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