Margin lending dilemma

The end of the financial year is nigh, so it's once again time to decide whether or not to pre-pay the next twelve months interest. The main benefit of doing so is that if it's paid before 30 June the entire amount is deductible in this year's tax return. The other potential benefit of pre-paying the interest is that the interest rate is fixed, rather than being variable if you are paying monthly. There appears to be little chance of an interest rate cut in the next twelve months, but some possibility that the interest rate might increase another 0.25% or 0.50%.

Each of my three margin lenders is offering different interest rates for prepaying twelve months interest. St George margin lending is offering 10.25%, but because we have our home and residential investment property loans with them we are "gold" clients, so I get a 0.25% discount on the interest rate, bringing it down to 10.00%. Yesterday I faxed in the paperwork to fix and prepay the interest on $70,000, which is almost the entire loan balance on this account.

I'll probably also fix and prepay most of the loan balance on my leveraged equities account, but I'll leave about $8,000 at the variable rate so I can reduce the loan balance at any time if I sell off some odd stock lots that were left sitting in this account after some takeover activity. Leveraged Equities usually mails me a prepayment form in early June, so I don't yet know what interest rate is on offer. Hopefully it will also be 10% or less.

My third Australian stock account on margin is with Commonwealth Securities (ComSec). They sent out a prepayment offer last week, but the interest rate on offer is an exorbitant 10.35%! This account has my largest margin loan balance (just over $150,000), so I'll have to phone them and try to negotiate a better rate. If they won't come to the party I'll consider transferring the holdings to my St George margin loan account. I'd rather not have to do so, as it might trigger a capital gains tax liability. It might also be a hassle arranging for the Comsec loan to be paid out if the shares on that account are transferred to my St George margin account.

The higher interest rate charged by ComSec seems even more excessive considering that they don't pay any trailing fees to brokers (as I found out from YourShare when I arranged to get a 50% rebate of trails on my various investment and loan accounts by making them my nominated broker). If I borrow funds from St George rather than ComSec I would get a rebate of trailing fees worth around 0.15% in addition to the interest rate being 10.00% rather than 10.35%

The interest rates on my margin loans have increased from around 8% a year ago, to around 10% today. There's considerable risk that the overall ROI of my stock investments won't exceed 10%pa in the medium term, which would make the use of gearing an ineffective investment strategy. However, most of my Australian stock holdings include considerable unrealised capital gains, so I'm not keen on selling stocks in order to reduce my margin loan balances at this time.

If interest rates drop and margin lending remains a useful investment strategy, I'm hoping to be able to liquidate these holdings gradually during my retirement. Under the current superannuation rules my SMSF pension income won't be taxable and doesn't even have to be included on tax returns. This would (I think) mean that it wouldn't be counted as income when working out the marginal tax rate to be applied to any capital gains realised during retirement. On the other hand, the Rudd government has indicated that they want to include such retirement pension income in some social security calculations, so presumably the data would then be available to the ATO and might end up also affecting capital gains tax calculations.

It's a bit hard trying to make sensible decisions about taxation planning when the rules can change at any time. In fact, some Labor politicians have expressed a desire to do away with the current 50% CGT concession for "long term" capital gains, so holding on to my stocks could end up costing me a lot extra tax in the long run. Perhaps I should hedge my bets by selling off a portion of my Australian stock portfolio and use the proceeds to reduce my margin loan balances. Of course, if I want to do that during the next financial year I can't fix and prepay the entire loan balance. Decisions, decisions...

Subscribe to Enough Wealth. Copyright 2006-2008

I want to Lose weight and Gain income

A recent meta-study confirmed what many overweight and obese workers probably suspect - that they are discriminated against in the workplace. The meta-analysis of 25 studies showed that obesity could lower a woman's annual earnings by as much as 6.2% and a man's by as much as 2.3% - and that's if you manage to get past the job interview. However, the statistics also show that employers have good reason to be wary of employing obese workers. One study showed that between 1997 and 2004, obese workers filed twice the number of workers' compensation claims, had seven times the medical costs and lost 13 times the days of work from work injury or illness compared with other employees. And the study of 11,000 Duke University employees found that the average medical-claims costs per 100 employees amounted to $US51,019 for the obese, compared with $US7,503 for the non-obese. That's an extra $435.16 in medical costs per obese worker. So in one sense the lower annual earnings for obese workers are largely offset by extra medical benefits from being employed.

Even if being overweight doesn't directly reduce your income, the extra calories required to maintain a higher BMI cost considerable amounts of money. For example, when I last changed jobs nearly ten years ago I had been eating a healthy diet and regularly going to the gym for a couple of years. My BMI was around 24 - probably the best it had been since High School. Since then my weight gradually crept back up until my BMI was back into the obese range (around 31) the past couple of years. And although I'd stopped going to the gym since changing jobs (it was no longer conveniently located on the way home from work, and I had less time available once we started our family), I think most of this weight gain was simply due to eating too much junk food. The core of my diet is still the same as when my BMI was under 25, but I'd started snacking on confectionery in the afternoons and eating ice cream for dessert almost every day. This year I'm attempting to stick to my basic, healthy diet plan and get some regular exercises - but I quite regularly lapse into eating some extra junk food. For example, the confectionery and ice cream I ate yesterday cost around $8.80 and added an extra unwanted 1,200 calories. If I did this every day for a year it would cost me over $3,200 and add around 65 kg to my weight! Fortunately today I've avoided ANY junk food (so far), and went for a 45-minute walk at lunchtime. One day down, 364 to go (again)...

Subscribe to Enough Wealth. Copyright 2006-2008

Credit card scores and scams

Credit scores in Australia are an amorphous concept, with interest rates generally being pegged for particular products, rather than being varied for individuals based on their credit history. In the US "credit score" usually refers to an individual's FICO (Fair Isaac COmpany) score. It is generally based on the following information:

• payments history- 35%
  
• amounts owed - 30%
  
• credit history length - 15%
  
• recent new credit - 10%
  
• types of credit utilised - 10%
  

However, agencies differ in exactly how they calculate the score.

Apart from determining one's ability to get credit, and influencing the interest rate that will be charged, the FICO score can be useful in monitoring for signs of credit fraud. If your FICO score has fallen unexpectedly you should check your credit report to see if it shows any suspicious inquiries or unexpected accounts charges. One of the best methods of credit scam protection is to place a fraud alert on your credit report. This will (in theory) mean that every time someone applies for credit on your account you will be notified and can therefore detect illegal activity as soon as possible.

Subscribe to Enough Wealth. Copyright 2006-2008

Benchmarking against 'The Joneses'

Apart from the more conventional Asset Class benchmarking I discussed in previous posts, I also compare my total net worth with comparable peer groups (the "Joneses"). The graph below shows my total net worth (and the stock, real estate and retirement components) over the past six years, and compares it to two relevant peer groups.

The first is the "top decile" (10%) of net worth for Australian's my age (based on the 2002 HILDA national survey results, adjusted for age effects and assumed inflation of 4%pa). By this comparison I'm doing quite well, slowly moving past the top 10% of individual NW and heading towards the top 10% "household" value.

The second comparison I like is to look at how I compare to the cut-off for the annual BRW "Rich 200" list (the 2008 list just came out). This year the cut-off has increased to $200m (up from $180m last year). The plot below shows 1% of the "Rich List" cut-off (to make it comparable to my NW). I'm quite happy if I can keep pace with this particular benchmark, as the cut-off is slightly inflated each year due to population growth - 200 people is now a smaller fraction of the total investor pool than it was back in 2002. One would expect the 200 richest people in Australia to be collectively quite skilled at managing their investments, so my aspirational goal is for my NW to eventually surpass 1% of the BRW "rich list" cut-off. I'm quite happy to leave it up to my sons to try to make it onto this list ;)

I think it's interesting that although new people regularly make it onto the "rich list" through very rapid wealth creation (often speculative business ventures that come good), and other's drop off it just as suddenly (when their business empire collapses), taken as a group the wealth of these "super-rich" increases at a rate typical for a diversified, high-growth asset allocation.

Subscribe to Enough Wealth. Copyright 2006-2008

Revamping my US Stock Portfolio

After almost two years my portfolio of US shares is undergoing a face lift. I initially planned on buying a parcel of one US stock each month for the first year, picking my selections from a short list provided from the "Little Book that beats the market" website. I was then going to sell each position after 18 months and reinvest the proceeds in a new selection from the current listing. However, the stock market slump and movement in the AUDUSD exchange rate has produced woeful returns. I also managed to lose money on my AUDUSD forex trading! Rather than be tempted into day trading forex, I should have just gone long the AUD with a CFD for a similar amount as my USD portfolio. That would have hedged my currency risk (although costing a bit in CFD interest). By trying to profit from the currency trading I actually made a bad investment worse!

So, I've now decided to sell off my current US stock holdings, only retaining my 1 "B" share in Berkshire Hathaway, and a small parcel of Microsoft stock. Looking at the stocks I'm selling three have done extremely well, but five did very badly. Overall these shares are down over 10% in USD terms, and much more in AUD value:



This table doesn't have the AUD values of the stock sales yet, as the official ATO exchange rate for 27 May won't be published until June. I expect to make an overall capital loss of around $10,000 in AUD terms, so I might sell off some Australian stocks that have made capital gains and be able to offset the losses against the capital gains in this year's tax return. I can either use the proceeds of the Australia stock sales to reduce my margin loan balances (which with interest rates up around 10% aren't such a good idea) or else reinvest the proceeds on the next market dip.




I think I'll reinvest the proceeds in BRK.B stock - increasing my holding to 15 shares of Berkshire. My new theory is that Warren is probably better at picking individual stocks than I am, and he may be picking up some bargains in the current bear market (I think he was sitting on a fairly large cash position last year). I don't believe BRK.B pays any dividend, so the small Microsoft holding is needed to provide some income, and therefore make the interest on the investment loan I used to fund this account tax deductible. Investing in Berkshire seems a bit strange - I'm moving away from picking individual stocks myself these days, and investing in low-cost index funds instead (for example in my retirement account). With Buffet's incredible investment track record and advancing years it also smacks of chasing last years winner, which is a well-known *bad idea* ;)

Anyhow, I'll probably let this investment sit for the next ten years or so. Hopefully BRK.B outperforms the market, the AUD drops back against the USD over that period, and the interest rate on my investment loan drops back during the next few years so it's less than the ROI! At least by only having two stocks in this account (and only one paying a dividend) the paperwork for my tax returns will be slightly simplified. This account represents about 7% of my NW, and around 3.5% of my investment portfolio (including borrowed funds), so by itself it won't have a massive impact on my results over the next ten years.

Subscribe to Enough Wealth. Copyright 2006-2008

Tweaking my Portfolio Benchmark

The first attempt at creating a benchmark for my portfolio performance produced figures that pass the reasonableness test. But the benchmark would better represent my asset mix if I changed it from 50% Australian stocks to 30% Au stocks and 20% International. It still won't be an exact match the my portfolio, but it should be good enough to show if my particular investment choices (eg. specific stocks, particular properties in Sydney) are producing adequate returns for the level of risk associated with those asset classes.

Getting some additional data from the latest CBC FInancial Advisor's Investment Market Review provides the following benchmark:

Benchmark^:
50% - Property (Australian House Prices, Sydney median annual values from REIA)
30% - All Ordinaries Accumulation Index.
20% - MSCI World Shares Ex Australia, Accumulation Index in $A.

Data (Quarterly figures up to 31 Apr 08):

1-year 3-year 5-year
% pa % pa % pa
--------- ---------- ----------
50% Property - Syd 2.70% -0.99% 3.21%
30% All Ords Accum. -4.56% 17.39% 18.40%
20% MSCI World ex Aus. -14.46% 5.24% 5.86%

Overall, ungeared -2.91% 5.77% 8.30%

CPI 4.24% 3.22% 2.80%

Cash rate 7.10% 6.39% 5.99%

Approx Loan int rate 9.10% 8.39% 7.99%

Benchmark (50% LVR) -14.92% 3.15% 8.61%

My Portfolio -5.26% 8.06% 11.46%

Using this benchmark my portfolio performance looks much better! If nothing else, it shows that for a meaningful analysis of fund manager or portfolio performance you need to be referencing a valid benchmark. Of course, unless you're looking at an Index Fund (which attempts to minimise tracking error and fees), there will always be deviations from the benchmark caused by the investment decisions being taken. Hopefully the choices add the returns rather than reduce them. It's all too easy to create a drag on your portfolio performance by "churning" your holdings and adding unnecessary transaction fees.

Subscribe to Enough Wealth. Copyright 2006-2008

I haven't been scammed after all

The saga of the undelivered briefcase I ordered on 2 May concluded today. Paypal closed the claim after the merchant provided a refund of my USD$125.50 payment and issued an apology:

"Sorry about the delay in getting to you - I am the company director and have been overseas for the last 2 months. I have just come to realise my main IT person has left without telling me. I have issued a full refund and we apologise."

All's well that ends well - but it leaves me wondering if I'd have got such a good result if I hadn't claimed within the 45-day deadline imposed by Paypal. My previous attempts at direct contact with the merchant had failed to achieve any result. No wonder that the company was deregistered earlier this year - perhaps the company accountant had also left without the managing director noticing for two months ;)

This illustrates that it's not always a good thing that the internet provides a level playing field for small and large businesses - that attractive website might belong to a large, established company, or it just may have been thrown together last week by a talented uni student running his start-up business from the coffee table in his shared rental accommodation.

Now I just have to try to find where else I can buy the DICOTA laptop briefcase at a reasonable price. Just as well I've got a couple more months before I go on vacation.

Subscribe to Enough Wealth. Copyright 2006-2008

An attempt at benchmarking my portfolio performance

My investment portfolio is a bit like an old attic full of family "treasures" that have been accumulated over the years. And it often seems like I've managed to accumulate some wealth in spite of, rather than because of, my investment choices. Many of the investments purchased seemed like a good idea at the time, but don't form a sensible part of any overall asset allocation strategy. And, just as I always seem to pick the slowest queue in the supermarket*, I seem to have a knack for going ahead with some poor investments while deciding against the ones that eventually became "10-baggers".

So it would be nice be able to compare my actual investment performance with what I "should" have achieved, given my chosen asset allocation and level of gearing. Benchmarking my portfolio isn't a simple matter as my asset allocation is slowly changing over time (by buying an investment property and then our own home, I've started out with a lot more real estate in my investment portfolio than I'd really like. Over time this should slowly drop from 50%+, towards my target allocation of around 25%). It's also complicated by variations in the level of gearing that I have - the property mortgages are slowly declining, while the stock portfolio gearing tends to fluctuate around my desired gearing level (60% LVR) as I buy and sell particular investments:


A final complication is the irregular addition of savings to my investment portfolio. I aim to add around $30K pa in 'savings', but this comes from a variable mix of superannuation contributions, mortgage principal repayments, funding the negative cashflow of my leveraged stock portfolio, and some ad hoc new investments (such as paying for the T3 share installments).

To simplify things I assumed a constant $30K addition to my investments at the end of each year, and a constant overall gearing level of 100% (50% LVR). I've also assumed that the average cost of my investments loans is around 2% above the cash rate. A recent investment report from Count Financial Planning provides the required data for a rough benchmarking of my portfolio over the past 1-, 3- and 5-years:

Simplified^ Benchmark:
50% - Property (Australian House Prices, Sydney median annual values from REIA)
50% - All Ordinaries Accumulation Index.

Data (Quarterly figures up to 31 Apr 08):

1-year 3-year 5-year
% pa % pa % pa
--------- ---------- ----------
50% Property - Syd 2.70% -0.99% 3.21%
50% All Ords Accum. -4.56% 17.39% 18.40%

Overall, ungeared -0.93% 8.20% 10.81%

CPI 4.24% 3.22% 2.80%

Cash rate 7.10% 6.39% 5.99%

Approx Loan int rate 9.10% 8.39% 7.99%

Benchmark" -10.96% 8.01% 13.63%

My Portfolio -5.26% 8.06% 11.46%

" = ungeared rate + (ungeared rate - int cost of gearing).

The figures show that:
: gearing improved returns over 5 years, but has the reduced 3 year average return (due to the negative investment returns of the past 12-months).
: My portfolio did better than this rough benchmark over the past year, but didn't perform as well as I'd expect over 5 years. Probably because I had some international stock exposure in my retirement account which isn't reflected in this rough benchmark.
: Sydney real estate was not the best place to be invested over the past 5 years!

Since I'm not a fund manager, benchmarking my portfolio is really just for idle curiosity. If I ever get all my investment information up to date in Quicken I may have a go at doing this more accurately.


* There's actually a valid reason why you always seem to pick the wrong queue. If there are ten queues, you only have a 10% chance of picking the fastest line. So, 90% of the time you'll end up sitting in a 'slow' queue watching one of the others queues proceed much faster. It's just human nature to pay attention to queue(s) that are faster than yours, while ignoring all the other queues that are even slower than the one you're in! ;)

^ My current allocation includes a mix of Australian and International stocks, so the benchmark should probably be:
50% Sydney Residential Property
25% Australian All Ords Accumulation Index
25% MSCI world (ex-Australia) Accumulation Index.

My Target Allocation is something like:
10% - Cash/Bonds/Alternative (Hedge/Agri/Art/Gold etc).
25% - Property (Mix of direct investments and Listed Property Index)
35% - Aust Shares (Index)
30% - International Shares (Index)
but I don't expect to get to this mix for another decade or so, buy making additional investments only in those asset classes which are currently underweight.

Subscribe to Enough Wealth. Copyright 2006-2008

Should I count on an inheritance in my reitrement plans?

My parents gave me a copy of their Will today. They'd previously discussed their intentions with me, so the contents came as no surprise. They expect to have enough capital to provide a reasonably comfortable reitrement income, and are leaving me a small lakeside, rural property. They've owned that property since I was a boy, and I'd like to retire there. Living there and being able to rent out our current home would also provide extra income during our retirement, but I'll continue saving for our retirement without taking into account any inheritance. My parents could easily end up needing extra money during retirement, so I don't think it's wise to include an inheritance in my financial plans.

Subscribe to Enough Wealth. Copyright 2006-2008

How I saved a few bucks on domain name renewals

Four of the domain names I have registered via Dotster were due for renewal in the next month or so. The normal fee for one year .com domain renewal with Dotster is $15.45 but I used the "NVU" coupon code I found at retailmenot.com to get a 15% discount off the price - a saving of $9.27 for about two minutes spent searching for the discount code. Now I just need to find the time during the next year to create the websites for two of these domains that are currently unused. At a bare minimum I'd like to have enough useful content to establish them in the search engines and attract enough traffic to cover holding costs via some passive AdSense revenue.

Subscribe to Enough Wealth. Copyright 2006-2008

Where there's a will, there's a fee

My parents are in their mid-70s and in pretty good health, but they recently decided it was about time that they finally got around to making a will. I'd suggested they do this many years ago, but my father doesn't really like to make plans at the best of times - so planning for his own death wasn't on the top of his "to do" list. My mother likes to be organised, but always felt that there was no point in her making a will if my father didn't do his as well. They were also very wary of letting other people know anything at all about their personal finances (unlike me), and didn't like the idea of getting their wills witnesses by a couple of neighbours or friends (even though the witnesses don't have to be shown the contents of the will being witnessed, just be aware that it is a will and witness the signing and dating of the will).

They finally arranged an appointment to see a representative of the NSW Public Trustee when they were having a "free will day" at the local shopping centre last week. My folks got the draft of their wills a couple of days ago and went in to sign them at the Public Trustee's offices yesterday. Of course it's very rare to find anything that is really "free" in life - in this case while the will preparation is free, that's because it names the Public Trustee as executor. Apparently the fees the Public Trustee is allowed to charge are much higher than most solicitors can charge (there is a set scale of charges for solicitors fees up to granting of probate in NSW). The {Public Trustee charges 4.4% of the first $100K value of an estate, 3.3% on the next $100K, 2.2% of the third $100K, and 1.1% of the estate value above that.

So, for an estate worth, say, $500,000, the public Trustee fee would be $12,100 (plus disbursements). In comparison, I think the typical solicitor charges less than half this amount for the same value estate (although it's hard to find published fee schedules). An even cheaper option is to name a trusted relative as executor, who wouldn't charge a fee if they are a beneficiary. The process of probate is very legalistic, similar to property conveyancing, but shouldn't be too hard for most competent individuals. All the required paperwork for probate in available on the NSW Supreme Court website.

I did find one free DIY will tool online via the Aami insurance website. It didn't quite cope with my parents situation (as it doesn't allow for specific gifts in a will, only for the entire estate to be left to one person, or several people in equal shares) but it will be interesting to compare that version with what my parents obtained from the Public Trustee. At least the Aami "free" will tool doesn't automatically tie you to any particular trustee as executor (you can nominate one or more individuals as executor), although it does have a page attached that recommends getting a living power of attorney - and advertises the services of the law firm that provided the free will tool. I also used this tool to generate a simple will for myself, which I'll get my parents to witness on the weekend (since they're not beneficiaries).

Subscribe to Enough Wealth. Copyright 2006-2008

What happens when a 55 year old millionaire marries a 19 year old beauty?

I think the most surprising thing about the acrimonious divorce of tyre millionaire and ex-racer Bob Jane from his wife Laree is that the marriage lasted twenty years before coming to grief. I suppose having three teenage children made Mr Jane and Ms Jane stick it out for as long as they did. Allegedly Laree Jane was an "extravagant spender" who had owned 41 credit cards and could not live within an $800,000 yearly allowance during her marriage to the tyre tycoon.

After the couple separated Ms Jane was initially paid $30,000 a month for personal expenses. When the payments stopped she resorted to raiding the business bank accounts of the two tyre franchises operated by herself, her sister and her brother-in-law in order to pay off her overused credit cards. Her ex is now trying to terminate the franchise agreements of the two stores because they haven't paid hundreds of thousands of dollars of unpaid franchise debts.

The privately owned Bob Jane Corporation operates more than 150 Bob Jane T-Marts and outsells even the major tyre manufacturers in the replacement trade.

Subscribe to Enough Wealth. Copyright 2006-2008

My first taste of internet fraud?

I posted a couple of weeks ago about how I'd ordered a nice, new aluminium DICOTA briefcase for taking my new Dell laptop on holiday around Europe, and to replace my broken work briefcase. The order still hasn't arrived, and I'm beginning to seriously suspect I've been duped out of US$125. I tried phoning the contact phone number provided on the bargain.net.au website again today, but still only got a recorded voice mail. I left a message, but don't really expect to get a response.

I had already emailed their admin department to check on the delivery early last week, and didn't get any reply. Today I checked out the procedure for handling such problems on the Paypal site (since I paid using my Paypal account). I found another customer service phone number for bargain.net.au on the Paypal receipt for this order, so I tried that number. I was actually answered by a human being (an asian lady) who initially agreed that I was talking to bargain.net.au. But after I started outlining my problem with non-delivery of an order she changed tack and said that it was just a residential phone number and that I must have dialled a wrong number (she then quoted a different number from what I'd called). I know that I dialled the correct number (since it was visible on the caller id display), and when I rang back the same number a few minutes later it wasn't being answered - so much for 'customer service'!

Checking out the ABN for the company (provided on the Paypal receipt) and their "seller reputation" on PayPal I found out a couple of interesting facts:
1. They'd only opened their Paypal account in Feb 2008.
2. They had a reputation (number of successful purchases via Paypal) rating of zero! (Wish I'd noticed that before making my payment - D'Oh!)
3. The ASIC website search showed that the private company trading as bargina.net.au (SonicVision Media Pty Lid.) was deregistered in April 2008!

Based on this information I immediately lodged a dispute claim via Paypal. It turns out that you can do this only within 45 days of making a payment. However, the initial claim simply gets an email sent to the seller via Paypal (with the details of your complaint that you've typed in) and Paypal expect you to try to resolve the issue directly with the seller.

If you don't settle the dispute you can escalate it to be reviewed by Paypal. But you have to do it within 10 days, otherwise the claim is automatically closed and you can't reopen it or lodge a new claim for the same order!

When you escalate a claim Paypal will "freeze" the amount of your disputed order in the seller's Paypal account (IF they have enough funds sitting there!). Since I have severe doubts about this merchant and had already had no luck trying to contact them, I decided to escalate the claim an hour after I'd raised it. I'm just hoping that there might be some funds still sitting in their account. If I'd waited a couple of days and the owner (Jeff Lam) became aware of my phone call the 'customer service' number (which I think is his home number) and the initial claim notice from Paypal he might have cleared out any funds sitting in his Paypal account. I really wish that when you escalated a claim on Paypal they displayed the amount that was able to be "frozen" in the merchant account - at least you wouldn't have to wait ten days to find out that PayPal wasn't going to be able to provide a refund.

Anyhow, I now have to wait and see if I get any response from the merchant regarding delivery of my order, or get offered a refund. If bargain.net.au doesn't respond to Paypal's enquiry within 10 days Paypal will automatically decide in my favour. Unfortunately only eBay purchases are subject to the A$3,000 Paypal purchase guarantee. As the purchase wasn't made via eBpay I'll probably only get as much money back off PayPal as was sitting in the merchant's PayPal account when the "freeze" got applied. Perhaps nothing at all.

If I do end up being out-of-pocket the US$125 I think I'll lodge a complaint via NSW Fair Trading (the merchant is located in Sydney), and possible even make a fraud complaint to the police IF it turns out that I've been ripped off. I have the IP address (and hence the whois and host details relating to the bargain.net.au website), so if nothing else I might at least be able to get the plug pulled on the website so that other consumers don't get stung.

Subscribe to Enough Wealth. Copyright 2006-2008

CFD trading platforms

I use CMC Markets for trading Forex, but there are many different CFD trading platforms out there. One of the CFD Providers available to those wishing to trade contracts for difference in the UK is One Financial. This online stock market trading broker provides all the major CFD markets, and has good coverage of energy, forex, hard and soft currencies, international indices, stocks and ETFs.

They claim to have some of the tightest spreads, lowest margins and fastest execution available in the market for trading CFDs with their award winning browser-based trading software. It provides free charting, news, and analytics. And users can access 24 hour customer support via chat, phone or email.

The easiest way to compare stock trading programs is to take them for a test drive. So it's nice to be able to sign up for a demo trading account in a few seconds with minimal information. The email with my demo account login and password hadn't arrived after an hour, so there is probably some human vetting of demo account requests involved. I requested a demo account with the minimum $10,000 balance, as that is similar to the amount (A$5,000) I trade for real. "Paper trading" is a good way to get used to the tools and practice implementing your trading plan (eg. stop and limit settings, trade size compared to total margin), but it's not the same a trading money for real. By using a demo account balance close to reality you can get a better impression of the potential gains and losses you may experience during trading CFDs. If nothing else it's good fun to experiment with CFD trading strategies using a demo account - when my demo account email arrives I think I'll let DS1 have a play with the account and learn about charting, calculating profits, and the various trading markets.

Subscribe to Enough Wealth. Copyright 2006-2008

Is Savings Rate or Total Return more important in reaching your investment target?

I've recently read a couple of posts discussing whether your investment returns or amount of savings has a bigger impact on your final portfolio value. The analyses provided showed that for periods up to 20 years or so, having a large savings rate ($10K pa instead of $5K pa) had a bigger impact than doubling the ROR from 4% to 8%. My initial response was that this was true looking at a 20 year time frame, but over longer periods the ROR ended up being much more important - especially since your savings become a less and less significant part of your total annual NW increase once your portfolio value grows to 3-4 times your annual salary.

I was looking at a comparison of Moomin's monthly net worth figures since 2003 compared to mine, and found that although his NW had increased eight-fold in the past 5 years while mine had only grown slightly more than two-fold in the same period, our NW had moved almost in parallel over this period:



However, the same monthly dollar change in NW represents a much better performance when you're starting out from $60K than it does starting from $480K ! I then did some quick calculations to compare what average total ROI would be needed to model Moomin's result and mine. It turned out that with the same annual savings rate of $30K my portfolio result can be explained with an average annual ROR of 12% and that of Moomin with the same savings rate and a much higher ROR of 23%!



However, although Moomin appears to be a better investor than I (he definitely takes a more professional approach) the ROR seemed a bit high. So I then had a look at what would be the result of a lower ROR but higher annual savings rate. Using the same $30K annual savings rate and 12% ROR for me, but higher savings rate ($45K) and more modest ROR (15%) for Moomin, I get a chart that appears to model the actual results just as closely (I haven't bothered doing any statistical analysis though):



While I think my annual savings rate averages around $30K pa during this period, I have no idea what Moomin's average savings rate has been - although I'm sure Moom knows exactly what his ROR and savings rate are ;) - so I can't tell which model is more realistic. But the point is that the same results can be obtained (over this short time frame) by EITHER getting a higher ROR OR by boosting the savings rate.

As risk is directly related to ROR, it would appear that boosting your savings rate is a more prudent method for achieving your investment goals. That is, trying to cut expenses and increase income in order to boost your savings is a much more certain route to wealth than shooting for amazing investment returns. However, as your NW becomes much larger than your annual salary it becomes more and more important to attain the maximum investment return commensurate with the level of risk you are comfortable with, and to minimise fees and charges.

Subscribe to Enough Wealth. Copyright 2006-2008

Suddenly, they stopped saying this was a repeat of the Great Depression...

Just over a month ago I posted that my NW had dropped back below A$1m (for only a couple of days as it turned out). At the time there was a whiff of panic in the air, with some mainstream media starting to muse that "this time" we might be in for another bout of stagflation (like the 70's), or that we may even have a depression not just a recession - perhaps a worse depression than in the 1940's...

A month later my NW has rebounded almost 10% from it's recent lows (wouldn't you love that rate of gain to continue for another couple of months), and it looks possible that my NW could set new highs by the end of this year (though I doubt it). Funny thing, in the last few weeks I haven't read any more articles about this being the end of the financial world. In fact, some people are starting to say that the worst may be over. But with oil still setting new highs on a regular basis, the sub-prime fiasco may just end up being a footnote in the economic history of the first decade of the 21st Century.

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Real estate 'university'

I've done moderately well with real estate investing over the years. I bought a vacant 2.5 acre block of land at Winmalee in the blue mountains in the early 80's which more than doubled in a few years. I originally bought it with the intention to build a house there, as I fancied the idea of living on a large block with some privacy, close to the Blue Mountains national park. However, I sold the block after a few years when I realised that it was just too far to commute from there to work every day. I wouldn't be able to live there until retirement, so I had to either borrow and build a couple of duplex townhouses on the block to rent out, or take the profit and invest elsewhere. In the end I decided it was too far out of town to even work as a self-managed rental property, so I sold out.

My next real estate investment was less successful - I bought a "cheap" rental property one of the cheapest suburbs in Western Sydney. My theory at the time was that top-end properties were rapidly becoming unaffordable compared to average wages, whereas houses at the bottom end could still appreciate and remain within reach of the typical first-time homeowner. In practice prices stagnated for several years and I had to make innumerable trips to the property and spend weekends renovating the property back to rentable standard as a series of tenants moved out (usually without notice and owing more back rent than they'd paid in rental bond). After I got married I sold the property (for slightly less than I paid, although the rental yield was more than the interest costs, so I probably broke even overall) so I could "go halves" in purchasing a rental property close to home with DW. That property has doubled in price since we bought it eight years ago, and rent has been more than interest costs for several years (although we put in a large deposit when buying the property, so the opportunity cost of those funds needs to be considered).

Since then we've also bought our own home, which is more of a lifestyle expense than an investment, with interest costs on the mortgage being considerably more than rent for equivalent accommodation. Whether or not any capital gains will make this "investment" pay off remains to be seen.

I think we're fairly typical "mom and dad" real estate investors, in that we haven't borrowed more than our salary income can service, and haven't used increased equity to immediately go out and buy additional properties using "liar loans" (no doc loans, or ones where we claim to be "owner occupiers" in order to get to get financing for rental property purchases). We're probably also fairly typical in that we've approached real estate investing as amateurs - often evaluating prospective properties on the basis of a quick visual inspection and biased by our own preferences (would WE like to live here?) when looking at possible rental properties.

This probably isn't the best way to approach what are, after all, very large, illiquid investments ;)

The problem though, is how to approach real estate investing in a more "professional" manner? There are innumerable books out there purporting to tell you how make a fortune from real estate investing, but many of those are based on 'rags to riches' stories that are based largely on luck (market timing) and using massive amounts of leverage (that would have produced very different results in less favourable market conditions). Many of these books are really just teasers to attract people to investments seminars that are now the main source of the author's income.

It would be nice to be able to get a proper "education" in real estate investing, but traditional universities don't offer a course in "Real Estate Investing 101". Nouveau Riche has an interesting concept in the form of Nouveau Riche University - a website that provides access to a home study course in real estate investing. I've no idea if the course is any good (the website itself is typically glitzy and definitely not your typical educational site - just look at the graphic below which accompanied the announcement of a new 'Independent National Senior Advisor') but it might be a less expensive lesson in real estate investing than the usual method of just diving straight in and buying a property. The 15-volume course costs $300 per month (one volume per month, so total cost is $4,500), and you can cancel if you don't find the material useful. You can get a $700 discount by buying the entire set in one hit, but seems a bit high-risk to me. The volumes cover the basics of real estate investing such as selecting properties, arranging financing and taxation issues. But they also cover topics such as "Flippin’ Explosion" which they call
"the Fastest Growing Trend in Real Estate" which I think isn't in sync with the current US real estate environment ;)

Anyhow, anyone in the US thinking of investing in real estate might want to check out the Nouveau Riche website for themselves. Just be careful that you don't end up being funnelled into buying an over-priced real estate "bargain" that is being off-loaded at a time of market weakness to unsuspecting "students". As the old saying goes, "if it looks too good to be true, it probably is", although like all bursting investment bubbles, the US real estate markets will probably provide opportunities for great buys when the correction finally bottoms out.

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to Enough Wealth. Copyright 2006-2008

Property portfolio update: May 2008

The latest monthly sales figures (April) for the suburbs of our home and investment property have just come out. Last month the total value of my equity in our home and rental property dropped by around $15,000 (which will be a drag on this month's net worth figure), but the latest figures shows a gain of around $20,000 - bringing the value of my property portfolio equity to an all time high of almost $487,000. The 12-month gain in average price for the two suburbs we're invested has dropped back to around 7.8%, slightly above the long term average of about 6%. The first tranche of this year's rent increase has now come into effect, but the rent rise has been more than offset my the rise in standard variable loan interest rates.

Although interest rate rises are painful in the short term, if rates drop back again in a couple of years time we'll actually be better off - inflation tends to push up real estate prices (due to increased construction costs for new homes, which tends to flow on to existing home prices) whereas the amount of home loan debt stays constant. If wages also rise in line with inflation, when rates (and monthly repayments) drop back down the loan repayments will then be consuming a smaller part of our wage income.

Subscribe to Enough Wealth. Copyright 2006-2008

Building our Square Foot Garden (2)

I ended up not doing much work on the DS1's vegetable garden last weekend. I spent a while chatting with my parents on Sunday afternoon when I dropped DS1 off for a visit, and then when I started digging out the remaining grass and levelling the area I got a bad headache and called it quits for the rest of Sunday afternoon.

I did manage to track down a supplier of 'bulk' bags of vermiculite in Sydney via the internet. On Monday I ordered 2x100L bags for $72 ($24 each plus $24 delivery), which is less than 1/4 the price per L that I paid for the 5L bags from Bunnings on Saturday! The bulk vermiculate was delivered today, so when I have a day off work on Friday I'll return the small bags to Bunnings and exchange them for some additional blocks of compressed cocopeat. If I get the boxes built on Friday and varnished I should be able to mix the soil mix on the weekend and DS1 can start planting out the seedlings he got for his birthday.

Subscribe to Enough Wealth. Copyright 2006-2008

Horror budget?

Most commentators seem to think that the Australia Budget announced this evening was quite good. The Labor government has apparently delivered on it's election promises, has socked a large part of the surplus into various "Funds" ear-marked for future spending, and has moved to close some "tax loop-holes" and reducing benefits for the well-paid.

However, I found the budget to be more obscure than usual, and haven't as yet worked out what the impact will be on our finances and plans for next financial year. There were many announcements such as new income limits for Family tax benefit B and child care rebate eligibility that might, or might not, have a big impact on us. While at first glance it would seem that the income limits won't affect us (I've seen figures of $150,000 highest income earner limit for Family Tax Benefit B and $110,000 combined income limit for the 50% child care rebate), there were other changes that may apply. For example, there was mention that amounts salary sacrificed into superannuation will now be counted as part of your "income". This could mean that DW's "grossed up" income will be too high to be eligible for the Family Tax Benefit next financial year, even while she's only working a couple of days a week.

It would be nice to think that the increase in child care rebate from 30% to 50% may offset this by making it more worthwhile for DW to work an extra day each week. However, we were never able to claim the child care rebate for DS1 (even though it was costing $75 a day at the only centre close to our workplace that had a vacancy) because the child care was only "registered" and not "approved". Chances are that whatever Child Care centre we can find for DS2 to attend two days a week later this year (after we return from our holiday) will turn out to not be an "approved" centre either. Even if we can find an "approved" centre with a vacancy, the new $110,000 household income limit may preclude us from getting a rebate due to the new way of calculating "income" - apparently tax deductions against rental and dividend income won't be counted when working out "income". This will mean that even though we are negatively geared (overall) into property and shares (and therefore have LESS cashflow than our take-home pay would indicate), the gross value of rent, dividends and superannuation contributions would be included when working out our eligibility for the Child Care rebate.

This may be yet another reason for reducing my level of gearing in the new financial year (the main one is that the interest rate on my margin loans has increased so much in that past year that it's now doubtful that total ROI on the geared investment will exceed the borrowing cost). There's no point borrowing to increase my stock portfolio if it simply boosts my "income" to a level that costs us other benefits.

Overall, I shouldn't be surprised that a Labor budget that delivers a $21 billion surplus might well end up costing my "working family" several thousand dollars a year.

Subscribe to Enough Wealth. Copyright 2006-2008

Will it be worth having private hospital insurance any more?

The Australian Federal budget for 2008/9 will be unveiled tomorrow, but a lot of the details have already been "leaked" by the government in advance. One of the changes will apparently be an increase in the threshold at which the "medicare surcharge" (tax) kicks in. Currently if a couple has a combined income over $100,000 and doesn't have private hospital insurance they have to pay an extra 1% medicare surcharge (on top of the normal medicare levy).

When DW was working full time this meant that taking out basic hospital cover didn't cost much more than the extra tax liability would have cost (if we didn't have insurance). However, over the years I've been less than impressed with the benefits of having private hospital cover. When DS2 was born we weren't even able to use our private hospital cover for the birth as there were no beds available in the private hospital. In any event, there are so many "gaps" in private hospital insurance that we would have ended up paying a few thousand dollars "out of pocket" if we hadn't used the public hospital for the birth. Each year the cost of private hospital insurance goes up, so that it now costs me $153 per month for the most basic level of family cover. I recently looked into enhancing our cover to included dental costs (in case DS1 or DS2 need braces), but the extra $70 a month is unlikely to be worthwhile (especially since having insurance doesn't cover 100% of the cost of all expenses).

Now that DW is working part-time (and I'm using salary sacrifice to contribute pre-tax into my superannuation account) our combined taxable income is too low for us to be liable for the surcharge if I dropped our insurance cover. If the proposed budget change takes effect we also wouldn't be in danger of exceeding the threshold when DW returns to work full-time. I'm giving serious thought to cancelling our private hospital cover and saving the extra $1,836 pa and relying on the public health system. There are plans to build a new public hospital less than one kilometer from where we live (if the State government ever allocates the required funding), so even if we keep our private hospital insurance we'd probably end up using the public hospital in case of emergency!

Subscribe to Enough Wealth. Copyright 2006-2008

How I plan on saving 50% of investment trailing fees

I'd seen a couple of services advertised that will rebate you part of the trailing fees that many investment products pay to financial planners, insurance and loan brokers. So I recently visited YourShare.com.au and joined up. The service offers an annual rebate of 50% of the trailing fees they get paid if you nominate them as your "fund broker" (70% for trails above $4000pa). I sent in completed nomination forms for my income protection insurance, three margin lending accounts, and various fund investments. I got a confirmation email acknowledging receipt and processing of my forms a few days later, and was advised that a few of the investments didn't actually pay any trail (Timbercorp and Rewards agribusiness investments). Also, Commonwealth Securities doesn't pay a trail on margin loan balances, although the form will still be processed so I receive a 100% rebate of the entry fee on any mutual fund investments I make via Comsec.

This means I should be getting a rebate on the trailing fee paid on my "loss of income" insurance premiums (probably 1%-2% of the amount paid), plus I'll get a around 0.25% of the value of my margin loans with Leveraged Equities and St George Margin lending. The rebate cheque is due each anniversary after joining the service, and will cover all trailing fees received during the year.

Although I'd always known that margin loan interest rates are around 1% higher than variable rate home loans, I hadn't realised that most margin lenders are paying 0.25%-0.35% trail to financial planners! As with most investments, if you invest directly in these products (without going through a financial planner or broker) you don't normally get any of this fee rebated (the investment manager simply pockets the trailing fee). Since I have investment loans of around $220,000 through LE and St George, assigning YourShare as my "broker" for these accounts should generate an annual trailing fee rebate of around $550. Not bad for a few minutes work.

There is at least one other similar trailing fee rebate service available, but although it rebates a larger percentage of trailing fees it also charges an annual fee. This makes it better for investors with a large portfolio, but would be similar (or slightly worse) in my case. Anyhow, once I get the first annual fee rebate cheque I'll be able to tell if the other service would provide a larger rebate, and can change broker nomination on my investments if that is the case.

Subscribe to Enough Wealth. Copyright 2006-2008

Net Worth of PF Bloggers: April 2008

Here's the current financial situation of some personal finance bloggers who post their net worth each month.

Monthly Net Worth of some PF Bloggers for April 2008:

Blogger    Age   Net Worth      $ Change  % Change
An English Major's Money  24    $23,613.00   $1,052.00   N/A
Aspire 2 Wealth           2x    $31,326.00   $2,489.00   N/A
Blogging Away Debt        2x   -$27,616.00   $2,827.00   N/A
Consumerism Commentary    30   $146,738.00   $3,564.00  2.5%
Debt Free 4 Ever          39    $50,099.00     $183.00   N/A
Enough Wealth             46 $1,072,448.00  $27,840.00  2.7%
How I Save Money          27   -$17,128.00     $657.00   N/A
Lazy Man and Money        2x   $218,825.00   $5,794.00  2.7%
Map Girl                  32    $50,847.00   $1,802.00  N/A
MaxLoot                   25    $42,986.00   $2,747.00  N/A
Moomin Valley             42   $485,756.00  $19,130.00  4.1%
My Money Blog             28   $257,939.00  $15,592.00  6.3%

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 27and so on.

Previous monthly reports can be found in the Net Worth category.

If you have any corrections, let me know as soon as possible after the post and I'll edit immediately. If it's more than a few days after the post, email me and I'll make the change the following month.

Note: Most of these figures are in USD, but some are not (eg. mine are in AUD). Also, some bloggers post combined net worth of a couple, others are single, or, like me, only post their personal net worth.

The N/A figures are either a lack of monthly data, or where I've not included % change data because the net worth is less than +/- $100K.
I've had some appreciative comments about this regular monthly post - if you like it, please link to it from your blog, or add a link to EnoughWealth to your blogroll. ;)

Subscribe to Enough Wealth. Copyright 2006-2008

Building our Square Foot Garden

I bought more materials today for constructing DS1's vegetable garden. It's loosely based on Mel Bartholomew's "Square Foot Gardening" concept, but I may end up compromising on the soil composition. The official "Mel's Mix" is supposed to be 1/3 compost, 1/3 peat moss, and 1/3 vermiculite. I had 1 cubic meter of "vegetable soil" delivered last Wednesday (which is around 75% compost), so today I wanted to purchase some peat moss and vermiculite to make up the required mix. It turned out that peat moss is not readily available, so the closest I could get was Cocopeat, which has very similar properties to peat moss, but is produced sustainably from coconut husks rather than strip mining peat bogs. Although I could only buy it in small packages (a brick that makes up 15L of peat when rehydrated), this isn't too expensive at $1.81 per pack (around $120 per cubic meter).

The vermiculite was another story. Although it's available (in small packs), the cost is very high at $7.51 per 5L bag. That works out the $1,500 per cubic meter, which is ridiculous. I bought three packs, but unless I can source vermiculite in bulk for lower cost I'll have to use around 5% rather than 35% vermiculite in my soil mix.

I'm building two 5' x 3' wood boxes for the vegetable garden, which will fit nicely into the available courtyard outside DS1's bedroom window. I happen to have a few nice 88x44cm granite slabs (benchtops that someone was throwing out when remodelling a kitchen) that will make a nice access path between the garden boxes. Each box has a volume of 1/3 cubic meter and will provide 24 square "plots" for planting a variety of DS1's favourite vegetables.

I also bought a timer tap and a simple sprinkler, so DS1 can just turn on the timer each morning before school to give the vegetable garden a good watering a few days a week. On the days when watering by hose isn't permitted he can keep the plants moist using his new watering can.

Tommorrow I'll cut and assemble the pine garden boxes and give them a coat of marine varnish spray. The boxes will be sitting on a layer of leaf mulch and be lined with a damp course (to make the wood box last a bit longer). Since the varnish takes 8 hours to dry we probably won't be able to fill them with soil and start planting seedlings and seeds until next weekend. We're starting with a selection of carrots, onions, brocolli, cauliflower, corn and chinese cabbage. I'll have to buy a few potatoes with lots of eyes at the supermarket and leave them in the sun to see if any sprout and can be planted.

This vegetable patch looks like it will end up costing a few hundred dollars altogether in materials (it could be built much cheaper using second hand lumber etc) and take several hours work putting it together. It should provide lots of fun for DS1 (and some educational value), but I'll be interested to see how much produce we get from this small area, and will track the quantities and calculate their value (based on the local supermarket prices).



I'll post some before and after shots of the couryard and assembled garden boxes, then some photos of whatever produce we get by springtime.

Copyright Enough Wealth 2008

Is water frugality worth the effort?

There are many places on earth where water is a precious, finite resource. Sydney isn't one of them. Yes, Sydney recently had an extended drought - one of the worst in a hundred years - but our overall water storage never dropped below about 35%. Although this seemed very alarming at the time (the State government signed contracts to build a large desalination plant just before the last election, which is now being building but will probably never really be needed), it's actually a pretty good figure for the lowest point in storage. After all, if the low point was never less than say, 60%, you'd obviously have too much storage capacity.



Which brings up the obvious solution to Sydney's variable rainfall - more storage capacity. Our main dam (Warragamba) was originally planned in 1845, but construction was deferred until the severe 1934-42 drought got things moving. The dam was built in 1948-60, and it's capacity was actually reduced late last century when a new, lower spillway was constructed to guard against a "1-in-100-year" FLOOD!

Since Sydney has adequate, but highly variable, rainfall, there were plans for a second large dam to supply Sydney. Unfortunately the previous State Premier was a firm friend of the anti-dam green lobby, and declared part of the new dam site a national park in order to prevent a second dam being built.

So, we're stuck with an expensive desalination plant that will only be able to provide relatively small quantities of very expensive potable water during a severe drought. It also needs to be kept running the rest of the time (using expensive and environmentally unfriendly fossil-fuel generated power) in order to remain in working order. If we had a second dam of similar size to Warragamba our overall water storage would not have dropped below about 63% at it's low point, and we'd now be sitting at 80% of maximum capacity. A side benefit would have been some hydro-electric power generation to feed into the grid during times of high rainfall, when storage went above 90%.

Aside from the desalination plant, the government's main solution to solving Sydney's water problem during droughts is for consumers to "conserve" water. However, aside from the propaganda and peer-pressure value of small fines for "banned" water usage (eg. watering the garden on the wrong day of the week), there is actually little or no pricing signal used to encourage water conservation. For example, out last water bill was for average daily usage of 879 kL (down from 931 last quarter, and 934 the same time last year). However, out of the total $213.70, only $96.74 was "usage charge" - the remainder was for the general water service and sewerage service fees.

Therefore, in the past year we have reduced our water consumption by almost 6%, yet this would only reduce the bill by 2.7% (if water price and fees remain constant). The water bill was accompanied by a leaflet showing average daily water use targets for families of different sizes. For our household the target is around 750 kL/day. (They don't mention what the actual average figures are, or how an older house is expected to meet a target that is based on a modern house that uses all the latest water-efficiency devices!). If we somehow managed to reduce our water consumption by almost 15% to meet this target, our water bill would only go down by $14.66 (or less than 18c per day), or 6.9%! In reality, they are about to raise the water service pricing (to pay for the desalination plant!), so even if we cut our usage to the target figure we'll probably be paying more for our water bill this time next year.

Another example of government red-tape and ineffective incentives is the "incentive" offered to install rain water tanks for use as "grey water" (ie. flushing toilets, watering gardens etc.). Although quite large amounts are paid out by the government for installing a new rainwater tank, it's only available if you buy a brand new tank and get it installed by a licensed plumber. This means that you still end up with an "out of pocket" cost for installing a rainwater tank, and will take many years to recoup the cost through any water savings. Since the tank water can't be connected to the normal water reticulation system (as it isn't considered "potable" and isn't treated - some houses have dead birds, possums etc. on their roofs - yuk!), I can't see why a plumber is needed to stick a tank between your roof down pipe and the garden hose. I may install a small (preferably used) tank in our front garden to provide water for DS1's new vegetable garden, but it won't be eligible for the government subsidy.

Copyright Enough Wealth 2008

Forex CFD Trading Update: April 2008

April continued my run of profitably months trading AUDUSD foreign exchange rate (the "Aussie"). I continued trading the minimum contract size (A$25,000) and using OCO (One-cancels-other) stop/limit pairs when I left a position open unattended (eg. while at work or overnight). Depending on volatility the stop-loss order would be priced 10-20 pips from my entry price, and the limit price (to take a profit) at least 30 pips from the entry price. The limit was set based on recent charting behaviour - resistance/support levels, previous retracements etc. Attended open positions were often much shorter opportunistic trades, where the price had dipped 10-15 pip below the trend line, and had started to retrace. Often a small profit of 5-10 pips (worth $12-$25) could be made in a few minutes. I think I overtraded a bit this month as the number of trades was higher than previous months, and the average profit per trade was very low. This month I'll try to only trade when there seems to be a clear opportunity, and also try to let my winning trades run a bit longer (probably need to cancel and reset my OCO orders when I'm approaching my limit).

I don't have figures on the win-loss ratio of trades as I sometimes open a second trade overlapping the previous position, so I have to manually sort through and pair up my trading history to determine the result of each trade pair. I did that for last financial year (up to 30 June), and I'll get the figures up to date before the end of this FY. Meanwhile I can get the overall profit(loss) and number of completed orders from the CMC Markets monthly account summary.



Copyright Enough Wealth 2008

Money info for UK readers

Anyone living in the UK reading this blog might be interested in visiting this interesting Money website. Aside from the usual information about the various Credit Cards on the market, it also has information regarding insurance and other money-related topics.

This site also offers a financial email newsletter and you can subscribe to the RSS feeds of one of its numerous financial blogs. The newsletter has some genuinely useful and interesting information, for example, there is an article about a high interest savings account available for people aged between16 and 20, offering an impressive 10% on savings (Alliance & Leicester's award winning Premier 21 account). Another article provides details of the ISA available from Barclays that is offering a tax-free 6.5% AER.

The main webpage is well laid out, and has a summary of "Latest Money News". There are links to the specialist sections on Credit Cards, Loans, Mortgages, Savings, Current Accounts, and Share Dealings. The insurance section covers car, home, travel and pet insurance and is well laid out. For example, the car insurance page lets you view and compare insurance offerings with the best discount, as well as special offers for woman, over-50s, young drivers, students, classic cars and performance cars.

The credit card page has listing of most popular cards, those that are offering 0% balance transfers, cash back/rewards, or cards available to people with bad credit, or for business use.

I quite like this site as apart from all the usual consumer financial product information, it is well organised and also provides some useful articles as well as news information.

Signing up for the email newsletter only requires an email address, and they state that they will NOT provide your details to any third party. The fact that they are registered with the Data Protection Act and provide a registration number is also reassuring. Once you've registered with your email address you can also download a free eBook of money saving tips. I signed up for the free eBook and got a message that the link would be emailed to me. The email hadn't arrived after five minutes, so I have yet to read through the eBook.

Copyright Enough Wealth 2008

What to buy the 8-year old that has everything?

DS1 turned 8 today, so we've been watching out for suitable gifts the past couple of months. I don't go too frugal when it comes to presents for the family, but I also don't want to waste money on expensive plastic toys that get broken or discarded after a few days. He already has plenty of "father-and-son" things from previous birthdays, so this year I concentrated on items he can enjoy by himself with minimal supervision or assistance.

He'd received a small digital camera from my parents last Christmas, and had a lot of fun taking pictures at the zoo and other family outings. Unfortunately he'd dropped it one too many times, so it now has the bad habit of erasing all the photos from memory at random intervals. I spotted a more up-market digital camera (5 megapixel, 3x optical zoom, LCD screen, SD-card memory) on sale at Aldi recently, so we decided to buy it for his birthday as a "shared" birthday gift from his parents and grandparents. $159 split between four adults seemed quite reasonable. DW and I will make sure we handle the transport of this new camera, and just hand it to DS1 when he wants to take a photo!

He also likes gardening, although our previous attempt to grow some carrots in our rather poor garden soil wasn't a success. Last weekend I pulled out a couple of straggly plants from the flower bed in the alcove outside his bedroom window, and moved the edging to create a small vegetable patch (2.8m x 1.7m). I ordered a cubic meter of 'vegetable soil' (50% mushroom compost, 50% sand, soil, cow manure and ash) from the local garden centre ($77 delivered) which was delivered onto our driveway this morning for his birthday. I enjoyed telling him he was getting a pile of dirt for his birthday ;)

While searching for information about what vegetables are best suited for a child try cultivating, I came across the interesting site squarefootgardening.com which provides information on grid-based, raised-bed gardens which looks promising. The main benefit of this system is that is doesn't require any digging to try to "improve" your existing soil, and has been used for school gardening projects with great success. In order to mimic the special "Mel's Mix" (1/3 compost, 1/3 peat, 1/3 vermiculite) for this type of garden I'll need to add some bags of peat and vermiculite to the "vegetable soil" - a project for this weekend. I'll also need to finish preparing the vegetable patch by clearing the remaining grass, putting down a layer of leaf mulch, and using some boards to create a couple of 6'x4' garden boxes with an access path down the centre.

My parents have bought a small "greenhouse" for propagating cuttings and seedlings, and will be getting him some small gardening tools. I'll be shopping for seed packets with him next weekend. With any luck we may end up getting fresh, organic vegetables from DS1's garden later this year. As an added incentive I may get DS1 to weigh out his "produce" and I'll pay him the going rate for his vegetables (based on current supermarket prices). The SFG website also mentions selling organic produce as a hobby business, so he may add this sideline to his busking "business".



Copyright Enough Wealth 2008

I bought a new briefcase

I purchased a nice leather briefcase for work a couple of years ago, but unfortunately the combination lock had the bad habit of going into the "reset combination" mode if the catch was knocked as it slide around the car boot during the daily 45-minute commute to work. After spending a fruitless half-hour trying to guess what the new combination had become, I resorted to forcing the lock open. This worked for one lock, but when the same thing happened to the remaining lock I ended up with a briefcase that doesn't latch shut. Time to buy a new briefcase.

I looked around at what was available in the stores, but most cases for $100 or less were simple back-pack or satchel style bag. I wanted a real briefcase for my work papers, and decided that an aluminium briefcase would also enable me to carry my new Dell laptop around in style. It would also be useful for taking my laptop on holiday to Europe with me later in the year.

In the end I chose the Dicota AluSlight case that is designed to hold a 15.4" laptop, accessories and some work papers etc. A quick online search found prices were mainly around $139-$159+PP for this item, but one site (bargain.net.au) had it advertised for $118.80+PP. I ordered it online and was able to pay via PayPal.

I was a bit surprised that the PayPal receipt eventually showed the amount in USD rather than AUD, but with the Aussie dollar at almost US$0.95 it's still cheaper than the other advertised prices. I tried phoning the online store to complain about the unclear pricing, but got a voicemail service and gave up. I'm now just hoping that the product is actually delivered! I have the Paypal receipt, but I have no idea what the procedure is for seeking a refund from Paypal if goods aren't delivered. The bargain.net.au voicemail service makes me doubt I'll have much luck chasing up this order if it doesn't arrive in the promised 3-5 days. And the USD pricing makes be suspect that they may not be trading within the jurisdiction of the NSW Department of Fair Trading...

Anyhow, fingers crossed that my shiny new briefcase arrives in one piece in the next couple of days.



Copyright Enough Wealth 2008

How I gave my personal financial risk management plan a check-up

A personal financial risk management plan is an important tool to help assure that I've adequate protection in place to look after myself and my family in the event that my assets or earning ability are impaired. Most people never develop a plan for managing financial risks, but it's actually not too difficult or time consuming to put a basic plan into place. Without a plan, you might:

• be over-insured in some areas and under insured in others.
  
• be unaware of the risks to which you are exposed.
  
• be insuring risks that are more emotional than financial in nature.

I spent about 30 minutes using a free, online tool from the university of Illinois to sketch out a rough financial risk management plan.

The tool helps you to:

• identify those events which pose a financial risk to you or your family.
  
• learn the four basic methods of managing risk.
  
• determine which methods you are currently using to manage your risks.
  
• identify gaps in your current risk management strategies.
  

The first step of the tool asks you to rate (on a scale of 1-4) a list of typical financial risks in terms of financial severity (ignoring any insurance you already have to mitigate the impact) and probability/frequency of the event happening. In my case the first step produced a simple graphical grouping showing which risks need to be addressed (the high impact/high probability ones), those that may be worth addressing (high impact but low probability), those where the risk can be absorbed more economically than insured against (low impact and high frequency risks), and those that can be ignored (low impact, and unlikely events).



This risk matrix will vary depending on your personal situation. The website gives the example of the risk of death - low probability but high impact for a young breadwinner with a dependant family, compared to high probability but fairly low financial impact for a 90-year-old with no dependants.

The next step looks at the various ways you can choose to handle risks. The website uses the example of an event (totalling your car) to illustrate the four general approaches to handle the risk:

1. Bear the risk: You drop the collision insurance on your ten year old car. You continue to drive it regularly.

2. Transfer the risk: You buy collision insurance on your car so that the insurance company bears the risk of having to replace or repair your car.

3. Reduce or control the risk: You wear seat belts, which would reduce your injury in the event of an accident, and you do not speed, which reduces the likelihood of an accident.

4. Remove the risk: You sell the car and use public transportation.

The website provides nine simple examples of risk handling decisions for you to check that you understand the four approaches.

Step three then goes on to help you identify which of the four approaches you are currently using to handle your financial risks. It then explains how the different techniques for handling risks will be appropriate depending on the probability and degree of financial severity, and puts this into the same sort of matrix that you previously developed for your risk assessment:



The website tool then goes on to tabulate the most appropriate methods for handling each of your risks, based on the way you rated them on financial severity and probability. "You may be surprised by some of the recommendations. For example, you may have believed that everyone needs life insurance. But if your death would have a low financial impact or if the probability of your death is high, you will see that techniques other than transferring (insuring) are recommended. Under this framework, only someone whose death would pose a financial hardship (such as someone who has dependent children) and for whom death is unlikely should insure his or her life. Others should be using different techniques, such as setting aside enough money to pay for your burial (bearing the risk) and seeking ways to reduce the size of the financial risk, such as structuring your estate so that a family business won't have to be sold to pay estate taxes."

Hopefully, this tool will provide a useful check-up of your existing financial risk management plan.

Copyright Enough Wealth 2008

Falling knives, dead cats bouncing, and buying opportunities

Nearly all bubbles eventually burst (there are some apparent exceptions, such as the growth in per capita income since the industrial revolution), and conversely, most crashes eventually recover. So, although the plunge in home prices in the US appears to still have a long way to go (the plot of the Standard & Poor's/Case Schiller index of house prices shown below has yet to show any hint of an inflection point - the rate of decline slowing rather than accelerating), there will, inevitably, come a point at which the 'correction' in prices has been overdone and bargains are to be had. So, if you're an aspiring home-owner, it may be time to look at available home loans in preparation of making the plunge once house prices stabilize at more affordable levels.



Meanwhile, those with a home mortgage might take the opportunity for mortgage refinance
at a lower rate. A home has, and always will be, a long term investment. The transaction costs of real estate make it an unsuitable asset class for short-term trading (despite what "flippers" may have thought during the boom years). Therefore, there's little chance of getting out of real estate during a down-turn and buying back in at lower prices. Instead, the best most home owners can hope for is to ride out the storm, and make sure they minimise costs by pursuing avenures for home refinance while interests rates are relatively low.

Refinance.com has a website that provides information on mortgage refinancing specific to each state, provides a list of the currently available 15- and 30-year fixed rate loans, as well as ARMS with reset periods of 1- ,3- or 5-years. It's interesting to see that the 1-year ARM is currently higher than the 15-year fixed rate loan, and only slightly less than a 30-year fixed rate loan. The site has a few tools to assist in comparing refinancing options. For example, there is a refinancing calculator that provides monthly payments, total payments, and total interest paid when you enter values for loan amount, interest rate and term of a loan.



Copyright Enough Wealth 2008

Australian budget predictions

The Australian annual federal budget is due out on 13 May, and some "leaks" of the less popular announcements have started to trickle out. The tax cuts promised by both parties prior to last year's election look likely to be introduced without any changes. There had been talk of replacing straight tax rate changes with making government superannuation contributions (with an option to "opt-out" for those that want/need the extra cash in hand), but it appears that this won't happen. Perhaps the previously announced tax cut "intentions" for future years will be re framed as planned increases in superannuation funding. When the previous Labor government introduced compulsory superannuation the intention had been to ramp up towards 15% of salary, rather than the current 9%.

I'm guessing that there will be some extra funding for retirement savings - perhaps an increase in the government co-contribution. Last year the Liberal government made a "one off" doubling of the co-contribution (from $1,500 to $3,000, for those people who made a $1,000 undeducted contribution and had taxable income below the $28,000 threshold). Perhaps the maximum co-contribution amount will be raised to $3,000 and the threshold increased (from around $58,000). It would be nice if they also made the threshold calculation easier to understand (and printed it on your tax assessment notice).

The pre-budget leaks have mainly been regarding "means testing" of some government handouts. For example, the $5,000 "baby bonus" and the "family tax benefit (B)" will probably no longer be paid out where the family income is too high (a figure of $250,000 was mentioned). We wouldn't be affected by such a high cut-off threshold, but I'm not too impressed by the idea.

Although there's no need to provide government handouts to high-income individuals (or families), the cost of gathering and compiling the data required to means test ALL payments, just to eliminate a tiny fraction of the total number or recipients is often not cost-effective. In the worst-case it could end up like the family tax benefit (A) situation, where a family has to estimate it's assessable income (which is different to both total income and taxable income) for the next financial year, and is then penalised if the estimate proves to be inaccurate and they've been paid too much during the year.

There have already been announcements regarding increases in tax on alcohol and tobacco, and it will be interesting to see what current "middle class welfare" programs are cut in order to meet the government's target of a 1.5% of GDP surplus.

There will probably be some funding announcements relating to climate change initiatives - probably wind, solar, and tidal energy generating research and commercialisation funds (they need another catchy "future fund" hollow log to store future surpluses). Of course there's no chance of any funding or support for nuclear power generation in Australia from a Labor government.

Although Labor had railed against "bracket creep" while in opposition, they are now down-playing the idea of using future budget surpluses to reduce income tax rates. They have also gone very quiet about automatically indexing tax thresholds.

There will be more federal funding for education, such as the "one computer per student" program. The effectiveness of this will depend, as always, on how willing and able the state governments are to pay for the required infrastructure, support and training that such federal initiatives create.

Copyright Enough Wealth 2008