependent in large part to the vagaries of the Sydney property market. The latest average house prices for the adjacent suburbs where our home and investment property are located shows considerably higher averages prices for house sales than were reported for the previous month:

Combined with the recent strength in the Australian stock market it looks like this month will give a boost to my net worth. Hopefully todays CPI figures will mean the interest rate on our mortgages doesn't increase again (our house is a variable rate loan, and the rental property is a 5-year fixed rate loan, with four years left to run). It may also help breath some life back into the property market - new house construction is running below the required rate to meet increased housing demand, which is starting to make rents increase. Any confidence that interest rates have now peaked will encourage both investors and home buyers back into the market, which should form the basis for the next increase in house prices in Sydney. Housing in Sydney tends to run in a 7-10 year cycle, and it's now been almost three years since the last peak in house prices.

Of the three goals I set at the start of this year (see side bar), my Net Worth and US Stock Portfolio goals are on track, but unfortunately my goal of getting down to my ideal weight by 30 June is not progressing as well as I'd planned.

In some ways diet and saving plans are similar - you pick your ideal behaviour and make an effort to stick to it until it becomes habitual or "automatic" behaviour. Unfortunately it seems easier to eliminate "junk spending" than it is to eliminate "junk food". I think the problem is that while you can arrange for your "essential" expenses (utility bills, home loan etc) to be paid automatically and can therefore focus on eliminating spending entirely (eg. "no spend" days), some basic level of food consumption is needed to maintain health. Food intake can't just be set on autopilot - every time you eat there is the chance you'll choose junk food instead of a more healthy food. I find that I'm most successful in sticking to a healthy eating plan if I have a fixed menu of healthy items for my breakfast, lunch and dinner - that way I CAN completely exclude eating anything that isn't "on my list".

Ah well, time to start writing down what I eat every day and tracking it on my diet spreadsheet...

Enough Wealth

Adventures in Day Trading - day 5

I decided to do another trade last night after all, and promptly lost another USD$80 - the price had been bouncing up and down and I thought I could sell at the top of a bounce and claw back some of my previous loss. Of course, it then stopped bouncing and went up!

This morning my wife's account was activated after her A$1000 deposit had been processed. The AUD started a rapid drop immediately after the latest quarterly CPI figure came out at 11am - only a 0.1% rise for the quarter. This means that inflation seems to have moderated, so it's less likely that the Reserve Bank will raise interest rates next month after all. It was interesting to see that this news had exactly opposite effects on the AUD and the stock market:

Although after the initial spike up the market drifted back down, whereas the drop in the AUD was more prolonged. DW put in a SELL order for AUD$100,000 (costing $1,000 for the 1% margin) when the Aussie dollar started to slide, but, although the order said "executed" it didn't appear in her FX positions listing. After checking with CMC markets help desk it turned out that her bank had deducted $1.50 fee for the BPay transfer, so her trading account only had A$998.50 available. Due to insufficient funds her $1000 SELL order was automatically cancelled! By the time she'd worked this all out, and decided to trade a $50,000 position instead, the drop in the AUD had bottomed out. DW was quite annoyed that she missed out on a potential $250 gain. She made a series of small trades this evening, but there was no clear trend and she lost on several trades. Her most recent trade is making money as the AUD recovers - so she may break even on today's trades.

Enough Wealth

Adventures in Day Trading - day 4

The paperwork for DW's own account for trading CFDs with CMC has all gone through and she transferred an initial $1000 into the new account. She should receive her login details tomorrow and can then start trading on her own account. Her overall trading on my account had resulted in a net profit of AUD$348.08, on which I'll have to pay tax, probably at a rate of 30%. I'll deposit $243.65 into her account tomorrow, and leave the "extra" $348.06 sitting in my account so I can do some trading myself. I quite enjoyed "playing" the forex market, so I'll probably give it a go (at least until I've used up the $348.06 "margin").

The AUD dropped from around .838 to around .830 during the day - due(?) to the producer price index being flat for the last quarter, which led to speculation that the CPI figure due out on Wed will also be lower than expected, so the Reserve Bank won't raise interest rate again, after all. It was speculation of another interest rate rise that had allegedly been driving the AUD towards 84c US recently (although I think the dollar will still trend up as long as commodity prices remain strong, which probably relies on the China economy remaining strong. As China is hosting the Olympics next year, which is usually a fillip to the host nation's economy, I think the AUD still has a way to go in this uptrend).

But that doesn't have much to do with the short-term fluctuations in the AUD/USD spot exchange rate that we're actually trading. Of course my very first trade off my own bat did badly - I bought the AUD at 0.8333/35 thinking that it had bottomed and was recovering towards the 0.8340 level. It turned out that I'd bought at the local maxima, and when it continued to drift lower I cut my losses at 0.8323/25, crystalising a USD$80 loss. It's still bumping along with a slight downward bias, so I don't think I'll be trading again tonight.

Enough Wealth

Monday 23 April 2007

Yes Spend Day

I got $36.35 in dividends from Alinta today. However, I also spent $200 for DW and DS's dentist visit. Purely by coincidence I was also booked in for dental work today (with a different dentist). I'm getting a crown done for a molar that previously had root canal and a couple of fillings. I still have another appointment to get the crown fitted (today was just the prep work and mouldings), but the dentist charged for both sessions today - $1,450!

I also finally decided to buy myself a new PC today - a base model Dell with some extra RAM, bigger HDD, slightly upmarket graphics card and a 20" "ultra" LCD monitor. Hopefully it will be OK to edit my digital home videos with - although running Vista it could be a struggle with 2GB of RAM. Total cost was $1802.90 - it didn't sound so bad when I worked it out as costing $1.65 a day over three years. I'll mainly use it for maintaining my investment records and doing my university assignments, so the depreciation will be tax deductible, reducing the "out of pocket" cost further. Dell phoned when I got home to confirm the order (and try to sell me a four year extended warranty for an extra $165 - no thanks), and advised that the computer should arrive within 10 business days.

Anyhow, if I manage to quit drinking 4L of diet coke each day as planned, I could afford to buy a computer like this every 9 months ;)

Total net spend for the day $3,416.55. Oh, and we also bought a roast chicken for dinner and did some grocery shopping on the way home - call it a round $3,500.

Enough Wealth

Sunday 22 April 2007

Frugal living: Diet Cola

I don't drink much alcohol (just the odd glass of wine at Christmas or when dining at a restaurant) but I do drink copious quantities of diet coke. Ever since my Uni days I've consumed several litres a day. Aside from wanting to cut down or eliminate this completely for my health, it also isn't very good for my wallet. Until recently diet coke typically cost around $2.40 for a 2L bottle, and I could stock up when it was on "special" for $1.69. However, it seems that Coca-cola has increased the wholesale price of their range (their excuse was increased sugar prices - which doesn't really make sense for "diet" coke!). All the major supermarket chains in Sydney have raised the regular price to around $3.30 for a 2L bottle, with the price on "special" only dropping to $2.49 these days. Even buying only on special this means that the cost has gone up by 50%, which will cost me around $600 extra each year. Time I tried to quit drinking diet coke "cold turkey" and switch to just drinking filtered tap water and the occasional cup of tea.

Enough Wealth

Saturday 21 April 2007

Pay Per Post is buying Company "X"

In yet another mysterious (ie. publicity seeking) pre-event announcement, Pay Per Post - the most admired provider of online ads in the known universe - has announced that next week they will announce that they've bought another company. Hopefully it is a sensible match for their current online advertising business - perhaps Blogsvertise, ReviewMe or a similar company (then again, I'm not sure which companies may already own each other). In terms of impact on bloggers I can only hope that this will mean additional avenues for monetizing blogs. It would also be nice if the opportunities this acquisition opens up are suitable for the smaller blogs - these are the ones with small, niche readerships, or perhaps are just starting out. At the moment the best advertising opportunities are, of course, only available to the more popular blogs with large numbers of readers. But it is the smaller blogs that would benefit most from the advertising revenue. I don't mind payment being proportional to readership, but at the moment smaller blogs are completely excluded from many advertising offers. Rather than paying flat rates (which makes small blogs unattractive to advertisers), perhaps they could introduce a pay-per-view system for smaller blogs to be able to take up offers that would normally not be available to them at all.

Adventures in Day Trading - day 3

DW the day trader, after getting off to a flying start, crashed to earth on day three. She opened a short position selling the AUD at 0.8341 on what appeared (to DW) to be the start of a down trend. Unfortunately, no sooner than she'd sold the Aussie dollar it started rising - slowly and with occasional tantalizing dips. By the time I got home from work the exchange rate was around 0.8350/52 and I suggested that she close out with a 11 point loss - which would just exceed the $100 "stop loss" she'd agreed to. However, the occasional dips were still giving her hope that she was right, and that the market would eventually come to its senses and behave the way she thought it should ;)

A little while later the rate had drifted up to 0.8355 and suddenly started to tick up quite rapidly. I stepped in and strongly encouraged she close position when the rate hit 0.8359, creating a $180 loss for the trade. DW still thought I'd panicked, but although the rate did drop back a little bit at various times in the next hour, it was definitely trending up rather than down.

After DW went to bed I stayed up watching the cricket world cup (Australia vs. NZ) and noticed that an up trend now seemed well established - so I went long at 0.8366. After continuing upwards to around 0.8370/72 the uptrend ran out of steam and I thought about closing the position for a small gain ($30), but left the position open as I was still watching the cricket and could check on the price every ad break. Eventually DW got up during the night to change DS2's nappy, and we watched the up trend resume. Eventually we got tired (Australia had NZ on the ropes at 7 for 140 or thereabouts, with NZ chasing 349, so the cricket had also lost interest), so we closed the position at 0.8372/74 for a reasonable $80 profit and went to bed.

So far our forex trades have a 75% success rate, but not sticking to the $100 stop loss limit was an expensive lesson for DW. Of course 4 trades are not indicative of any trading skill or lack thereof - once we've clocked up 100 trades we'll be able to see if we have a statistically significant deviation from the roughly 50:50 win:loss ratio you'd expect from random outcomes (actually, you'd expect to "win" less than 50% of the time, as CMC Markets is taking a $20 cut of of each round trip).

I believe that "successful" traders (allegedly exhibiting skill rather than luck) typically achieve around 65% winning trades, with their profitability depending largely on letting the winning trades run, and cutting losses ruthlessly according to a set trading plan. We'll see how things work out. Anyhow, with a $1000 starting stake, and now a $300 or so "buffer" to cover margins, DW should be able to have some fun trading before she runs out of margin and has to call it quits.

Trading so far (1% margin on $100,000 AUD/USD spot price)

Trade Capital Open Close Profit
Short (SELL AUD) AUD$1000 0.8369 0.8362 US $70
Short (SELL AUD) AUD$1000 0.8328 0.8296 US $320
Short (SELL AUD) AUD$1000 0.8341 0.8359 US-$180
Long (BUY AUD) AUD$1000 0.8366 0.8374 US $80

Overall US $290 (AUD$346.23 CR)

Enough Wealth

Friday 20 April 2007

Another Day another Dividend

An Interim Dividend of $160.00 fully franked (franking credit $68.57) arrived from Onesteel.

I also received the confirmation notice for the 113 Suncorp shares I'd bought for $15.50 in the recent share entitlement offer. As expected the stock price for Suncorp didn't drop very much from the dilution (probably not everyone took up their entitlement). They're currently trading at $21.60, so the offer price turned out to be a bargain.

Enough Wealth

Live Portfolio Updates in Sidebar

I updated my US stock portfolio spreadsheet using Google spreadsheet, and used the "publish" feature to create html code to display the current portfolio (with current prices linked into the google spreadsheet from google finance data) and performance in live tables in the blog sidebar. These tables will be automatically updated to show current prices, overall gain, and the calculated annualised return (using the XIRR function). It's quite a cool little tool, but I wish google finance provided data on the Australian market - currently they only supply data on the US, Japan and European markets.

US Stock Portfolio:


Enough Wealth

My Saving and Tax Rates

It's a bit hard to work out exactly what my savings rate is. Apart from my salary I also get dividend income from my stock portfolio, but the dividends are mostly used on paying interest on my margin loans. To simplify things I did a calculation of my direct savings as a percentage of my gross salary:

Saving stream % of salary
Employer Superannuation contribution 8.25 % (The 9% SGL as a % of total salary including the SGL)
My Superannuation contribution 11.62 % (as a pre-tax "salary sacrifice")
Other savings/investments 9.72 %
TOTAL Savings Rate 29.60 % of gross salary

I've included principal repayments off my portion of our home loan as part of my "savings" but haven't included the interest payments on our home and investment property loans.

I also did a rough calculation of what taxes I'm paying:

Federal - Income tax & Medicare levy 13.81 %
State taxes - Land tax & GST* 3.72 %
Local taxes - council rates 1.28 %
TOTAL Tax Rate 18.81 % of gross salary
or 31.17 % of taxable income

* although the GST rate is 10%, unprocessed food is GST-free, so the average GST on my grocery bills is only 1.86%

The federal tax is based on the tax rate applicable to net "taxable income". It's a bit misleading to quote it as a percentage of gross income, as it includes tax paid on dividend income. State and Local taxes are a function of consumption (GST) and real estate assets (land tax and council rates). As a percentage of my Net Worth my annual tax bill is a much more modest 1.51%. But this figure doesn't include taxes paid on superannuation fund earnings (@ 15%), superannuation pre-tax contributions tax (@ 15%) or any Capital Gains Tax (@ half my marginal tax rate, say 15%) on realised gains. However, if I move assets into my superannuation fund and only realise gains when it is "pension" mode (after age 60), there would be much less capital gains tax due.

We have no gift tax or death duties in Australia, which helps with intergenerational transfer of wealth.

Overall, it appears that income from all sources (salary, investment income, capital gains) ends up being taxed at around 15% on average, with little "double taxation" occurring (due to franking credits and no gift tax or death duties). And the new "simple super" offers good opportunities to greater reduce tax on capital gains by realising such gains during retirement.

Enough Wealth

Adventures in Day Trading - day 2

DW went solo with a spot AUD/USD trade today. Managed to make around US$300 profit! It seems so easy when things go your way, the biggest dangers are in getting overconfident and not sticking to your trading plan - ie. closing your position if things don't go the way you expect. We'll see how her trading progresses in the next few weeks. I suggested that she apply for her own CMC account to do her forex trades - there's no point in her continuing to use my account, as the profits are taxable at my marginal tax rate, which is higher than hers while she is on maternity leave.

Enough Wealth

Thursday 19 April 2007

Adventures in Day Trading - day 1

DW and I sat up for two hours with our shorted $100,000 AUD/USD spot price position open, watching the Aussie dollar drop from 0.8360 to a low of 0.8358 and then bounce around 60/62 for ages. In the end we gave up (the down trend seemed to have petered out) and closed the position with a net profit of USD$70.00

Of course DW started musing that "if I could make $50 a day trading while on maternity leave..." which I had expected. I'm not too worried that she'll get carried away and lose any substantial amounts of money, as she was happy to agree to call trading quits for the day if she loses more than $100 in a session.

It was funny that because the AUD had initially gone up a few pts after we opened our short position, and we had used the entire $1000 I had sitting in the account for the trade, we didn't have our margin covered for a short while at the start. This morning my email box had a "margin call" for AUD$23.89 which had apparently been automatically generated when we initially went into the red and didn't have the full $1000 margin covered. As we had closed out our position at a profit after a couple of hours I just ignored the email. It was my first ever "margin call", despite having used margin loans for my stock portfolios for over ten years.

It's interesting that I view trading differently from DW. I think that trading (especially synthetic trades like CFDs) is a zero-sum game, and any winning streak we have will be due to "luck" rather than any great trading skills. DW on the other hand imagines she will be able to trade profitably be anticipating market moves. Then again, when we occasionally visit a casino I'll stick to the $5 blackjack table and attempt to count cards to shift the odds in my favour, whereas DW carefully studies the patterns of numbers that have come up on the roulette wheel and can see "patterns" in the sequences of (random) numbers that have come up.

Perhaps DW's degree in economics makes her more likely to view random events as having some underlying, predictable basis, whereas my degree in applied science makes me view more of the things that go on in life as simple random, and unpredictable, events.

Anyhow, at the end of day 1 as a day trader, DW's account balance is AUD$1000 and USD$70 - for a total value of AUD$1083.64. If you annualise this out our ROI so far is around 3,100% pa! Perhaps I should start a "secrets of day trading success" newsletter ;)

Enough Wealth

Term Life Insurance

One part of personal finance that financial planners will always raise is the question of whether or not you have adequate insurance in place. Although planners may have a vested interest in getting you to take on more insurance (a large part of the first year's premium is usually paid out as a fee to your advisor), the question of insurance is vital for many people. In my case I increased my term life insurance to $400K after I'd got married and our first child was expected. This amount, combined with the balance of my superannuation account, would be enough to pay off our home loan and investment property loan. Without those regular repayments DW should be able to manage to get by financially. In Australia it is often most cost effective to take out life insurance through your superannuation fund, as the premium is competitive and will be paid out of "pre-tax" dollars. US readers can look up rates on term life insurance from

It's important to shop around for the best rates for equivalent cover (check any exclusions and provisions carefully) as there can be considerable variation, and it's important to find the lowest term life insurance rates.

The site has some useful information about the types of insurance, insurance terminology and some FAQs about how different life events (eg. divorce, poor health) can affect your decisions about life insurance. They also have a "Decision Maker" which is a series of questions to help you decide what type of insurance you need. You can also get quotes from the site to verify if they are providing affordable online life insurance.

Enough Wealth

Wednesday 18 April 2007

What Shape is your Investment Life Cycle?

Some simple scenarios I've run on excel to illustrate various retirement situations that might arise depending on how much one saves, rate of salary increases, ROI, and % of final salary spent each year during retirement. They're only meant as rough indications of how these variables can effect the final outcome.
General assumptions used throughout:
* all figures are in today's $
* all % are real, after-tax rates eg. to get the 5% ROI you'd have to make maybe 10% gross return.
* a $40K starting salary at age 20
* starts working F/T at age 20
* works F/T until retirement at age 65
* salary increases x% pa until age 54, then remains constant
* earns 20% of age-20 salary when 18, 25% of age-20 salary when 19 (eg. casual work)
* saves y% of gross salary each year (ie. any debt repayments student loan/home loan are in addition to this)
* spends p% of final salary each year during retirement phase

The Scenarios

ROI x% y% p% Comments
A 5% 3% 10% 100% "Typical" situation. Comfortable retirement with all NW consumed by age 80.
B 5% 2% 10% 100% Lower rate of salary progression. There is actually a residual NW at age 80
in this case as final salary (and hence pension) is lower as a % of starting
salary and savings in early years were thus relatively higher.
C 5% 3% 15% 100% A "PAW" - saves 15% of gross salary. Has a high NW at age 65 so ends up with a
large residual amount at age 80. Could either leave a large estate, or could
spend more than 100% of final salary during retirement years. (see D below).
D 5% 3% 15% 150% As above, but spends 150% of final salary during the retirement phase.
E 5% 3% 20% 100% "Super Saver" - consistently socks away 20% of gross salary while working.
F 8% 3% 20% 100% High-risk, high-return (8% real ROI), super-saver. This is my model ;)
I can meet the 20% savings target and so far have met the 3% real salary rise
and 8% real ROI hurdles. This is the most uncertain model as it would need
everything to work out in order to achieve 3% real wage rises and 8% real,
after-tax ROI for the next 20 years.

Enough Wealth

I must be getting [g]old

Reading through some of the previous posts I noticed that I've sometimes substituted words when typing these posts. For example, writing "every data" instead of "every day", and "under the water" instead of "under the weather".

I've never been good at proof-reading on screen, for work and uni I usually print out the final copy and do a final proof check of the hard copy. But I used to just find the usual typos - not discover that I was inserting incorrect words that just happen to sound the same as the word I had intended to write! Hopefully this is just a sign that I'm typing these posts too fast, and getting older, and isn't the first sign of some exotic neurological problem ;)

Enough Wealth

I'm a Day Trader!

Well, my theory about using CMC Markets Contracts for Differences to trade my US Stock portfolio at lower cost than via my broker was a non-starter. When I picked a short list of 6 possible stocks to buy from the "magic formula" list, none of them were available to trade via CMC Markets. So it looks as if I'll stick to buying US stocks through my Comsec-Pershing broker account for $65 per trade. Some kind folk have suggested some US online brokers that will open accounts for non-US traders, but they all required funds transferred in advance of trading, and by wire transfer. Wire transfers cost $30 each time from my Australian bank, so it would cost half as much as the Comsec-Pershing brokerage fee just to transfer the funds for each monthly trade. I could save on the wire transfer fees by shifting a large chunk of cash into the US broker account, but as I'm borrowing the trading funds at around 8% pa interest this also would cost.

Anyhow, having opened the CMC Markets account and funded it with an initial A$1000 it was ready and waiting when DW suddenly decided that the AUD had gone too high vs the USD and wanted to know how she could short the Aussie dollar. I told her she could use my CFD trading account and I did an initial trade selling $100,000 AUD vs USD spot @0.8369, just as an experiment to confirm that currency movements were affecting the open position in the way I expected. So far the AUD went up 4 ticks, costing DW $35, then dropped back down to 0.8365, making her a $35 "paper profit". I'll watch the currency movement on the live chart for a while before closing the position before I go to bed. I'll then explain what happened to DW tomorrow and let her have a go at doing a trade. Personally I think this is just like gambling (which DW enjoys on a small scale), which I don't get any pleasure from. I think this is going to turn out to be a lose-lose situation. If DW makes some money from trading she'll probably think it's an easy way to "earn" some money while on maternity leave, and will be at risk of suddenly making a big loss. If she loses a little bit she'll probably lose interest in it after a while. Either way I don't think this day trading lark will finish with us making any profit.

Hopefully this "entertainment" won't end up costing too much...

Enough Wealth

Tuesday 17 April 2007


I'm currently using a 3 yr-old Toshiba Satellite notebook as my main PC at home. I'd bought it after my previous Gateway PC died (OK, I was an idiot and plugged in a USB device upside down without looking and totally shorted out the motherboard. D'Oh!). The one I had before that was a "clone" Pentium-100 that I'd had for ages - it has been serving quite well as DS1's PC - he's only 6 so most of the software he runs works quite happily on a P-100. Unfortunately when I got home tonight I was informed that they'd had to turn it off when there was a "bang" and smell of smoke. I inspected the PC and all appeared OK, but the old VDU was smelling of smoke, so I think it's the monitor that has broken. I can probably pick up a replacement monitor for free as lots of people seem to put out old/broken PCs for collection when the bi-monthly council cleanup is on.

One of these days I'll buy a new desktop PC (probably a Dell) as I'd like to be able to edit and burn our home videos onto DVD and run some of the games I have. The notebook doesn't run most of my games as it doesn't have a suitable graphics card, and it only has a DVD player and CD-burner. I keep putting off buying the new PC though as each year they get cheaper and have better features. I've bought quite a few PCs since my first one (a Sinclair ZX80) and got a bit sick of spending a couple of thousand dollars every couple of years on a new PC.

Enough Wealth

Stocking up on Light Bulbs

The Australian federal government announced recently that they were going to ban the sale of incandescent light globes from next year, so that everyone switches to the new, energy efficient compact fluorescent ones. Supposedly they are much cheaper to run and their higher initial cost is less than the equivalent number of incandescent globes that would burn out during their lifetime. This sounds like a win-win with the emission of greenhouse gases being reduced while the consumer actually saves money in the long run.

I'll use the new fluorescents as much as possible (I already have half a dozen scattered through our house), but I think I'll also put in a stockpile of incandescent globes in the garage before they're no longer on sale. Why?
- unused, an incandescent globe should have an almost unlimited shelf life, and it's cheaper to have some of these sitting around as spares than the more expensive fluorescent globes.
- I have a mix of screw thread and bayonet light fittings in the house. I've only seen compact fluorescent globes with the modern bayonet fitting, and it may be difficult or impossible to get them with screw fittings. I'd rather not have to replace light fittings just to be able change light globes.
- I can cobble together a generator from some wire and an old bike - so in a disaster I could always get lighting setup using incandescent globes. Doing the same with compact fluorescents would be much harder as they don't work with DC and need 240V (as far as I know).

Enough Wealth

Monday 16 April 2007

Financial Miscellany

A day of financial odds and ends. The Australian stock market powered up to new all-time highs early in the morning, so I decided to purchase another 4 XJORT S&P/ASX200 20-Dec-2007 5500 PUT Options - as the market goes higher the cost of the PUT options drops, so the same options that cost $1580 each back on 9 FEB, today cost me $960 each. I now have a total of 7 PUT option contracts, which would offset around 2/3 of any losses my Australian stock portfolio would suffer if the market crashed below 5,500. Below 5500 the contracts are "in the money" and are worth $10 for each pt the index drops below 5500. Above that level the value of the contracts will diminish as the expiration date (20-Dec) approaches. But they still mirror that movements in the market, so I have some "insurance" if the market suffered a correction in the meantime. A look at the All Ords index for the past 25 years shows that we're above the long-term market trend. Although the pundits say the market isn't overpriced on current p/e rations, that could quickly change if the world economy slowed or there was some significant global crisis.

Aside from buying the PUT options I also phoned the plumber to query the $800+ bill for clearing out a blocked drain. The owner said he'd check into it and get back to me.

My mother is thinking about cashing in her retirement fund (she deposited $119,865 of the proceeds from selling an investment unit back in 2004 in order to reduce the amount of capital gains tax payable). $91,149 of the $119,865 was tax deductible, so it had 15% contribution tax ($13,672.31) applied when it was deposited into her retirement fund. The balance of the contribution ($28,716) was undeducted, so there was no contribution tax due. Unfortunately the capital gains realised on the unit sale meant that her overall adjusted taxable income (ATI) was high enough that a superannuation surcharge was also charged ($13,216.60). So the overall tax saving was not very large, but every little bit helps. Anyhow, her balance has grown to $139,078.74 - an annualised ROI of 11.86%. Her retirement fund has a pretty aggressive investment mix for someone in their 70s - mainly due to the fact that the balance of my parents assets are in cash or real estate, so this component can be overweight in stocks.

Some more dividend statements were waiting in the mail when I got home - $49.70 from Rio Tinto and $498.00 from Sims Group. Most of the dividends I receive end up going towards the interest on my stock portfolio margin loans. I only have a few DRPs in place - those where the number of shares issued gets rounded up to the next whole number of shares.

Enough Wealth

CC Arbitrage Hiccup

The monthly statement for one of the Credit Cards I used for 0% balance transfer arbitrage just arrived. I somehow managed to misjudge and overpaid the amount required to clear the balance just before the 0% period ended. The amount overpaid was one minimum monthly payment - so I now a $240 credit on a CC I never use. Ah well, I'll just have to use this card to pay a couple of grocery bills at the supermarket. This will teach me to double-check the final amount required to clear a CC at the end of a 0% balance transfer period.

Enough Wealth

Saturday 14 April 2007

Investing as a Hobby

Do you prefer white wine or red? Collect HO or N gauge railway models? Do you prefer actively managed funds or index funds? Stocks, Bonds or Property?

I must admit that to a large degree I treat investing as a hobby. I enjoy reading through the weekly investment lift-outs in the newspapers, read investment magazines and surf the web looking for the next "millionaire in the making" article. Even if a lot of it doesn't teach me anything new, or I don't agree with the viewpoint, I still enjoy spending my time "playing" with my investments and reading about investing. Just as I enjoy reading about scuba diving sites or model railway layouts. Sometimes I'll even open up a new investment just for the fun of it.

Another thing in common with my other hobbies is that to some extent I accumulate net worth just for the sake of it. My retirement fund is on track to support me when I choose (or are forced) to stop working for an income, and although my other investments have theoretical performance targets, and target amounts, I'm not saving for any particular items or expenditures.

For me, saving and investing my money isn't all about deferred expenditure for some future purchase. For me the act of investing is an "experience" or "consumption" in and of itself. The only strange thing about this particular hobby is that often the more you spend on buying fancy new investments, the more you can afford to indulge your hobby in the future!

One mildly worrying thing (OK, it doesn't actually worry me at all) is that many people apparently view collecting money as a hobby as an undesirable behaviour. While gathering money to "keep score" may be OK for businessmen (ie. investing as a sport), it is viewed as unwholesome to accumulate money "for it's own sake". Some people continue to have a phobia about being poor even when they are, by most measures, already rich, and thus end up taking frugality to extremes and becoming the stereotypical Scrooge McDuck. I'm sure many well-balanced people enjoy the simple pleasure of watching their net worth increase over time. And you don't have to justify it by saying that you're saving for that round the whole cruise you've always wanted, or intend leaving your millions to a charity in your will.

Enough Wealth

What's the Best Investment Asset Mix for a Baby's Retirement Fund?

I'm not sure, but the investment options I picked for the Personal Superannuation account I opened for DS2 on 10 Nov 2006 (DS2 was born last September) were:
Initial Current
ING Global Emerging Markets - Entry Fee 10% 1.4382 1.52460
OptiMix Geared Australian Shares Entry Fee 30% 1.2060 1.38040
OptiMix Global Smaller Companies Shares - Entry Fee 10% 1.6289 1.73940
Vanguard Australian Shares Index - Entry Fee 20% 1.2370 1.38410
Vanguard International Shares Index - Entry Fee 20% 1.2491 1.25220
Vanguard Property Securities Index - Entry Fee 10% 1.2090 1.33700

The entry fee for the ING OneAnswer Personal Superannuation scheme is quite hefty (around 4%), but doesn't matter as I made the investment application via Count who rebate the upfront fee 100%.

Total initial investment was $1000, with quarterly additional investments scheduled to start from next July. The current value of the investment is $1,091.

When DS2 is older I'll help him find a casual job, such as delivering letter box junk mail on the weekends. Although it is quite easy for kids to earn some pocket money doing odd jobs, it's a much harder task finding a "real" casual job for the under-15s. The benefit of having such a job (apart from the life lessons around working, earning money etc.) is that if he earns more than 10% of his income working for an employer he can make an undeducted contribution of up to $1000 each year and get a government co-contribution of up to $1500 per annum.

I already did this for a couple of years with DS1 while he had a job doing a paper round. Boosting retirement savings at such an early age should have a huge impact on their final benefits, as they have 60 years for the magic of compounding to do it's thing.

Enough Wealth

Thursday 12 April 2007

Reviewing Net Worth Progress

Apart from a monthly update using NetWorthIQ, I also update a spreadsheet with my net worth data each data. I get daily values for my stock portfolios, margin loans, and retirement fund. The real estate valuations and mortgage loans are only updated monthly. This suits me as it only takes a few minutes each morning and its fun to see the daily gyrations in the various values. I find that I've gotten used to daily ups and downs, so that even fairly large "crashes" don't worry me as I treat it as just part of the "noise" in my investment returns.

My retirement fund is pretty well on track to provide for a comfortable retirement, so what do I compare the total NW to? I've chosen a couple of indicators that are shown on the chart below.

Firstly, I've used a logarithmic scale for the chart, so that projected ROI of 7%, 10% and 13% are straight lines. These values are my personal view of what would be "poor", "likely" and "good" returns over the long term for my ideal asset mix - assuming an inflation rate averaging 2.5%. The grey scale at A$1m is adjusted for the actual CPI data from 2002 to 2007, and projected forward at an assumed rate of 2.5%.

Secondly, I've plotted available data from the annual HILDA reports to show what the top 10% NW is for a single-person of my age at that year (actually HILDA only reports household data, so I've taken half the household value as an approximation for the single-person NW).

Thirdly, I've plotted available data from the annual HILDA reports to show what the top 25% NW is for a household with head of household of my age at that year.

Finally, I've plotted 1/100th of the annual BRW "Rich 200" list cut-off value. I scaled it to 1% so the figure is in the region of my NW. I think that the annual cut-off figure of the "rich list" is a good indicator of what returns the best investors are actually each year - with some upward bias as those whose do badly drop out of the "Rich 200" list, and more successful investors are added to the list.

Overall I'm quite happy with how my NW has been tracking in terms of both absolute return (averaging more than the expected ROI of 10%pa) and in comparison to the "rich list". In fact I've slowly been creeping up on the "rich list" data points - at this rate I might make it on to the list if I live another 200 years or so!

It's rather depressing to see how the NW of even the "top" 10% and 25% of Australian households has been progressing - it seems to be keeping pace with my "poor" average ROI of around 7%. This is probably due to "choice" of asset mix these households are making -most likely just a stake in their own home, a mortgage, and their compulsory superannuation being invested in the default "balanced" option. It would be interesting if the HILDA studies included details of asset allocations.

It will be interesting to track my continued progress against these "KPIs" in future years - since 2002 we've had the real estate boom go bust in Sydney, while the stock market has had a phenomenal bull run for the past 3-4 years.

Enough Wealth

Wednesday 11 April 2007

Turning Lead into Gold

The bill from the plumber arrived today for clearing out our blocked sewer pipe. I'd initially expected it to cost a couple of hundred dollars, as he'd done the job before and I think it cost around $400 that time, which had included installing a new access pipe to "make the job easier next time". I started to suspect it wouldn't be all that cheap when I initially talked to him via mobile after he first arrived at our house. When I mentioned the access pipe he'd installed last time, he said that this time the blockage was in a different spot connected to the other bathroom. He also asked for the drainage diagram, which is never a good sign for a supposedly simple job.

It turned out that the diagram we had from the house purchase was out of date, and didn't include changes made after the house was built. So after digging around the back of the house looking where he thought the pipe might be, he went away and promised to come back after looking up a copy of the new diagram. When I had a look the next evening after he'd finished, I noticed the neat new cement work where he'd added in a permanent access port to the pipe he installed last time, and also the repair job he'd done to the paver he'd dug up looking for where the pipes might be. When I commented to DW that the cementing was very neat, but I hated to think how much it would all cost, DW replied that "Oh, that shouldn't cost anything as he guessed wrong about where the pipe was" - I didn't say anything, but....

Anyhow, the bill came to $832.15 (!) - $50 service call, $65 plant hire (don't they have their own gear?), $573.50 labour, and $68 materials (some cement and a new garden tap).

The funny thing is that the job sheet shows that the blockage turned out the be immediately upstream of the Inspection Opening that he'd installed last time - which I mentioned to him when he first arrived. But what would I know, I'm not a plumber.

Enough Wealth

Tuesday 10 April 2007

US Stock Trade and "Little Book" Portfolio Update - APR 2007

This month I selected Optimal Group (OPMR) from the MagicFormula listing to add to my "Little Book That Beats The Market" Portfolio of US Shares (100% geared). I bought 600 OPMR @ $8.48. My US Stock Portfolio currently stands as:

Symbol P/E Last Shrs Trade Date Paid Comm Value Gain
HRB 28.89 21.03 200 28-Jun-06 24.16 130 $5,103.75 -$889.62 -14.84%
MOT 12.07 17.65 265 24-Jul-06 18.98 130 $5,675.59 -$557.68 -8.95%
MSFT 24.42 28.57 200 21-Aug-06 24.64 130 $6,933.62 $823.79 +13.48%
ASEI 22.88 52.60 100 18-Sep-06 49.51 130 $6,382.72 $244.97 +3.99%
PWEI 6.55 32.86 150 13-Oct-06 33.29 130 $5,981.07 -$208.27 -3.36%
OVTI 14.61 12.49 300 13-Nov-06 16.47 130 $4,546.78 -$1,578.82 -25.77%
EPIQ 14.05 22.15 320 11-Dec-06 15.65 130 $8,600.90 $2,393.97 +38.57%
CRYP 14.02 25.34 200 10-Jan-07 23.92 130 $6,149.74 $214.62 +3.62%
VRGY 48.43 25.23 270 14-Feb-07 18.29 130 $8,266.11 $2,143.75 +35.02%
KG 16.77 19.96 260 7-Mar-07 18.49 130 $6,297.29 $333.78 +5.60%
OPMR 16.89 8.48 600 10-Apr-07 8.48 130 $6,174.01 -$130.00 -2.06%
11 symbols Total(AUD): $70,111.57 $2,790.49 +4.15%

The commision amounts include an allowance of another $65 for selling costs. There is no allowance for dividends received (around $300) or interest paid on the Portfolio Loan (currently around $400 a month).
At the moment the performance of this portfolio is largely governed by what individual stocks I have selected (semi-randomly) from the Lists generated on the website. For example, in the first trade I was tossing up whether the buy H&R Block or Hasbro toys - in the end I chose to purchase HRB (which has dropped nearly 15%). HAS in the same period has gained in price. Over a period of several years, once I am fully invested (with a portfolio of 18 stocks), the performance of my particular portfolio should be more in line with what can reasonably be expected from application of the "Little Book" methodology.

I'm quite happy with how the portfolio is performing, especially as the above figures are in AUD and the portfolio is held in USD. With the AUD hitting a 16-year high today, my foreign exchange losses have impacted the ROI to date quite significantly.

I was going to "mirror" my US stock purchases with CFD purchases of equivalent value via CMC Markets, but none of the US stocks I was considering adding to the portfolio today are actually traded by CMC Markets. I may either use the CFD trading the hedge my currency exposure, or perhaps use it to by a core index holding of QQQQ or Russel2000.

Enough Wealth

Net Worth - PF Bloggers progress for MAR '07

Here's the latest round-up on how the various PF (Personal Finance) bloggers who post their Net Worth each month are progressing.

Monthly Net Worth of PF Bloggers for MAR 2007:

Blogger Age Net Worth $ Change % Change
Accumulating Money 2x no Feb data no Feb data N/A
Blogging Away Debt 2x -$33,791.00 $2,311.00 6.4%
Blunt Money 2x $235,688.70 $3,373.42 1.4%
Consumerism Commentary 30 $87,999.49 $10,680.04 13.8%
Crazy Money 27 $248,085.00 $7,529.00 3.1%
Enough Wealth 45 $1,070,998.00 $4,210.00 0.4%
Financial ladder xx $152,120.85 $8,601.65 6.0%
Finance Journey 25 $153,888.00 $2,261.00 1.5%
It's Just Money 32 $163,908.024 $4,667.58 2.9%
Lazy Man and Money 2x $169,009.00 $1,869.00 1.1%
Make love, not debt 2x -$60,964.42 $3,213.85 5.0%
Making Our Way 37 no Mar data no Mar data N/A
Mapgirl 3x $42,647.00 $3,664.00 9.4%
Moomin Valley 4x $417,195.00 $11,137.00 2.7%
Money Blog Site 25 no Mar data no Mar data N/A
My Money Blog 28 $133,672.00 $7,147.00 5.6%
My Open Wallet 37 $326,997.00 no Feb data N/A
Savvy Saver 27 $194,039.00 no Feb data N/A
Seeking Wealth xx $20,089.63 $3,136.80 N/A
Tired But Happy xx $145,292.00 $5,415.00 3.9%

nb. Some ages have been adjusted as follows:
exact age provided = listed as given
"20's" = listed as 2x
"early 20's" = listed as 22
"mid-late 20's" = listed as 27
and so on.

Please note - I'm still under the water (coughing up phlegm and feeling lousy), so I only updated the existing blogs in my list. If you sent me an email requesting to be added, I haven't forgotten you - I've just chosen to go to bed early, rather than add you to the list this month. Check back next month.

If anyone notices the N/A recorded for % change where dollar figures were listed last month and this month, it's because % change is not very meaningful where your net worth is very small - I generally don't bother including % change if your net worth is between -$50K and +$50K.

I've deleted a few blogs from the list that are either inactive or no longer post net worth updates.

Enough Wealth

Sunday 8 April 2007

Tax and the Joy or Franking Credits

I've started working through the last ten years of my tax returns to collate all the DRP and BSP stock issues, so I can get my stock transaction records up to date and estimate how much capital gains tax I'd have to pay if I liquidated my stock holdings to contribute the money into my SMSF next financial year. I took the opportunity to entry all the dividend information I've received so far this financial year. It was interesting to note how the total dividends received each year has slowly increased (this is partly due to buying some extra stocks as the bull market has reduced my margin loan gearing, and allowed me to purchase some additional stocks and retain a LVR of around 50%-60%). My records also show how more companies have paid fully franked shares in recent years - the % tax paid on dividends has slowly increased towards the 30% company tax rate:

Tax Year Dividends Franking Grossed Up Dividends Taxable Avg Income
Received Credit Dividends % Tax Paid Income Tax Rate

2003/2004 $10,039.90 $3,364.34 $13,404.24 25.1 % $60,396 25.3 %

2004/2005 $11,202.95 $4,000.30 $15,203.25 26.3 % $47,996 22.0 %

2005/2006 $12,954.82 $4,864.30 $17,819.12 27.3 % $56,078 27.3 %

2006/2007 $10,745.22 $4,017.47 $14,762.69 27.2 % $??,??? 2?.? %

This also shows how my taxable income has stayed the same or decreased slightly while my salary has actually been going up. This is mainly due to the size of my margin loans (and hence tax deductible interest) increasing in relation to my salary.

I don't know what my taxable income will be for this year - I usually pre-pay 12 months worth of my margin loan interest in June to bring forward the tax deduction. I may not prepay as large an amount this year, in case I wish to sell of most of my geared stock portfolio to reinvest the funds into my SMSF.

* The figures for the current tax year, ending 30 June, are not yet complete

Enough Wealth

Saturday 7 April 2007

Frugal living: Easter Eggs

Easter Eggs are often a very expensive way to buy mediocre chocolate, but one way to join in the fun without breaking the bank is to wait until next Tuesday to buy. Some stores were already advertising Easter chocolates at 20% off on Saturday - desperate to sell their stock before Sunday. If the pattern of previous year's persists, come Tuesday the stores will be full of Easter Eggs at 50% off.

Of course the traditional method of having cheap Easter eggs is to use food dye and non-toxic paints to colour and decorate hard-boiled hen eggs. This is actually a fun family activity, and a healthy alternative to overdosing on chocolate.

Enough Wealth

How to Pay $0 Income Tax on an Income of $100,000

One of the catchiest phrases I ever heard at an "investment seminar"* was "tax is optional". Despite the common confusion between legal tax minimization, and illegal tax evasion, there are some relatively straight forward methods to protect one's hard earned income from the ravages of taxation. Now, the following is simply a couple of scenarios I've been thinking about, it is not professional tax advice as a) I'm not qualified to give any, and b) you'd be an idiot to base your investment planning purely on something you read on a blog - always check it out yourself against reliable reference material, or get professional advice. Having got past all the disclaimers, let's look at a few rough examples.

a) The obvious one - if you're over 60, come 1 July this year the new "simple super" legislation will make all income coming to you from your superannuation fund tax exempt - it doesn't even have to be included on any tax return you fill in. Hence retirees with adequate retirement savings will easily be able to pay no tax on a $100,000 annual income if it's coming to them from their taxed super fund.

b) If you're earning $100,000 salary in Australia the 2006/2007 tax rate for a resident single person would mean you normally would pay $27,850 in income tax (not counting the medicare levy), leaving $72,150 after tax income. This could be reduced to zero by arranging a salary sacrifice of %92,500 into superannuation. This would reduce your taxable income to $7,500. The tax rate on the first $6,000 of income is 0%, and the $235 low income tax offset would mean you could earn at least $7,500 taxable income without actually paying any income tax. Of course you'd probably need some other way to finance your living expenses if you reduced your taxable income to only $7,500! There is also the superannuation contribution tax of 15% on salary sacrificed contributions, so to some extent you'd simply be replacing $27,850 income tax with $13,875 contribution tax. This makes salary sacrifice of taxable income below $25,000 (the threshold for the 30% income tax rate) generally not worthwhile.

BTW This option would not longer be available after the new "simple super" rules come into force on 1 July - the max. salary sacrifice + SGL contribution total will be $50,000. And under the current rules, there is an age-based maximum that would make this option only work for older employees.

c) Have large tax deductions from investment interest expenses to reduce your taxable income to the extent that it entirely offset by franking credits from your stock dividends. This is theoretically possible, but would only be possible for some investors with large existing investment portfolios. For example,
Person X has a $1,000,000 stock portfolio yielding 3% ($30K) in fully franked dividends and earns $70,000 in salary. The stock portfolio averaging 6% capital growth.
If this person borrowed $2,000,000 via a margin loan at 8% interest and used it to expand the existing stock portfolio. The new situation would be:
$70K salary + $90K dividends.
Dividend franking credit $38,571.
Gross income = $198,571
Tax deductible interest = $160,000, paid for by salary and dividends.
Taxable income = 198,571 - 160,000 = 38,571
Tax on 38,571 = 6,921.30
Refund due = franking credit - tax liability = 38,571 - 6,921.30 = $31,649.70

The extra capital gain from the $2m extra invested is worth an average of $120,000. As it is eventually only taxed at half the applicable marginal income tax rate, the eventual after tax gain would be more than the decrease in current income.

Of course this would only work if you could live on $31K of after tax income, ie. you were going to invest $40,500 (56%!) of your after tax income anyhow. Otherwise you'd be short of income for living expenses.

Now, none of these options are practical or advisable for most people. And the ethics of paying nil tax is very personal - after all, someone has to pay for roads, schools, hospitals etc. And the use of gearing, especially using margin loans, increases risk - you may end up with investments that perform way below "average" during your holding period. But some combination of the above can be used to reduce the amount of income tax paid, provided you are currently spending less than you earn and are investing some "after tax" dollars.

There also some further benefits possible by lowering your taxable income - for example, reducing the amount of medicare levy payable, qualifying for the government superannuation co-contribution, and so forth. You have to be a bit careful if you are married with kids and getting some "family tax benefit" payments (A or B) - the rules for calculating income differ between the ATO and centrelink.

It's probably best to end with another catchy quotation - "tax reduction should not be the key factor behind any investment decision." After all, it's no good getting a big tax break on an investment that ends up worthless.

* ie. high pressure sales talk for an investment scheme

Enough Wealth

Friday 6 April 2007

Why Generation Y is Addicted to Debt

Just a quick link to an interesting piece in today's SMH about consumer debt:
Abstract Nouns are All Very Well

Enough Wealth

Frugal living: Reading Oprah's Book Club Selection for $0

While at home sick last Monday I heard mention that Oprah's selection of "The Road" was considered a bit unusual. I only took notice because of it's theme - I'm a SF fan and especially like post-apocalypse survivalist novels (I was actually a volunteer with the NSW State Emergency Service as "Intelligence Officer" for the Sydney Northern Division for about ten years, having been interested in civil defense at the time).

I read the short extract available online and it piqued my interest enough to enquire about it at the local bookshop at lunchtime. It was in stock (actually on sale at $28, reduced from $32 - still too expensive for my taste, especially as it is quite a thin novel), so I read a bit of it "browsing" in the bookshop. I got up to page 122 during lunchtime, so I went back after work to finish it off. I found it very moving, but depressing. While reading it I thought of my family and how it is possible in disasters for all the love in world to be insufficient to protect you're loved ones - even if you die trying. [Warning: spoiler coming...] Fortunately the novel has a relatively happy ending, but the way the story unfolded a tragic ending would have been much more likely in "reality". It made my feel a bit better, but in my view the ending was a bit too 'Hollywood' for it to be deemed a truly great novel.

ps. I DO actually buy quite a few books (mainly investment ones) from this bookseller, so I didn't feel too bad about not buying the novel today. As for the author -there was no significant loss of royalty payment; If I hadn't been able to read it for free today, I'd have just waited 'til it was available from the local library.

pps. I thought about including an affiliate link to the novel in this post but that would have been TOO weird - posting about how to read the novel for $0, and at the same time trying the earn a commission out of one of my readers paying for the novel!

Enough Wealth

Applying for Our New Retirement Account (SMSF)

The paperwork from for setting up our new Self-Managed Superannuation Fund (SMSF) arrived in the post yesterday. A very thick envelope of "personalized" boiler-plate, with sixteen(!) little yellow tags showing where DW and I have to sign our names. I'll take a stab at wading through the details of the more relevant parts (the Trust Deed and the Investment Strategy) this weekend, between doing my university assignments and hiding Easter eggs* for DS1 to find, and hopefully we can get it all signed and sent back next week. Transferring DW and my super from BT super into the SMSF will save at least $1,670 in annual admin fees as far as I can tell**. I'll invest in the same asset mix within the SMSF as I had selected in the BT super scheme, just via Index funds instead of actively managed funds in some cases. If the capital gains tax liability caused by liquidating my stock portfolios isn't too high I'll also look at shifting my direct share investments into the SMSF as well, as there will be considerable tax savings over time within the super environment (especially NIL capital gains tax on super assets sold when the SMSF is in pension mode). You can't use gearing within a super fund (they're not allowed to borrow, except for very limited cases, such as when settling share trades) but, apparently it is OK to buy CFDs.

* They're actually lots of little packets of Trolli "bunny surprise" sweets (a bit like gummi bears), as DS1 is allergic to both milk and soy, so chocolate eggs are a no-no, even the "lactose free" ones. Just as well that he loves gummi bears ;)

** The SMSF admin fee is AUD$599 pa. The BT fund charges a $53 pa member fee, plus an admin fee of around 1.5% pa. Our employer has arranged for a "member fee rebate" of about 0.9% pa but this still means that on the combined balances of DW and myself (around $370K) we're currently paying a net admin fee of around $2,270 pa to BT.

Enough Wealth

Thursday 5 April 2007

A Table of Accounts

I started working on creating a nice looking "table of accounts" to provide a detailed, single-page snapshot of my fiscal situation. This was partly triggered by DW stating that "if you're hit by a bus I won't know what's going on with all your finances". I also want to have a more detailed "snapshot" of my accounts than my overall networth calculation provides. Although initially I'm just creating an excel spreadsheet to display the required information (see below), I'm toying with the idea of writing a .net application (either VB or Java) to display this info. The benefit would be that I could later on add in a webscraper object (eg. WebZinc) to automatically collect the latest figures off the internet (for nearly all the items), which would mean I'd only have to update some figure manually once a month (like my property valuation estimates, and some online data that has overly secure login methods). I don't think I have the time to start on such a hobby project at the moment though - I have some uni assignments due this weekend for the Master of IT and Grad Dip in Seconday Education courses I'm enrolled in.

One thing this chart already shows is that I have overly complicated my life by accumulated lots of surplus accounts in recent times. The three different margin lending accounts were opened as I evolved from starting with just a basic margin loan account to then adding one that also provider online trading access, and then to another from my home loan provider where the interest rate was at a slight discount. Most of the online savings accounts were opened just to get a small opening bonus, or accumulate some referral bonuses. And most of the credit card accounts were opened to make use of 0% balance transfer offers. There are also some cash management accounts that were automatically opened for me when I opened margin loan or brokerage accounts.

An interesting thing I've included which I don't normally consider, are contingent liabilities and contingent assets ie. Capital Gains Tax that would be due if I liquidated my stock investments (I'm still updating my stock transaction log, so I don't even know what this figure is at the moment), the value of my life insurance policy, a guestimate of possible inheritance (although this could easily end up being $0), and the current value of my accumulated annual and long-service leave which would be paid out if I quit my current job.

Enough Wealth

Wednesday 4 April 2007

Spending Money Like Waste Water

While I was home sick yesterday the plumber finished his second day of working to clear out our blocked sewer pipe. Apparently there is no accurate plumbing diagram for our house available (it was build about 40 years ago, and had some additions done before we bought it four years ago) so he had a few false starts digging around to find the sewer pipe. He said he'd send the bill, so I've no idea how much it will end up costing. I did opt for him just clearing out the blockage (tree roots) and coming back when/if needed again in a few years - the alternative was to reroute part of the existing sewer line outside of our house (for some reason it runs underneath our house), but this would cost around $1,500 and wouldn't guarantee we wouldn't get some more roots blocking a different section of the existing pipework anyhow.

I was back at work today and had an appointment with the dentist at lunchtime to repair a tooth that lost a large chunk out of it last week. The same tooth had root canal done a few years ago (around $1,000), and later on a repair job to fix a chunk of tooth that broke off the back of the tooth a short while later. This time a different part of the same tooth had broken off the front. The session cost $300 - $60 for two x-rays (my other teeth look fine, except for another molar on the other side that also had root canal done a few years back), cleaning, descaling, and fluoride treatment. Plus the actual repair job which "only" cost $90. Unfortunately the dentist recommended getting a crown done for the tooth asap, as it is badly cracked and won't last very much longer left as it is - this means the $90 repair job is only going to be used for a couple of weeks. I think she said the exact same thing two years ago when she made the last repair, so decided that it's time to "bite the bullet" and get the crown done. I've booked in for the two sessions required for the crown - it will cost around $1,400 for one crown! They have a nice, realistic tooth-like appearance, but at that price I almost expect solid gold like the "good old days".

We only have basic private hospital cover, with no dental cover, so this is all "out of pocket". I will get a 30% tax rebate for the amount of total "out of pocket" family medical expenses this tax year for any amounts above $1,200 or thereabouts. I may look into the cost of adding dental cover to our health plan, as the other molar that had root canal a few years ago apparently will also need a crown eventually. Plus DS1 has started getting loosing his baby teeth and has an overbite - so he may need braces or something later on. And DW doesn't have the best teeth in the world either...

I'll have to do a cost-benefit analysis based on the expected annual cost of the dental cover vs. likely dental work. I won't pay for dental insurance just on the off chance of needing some major work, as any emergency work (eg. from a car accident) would be covered by medicare in the public hospital system, and I've no interest in any "cosmetic" dental work that might be covered.

Enough Wealth

Tuesday 3 April 2007

Yippee, my form 1042S arrived!

There's nothing wrong with giving each form a unique ID number, after all the names of some forms like the "Foreign Person's U.S. Source Income Subject to Withholding" form don't exactly roll of the tongue. What amazes me is that even common forms (equivalent to our Australian annual "tax summary" statement) seem to get referred to by their "code name" eg/ "W2" or whatever.

Anyhow, back to the topic of this post - my 1042S arrived in the post today. It's really just of academic interest to me. As a non-resident I don't have to do a US tax return (as far as I know). The information provided is also of no practical use in filling in my Australian tax return (due after June 30). Even though there's a tax agreement between the US and Australia so I can claim a tax credit on my Australian return for any US tax already paid on my US dividends, the Australian system requires me to report all transactions in the Australian tax year (1 July - 30 June), so a Calendar year statement from the US isn't really much help. Also, the Australian return must list each individual transaction converted to the equivalent AUD value applicable at the time of the transaction. Theoretically this would mean looking up the exchange rate for the date each dividend was paid into my US broker account. But I'll probably just use the exchange rate that was applied to the funds I transferred each month to make my stock purchase - the variation in exchange rate will not have a material impact on the calculated amounts, as the totals for Jun-Dec 06 are only USD$60.25 in dividends and USD$9.04 US Federal tax withheld. As the Australian tax return often only requires whole dollar amounts for many items, the rounding error is likely to be much larger than any difference in exchange rate that occurred during a month.

I haven't quite worked out what my US broker is doing with my US dividend amounts - the first dividend sat in the cash account, and then was deducted from the amount due for the next stock purchase I made. However, subsequent dividends have simply accumulated in the cash balance of my US stock account for several months, and weren't credited against the amount due for subsequent monthly stock purchases. The amount is trivial, but it's still annoying to have a cash balance sitting in my US account unused and not earning any interest, when I then have to borrow that amount in Australia to pay for my next stock purchase in full! Hopefully when I start selling my first US "Little Book Portfolio" stock purchases at the end of the year (once they've been held 18 months) the amounts will be added to the current cash balance and be used to fund subsequent monthly stock purchases.

Enough Wealth

Net Worth Update

My Networth as at 31 Mar totalled $1,070,988 (AUD), an overall increase of only $4,210 (0.39%) for the month. My stock leveraged stock portfolios increased by a net 3.52% during March, and the estimated valuations for my share of our home and investment property increased 1.42% compared to last month, which is encouraging. The property gains were slightly offset by our mortgage loan balances increasing by a net $1,084 (0.30%) due to our monthly redraw of $3,500. We're redrawing some of our advance mortgage payments to help with our repayments while DW is on maternity leave.

The biggest negative for the month was a sharp drop in the valuation of my retirement account, which wasn't recovered fully by the stock market recovery - possibly some fee or tax liability was paid out during the month. The retirement account balance ended down $6,628 (2.00%) for the month. I'll have to check all the transactions for the month online to confirm exactly what was going on, but the online transactions are a pain to analyse - having half a dozen investment options (mutual funds) in my retirement account, each and every transaction is split into a separate transaction for each investment option. The easiest method is to download the relevant date range and import it into excel, then sort by transaction type and description and total up all the related items for each date to work out the total amounts being deducted for fees, insurance premium, fee rebate, tax etc.

Enough Wealth

Monday 2 April 2007

Demographic Disaster or Hype and Hysteria?

The Australian Treasurer today released an updated "Intergenerational Report", five years after the first report made official the looming demographic disaster facing government finances as the aging Baby Boomer generation reached retirement age, stopped paying taxes and starting drawing on the aged pension. The most interesting aspect from my point of view was the radical change in the projected situation in 40 years time (which is based on expected trends in life expectancy, fertility rates, retirement ages and workforce participation) compared to the previous report. Instead of a projected 50 Billion dollars a year (5% of GDP) budget deficit in 40 years time, the latest projection is for a more modest $35 Billion dollar a year shortfall - a reduction of 40%. This decrease was largely due to a slight increase in the fertility rate (whereas the original report expected the downward trend in fertility to persevere) and a slight increase in the participation rate, especially of older male full-time employees. It makes me wonder what situation will arise if, as is likely, the participation rate increases further. As there is apparently a large proportion of the Baby Boomer generation that has insufficient funds socked away for their retirement, it seems inevitable that more of them will have to continue working beyond their planned retirement age. Perhaps this will end up being a non-event. I'll see what comes out in the next update 5 years from now.

Enough Wealth