Children's tax returns

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

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

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

The estimated tax refunds calculated by eTax are:

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

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

Subscribe to Enough Wealth. Copyright 2006-2012

Plans are only as good as our assumptions

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

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

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

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

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

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

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

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

Subscribe to Enough Wealth. Copyright 2006-2012

Self-managed Superannuation Savings continue to boom

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

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

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

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

Subscribe to Enough Wealth. Copyright 2006-2012

Net Worth Update: November 2012

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

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

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

Assets___________$ Amount

Stocks_*_________-$31,891 

Retirement_______$425,884 

Properties_______$870,655 

Debts____________$ Amount

Home Mortgage(s)_$363,882 

Net Worth________$900,766

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


Subscribe to Enough Wealth. Copyright 2006-2012