What is the best investment?

One of the most common and frequent questions I am asked is:

“Matt, what is the best investment?”

In the media this question is often covered by delving into some analysis of the current state of the markets. In my opinion that is an incorrect and incomplete approach. So my jaw dropped on Saturday when I read an article in a mainstream newspaper that correctly answered this question. The article was by Marcus Padley and appeared in The West Australian (4th August 2007, page 66).

In his article Padley notes: “The best long-term investment of all is in your own business, your own career, your own development, your own intellect. Far better you invest in that than any equity investment.”

The best investment ever is in yourself. Invest in learning new skills and talents that could earn you higher income. Invest in personal development to better use the tool of your mind to guide your spending and risk assessment decisions. Both of those investments have a long-term exponential reward to your life and wealth.

Padley’s statement is more correct than traditional answers in the media because it considers the larger context of wealth creation.

International author and speaker Anthony Robbins once said: “Successful people ask better questions, and as a result, they get better answers.”

Contextually, anyone who believes that the original question above is a good question would benefit by investing in themselves to learn better wealth creation questions to ask. That will be one key to their success.

Stay tuned, as over time I will reveal better questions to ask yourself and your advisers.

The key ingredient to wealth

Hi

Imagine for a minute that you’re on a ship sailing the seas; perhaps a cruise along the Alaskan coastline. The ship hits an iceberg, starts taking on water and the Captain announces “abandon ship – everyone to the life boats”. Traditionally, who are the first to be saved?

The women and children.

But why the children? They probably have very little knowledge and skills, will panic and once they get on the life boat will make life hell for all the other survivors by whinging the whole time. (Yes, I am a parent.)

So, why save the children?

Because they are the future. The embodiment of massive potential.

Matt, you were once a new born baby with massive potential for future greatness. Ask your parents what they were thinking when they first held you in their arms.

What Happens?

Why don’t so many people achieve their stated dreams?

According to the great achievers the key ingredient to wealth is our minds. And conversely the greatest obstacle to wealth is ourselves.

What happens is…life happens, and the choices we make in interpreting each life event. The choices create positive and negative beliefs about success, achievement, wealth, and what it means to be “rich”. The negative beliefs become blockages to achieving the level of financial success we desire.

Just walk into any good book store and there is ample information about how to get rich. You can easily discover what to do and how to do it. So why aren’t more people really wealthy?

…well the excuses are endless. But they all boil down to the same thing – they made choices away from wealth rather than towards it. And most of our choices have a large emotional undercurrent.

To get wealthy the most important thing to master is your own mind and your own emotions.

An Example

Conceptually most of us understand that we can achieve higher investment returns and greater wealth by investing in more growth oriented investments, compared with investing in income oriented investments. So if you want to get richer you would invest maximum amounts in growth investments.

However research shows that most people cannot emotionally handle the short-term volatility of growth oriented investments. They are more comfortable having at least 30% of their long-term investments in defensive assets.

In other words, most people are allowing their short-term emotions to compromise their long-term wealth creation potential.

Does that sound like it could be you, Matt?

You can still achieve what you want

Do you still feel that you have the potential to achieve greatness? To achieve whatever you dream. To be as wealthy as you desire and to use that wealth to live the life you desire. Do you still believe it, Matt?

I believe you do have massive potential, no matter what age you now are.

As well as learning about the details of investment strategies and products, invest in learning about yourself. That will have the greatest return-on-investment. And you will reap the rewards in many diverse ways, including wealth.

– END ARTICLE –


Workshop: 100% Yes! for Financial Success

Would you like to take the next step in wiping out your obstacles to creating wealth? If so, this workshop is for you.

Two years ago I attended a terrific workshop called “100% Yes!” run by internationally renowned psychologist Steve Wells. I learnt some powerful techniques for dealing with emotional stresses and beliefs in all areas of my life. And the best thing is that they achieve very rapid results.

Steve and I both know the important role of positive and negative beliefs in wealth creation so we have teamed up to bring you the workshop “100% Yes! for Financial Success”.

In the workshop you will learn powerful techniques for identifying and dealing with your negative beliefs around money that are obstacles in your wealth creation journey. Plus you’ll also learn some simple and powerful financial steps you can take to ensure financial peace of mind.

The workshop will be held in Perth in September, and the early-bird deal closes on 17th August – so get in quick.

Visit the workshop web page to learn more.

Apparently you are not responsible enough to be investing by yourself

“…weak and unsophisticated investors should not be permitted to make high-risk investments unless they are totally aware of the risks”.

According to an article in The Weekend Australian the above is the opinion of Tony Lewis of Lewis Securities in response to recent loses experienced by investors in income based products. Lewis goes on to suggest that “applications for new investments (or rollovers of maturities) by public lending institutions should be certified by an Australian Financial Services Licence holder or their representative.”

[Reference: “Certification needed to protect fools who rush into financial products”, by Tim Blue; The Weekend Australian; July 28-29, 2007. Read the full article here.]

Yes, it appears that many people have been lured into high risk investments by virtue of the associated marketing and advertising information. But if that is all they base their investment decisions on it is foolish, as the article’s headline suggests.

Is a broadly applied, paternalistic approach really the solution to foolish behaviour of some individuals?

Two consenting adults
In my view, someone completing an application form based on their own research (no adviser involvement) is entering into a situation that is akin to intercourse between two consenting adults. Yes, it is likely that at least one of the parties has presented themselves to be more attractive than reality. But if they proceed with fervour and no protection and then suffer negative consequences then a wonderful learning opportunity results. If the lesson is not learnt the universe is bound to create several more learning opportunities for the individuals involved.

“Fools and their money are soon parted”, so the saying goes.

We expect adults to take personal responsibility for their sexual actions yet when it comes to their money somehow adults are no longer adequately responsible. I would have thought it was the other way around – as far as I am aware no hormones are involved in investment.

How would you feel?
If you are reading this article it is likely that you are an active investor who likes to do your own research, probably without the aid of a financial adviser. Further, you may not yet meet the legal definition of a sophisticated investor. So, how would you feel if you were told that you could not complete an application form without official sign-off by an authorised adviser?

By leaving a comment below, please let me know how you would feel in the above situation. (You can be anonymous)

Also please let me know your view on how these situations should be managed? Am I too harsh in expecting personal responsibility; should we legislate to protect people against themselves?

What if you live to 100?

Will you have money left at the end of your life or life left at the end of your money?

Only one generation ago people did not need to think that much about creating wealth and saving for retirement; they often worked until they could work no more and then died soon after.

Now the current retiring generation seems to retire around age 55 and statistically about half will live into their 80s. So they need to ensure their wealth lasts at least 30 years.

With the advances in science we must seriously face the possibility of having life left at the end of our money.

Aubrey de Grey, British researcher on aging, provocatively proposes that the first human beings who will live to 1,000 years old have already been born. In his presentation to the elite TED conference De Gray proposes that first generation therapies to provide moderate life extension (30 years) are just around the corner. Following which there will be a rapid pace of develpoment of second and third generation therapies. Consequently, by the end of each life extension we’ll be able to further extend. (View the video of Aubrey de Grey’s presentation at the TED conference here.)

A fascinating perspective and a topic likely to cause lively discussion at dinner parties. Do you want to live forever?

What about our money?

But, let’s also consider that whilst we may scientifically be able to live forever what kind of life will it be? How much will it cost to participate in the medical solutions that delay aging and make aging less painful?

If you like the idea of a long and comfortable life, perhaps even living forever, what are you doing right now to ensure you have the financial resources to support your choice?

Clearly our financial habits will need to evolve to keep pace with our social evolution; but can we change our habits as quickly as society is changing?

My experience is that the current generation of baby boomers have not changed their financial habits anywhere close enough to the pace of change in their lifestyle expectations. Compared to their parent’s generation they want to retire much sooner and live a much better lifestyle in retirement. But just like their parents they are saving very little of what they earn through their working life. The equation just does not compute.

What do you think?

If we are to live much, much longer our life experience will need to change. But how?

Leave a comment and let me know what you think…will we stay in education for longer, work longer, increase our financial savvy, become more welfare oriented?

Can you really achieve your financial dreams?

About a year ago during a client meeting a young lady in her mid-twenties asked me, “Matt, why are we talking about all of these dreams and goals? Is it realistic to think you can achieve them?”

Absolutely you can! You can achieve whatever you want, and there is lots of evidence to that effect.

To illustrate this point watch this video interview with Allan Pease, the international expert and best selling author also known as “Mr Body Language”.  In this candid interview with me on “Wake Up! WA” , Pease reveals how he has defied the prognosis of scores of medical experts to survive cancer, many years longer than predicted (and still going strong).  Plus Pease has achieved massive success in many areas of his life.

Allan Pease has given many media interviews during his 30 year career but until this interview had never revealed the three key ingredients of how he achieved his phenomenal success.

To discover how you can achieve whatever it is that you dream of watch the video now:

How to not lose your life savings

Oh the tragedy! On the front cover of yesterday’s edition of The West Australian newspaper was a story about a single Dad who had lost his life savings in the recent collapse of the property developer, Australian Capital Reserve. Sadly when I read such stories the empathetic part of me is quickly overrun by frustration. Quite simply this should not be happening in 2007!

Yet this massive loss of life savings in a marginal investment still occurs with alarming regularity, so I feel compelled to dedicate an article to helping prevent its occurrence – especially to you.

It is taking a lot of restraint for me not to engage in a rebuke of the traditional finger pointing at product sales representatives and financial advisers. Irrespective of the potential presence of a slick, self-motivated sales representative no-one, I repeat, no-one should lose their life savings in a marginal investment. And certainly not if they take personal responsibility for protecting what they have worked hard to earn.

In this article I will share three tips for you to ensure that this never happens to you.

Spread the love

Struth, I thought most people had heard the old adage “don’t put your eggs in one basket”. Maybe they have heard it but have a momentary lapse of memory when they see a high return being promised.

You won’t lose your entire life savings in an investment if all of your life savings aren’t in that investment.

Especially in the case of high risk, marginal investment products only invest the amount you are prepared to lose if it all goes belly up. By that I mean, per product.

An Exception

The above does not strictly apply to superannuation accounts or investment wrap accounts since they are not investments. They are administration accounts that provide access to a broad basket of eggs (investments).

Think of administration accounts as being like a gym. Generally you only join one gym. But at the gym you have access to lots of different equipment you can use to boost your fitness and health. Use of the equipment boosts your health, not the gym.

I mention this exception since I have encountered many people who think that diversifying their investments means having lots of superannuation accounts. That is not the case. Like gyms, you generally have one superannuation account within which you use several investments to boost your wealth.

Guarantee Equals Red Flag

Whenever I see “guarantee” anywhere near investment related information a massive circle of red flags pops up around me. Those red flags tell me that I must dig deeper and find out:

  • Exactly what is being guaranteed?
  • The circumstances under which the guarantee is valid and when it is voided.
  • The cost of the guarantee
  • How is the guarantee being facilitated? (e.g. if a guaranteed income, where is that income being earned so that it can be paid to investors)
  • Who is providing the guarantee and how robust are they?
  • Is there any research available form a reputable, independent source?

Except for the last point, all of the above information must be included in a Product Disclosure Statement (PDS) and provided to retail investors. So if you want to avoid losing your life savings read Product Disclosure Statements before investing.

By law the Product Disclosure Statement is big because it is designed to ensure you have most if not all the information about the product to avoid making an investment that is inappropriate for you.

If you don’t know that you could lose all of your money (or some other undesirable outcome) and you don’t know because you didn’t read the Product Disclosure Statement in full then the main person to blame for the outcome is…..

If the product is not legally regulated and doesn’t have a Product Disclosure Statement then don’t invest.

Get a Third Opinion

If you feel you don’t understand the Product Disclosure Statement then pay for at least one expert and independent opinion from a licensed Financial Adviser.

If a doctor told you that you had a terminal illness would you seek a second opinion?

For many people losing their entire life savings could be terminal. So before committing yourself to a potential life sentence seek a second opinion from an expert.

And, if after reading this article and the Product Disclosure Statement you still want to invest your life savings in one product then seek three expert and licensed opinions.

For financial advice this is how this tip may work in practical terms:

  • Pay one adviser for comprehensive advice on the appropriateness of the product to your circumstances and goals
  • Pay at least one other adviser for a comprehensive review of the first adviser’s advice. Give them the original Statement of Advice and pay them a fixed fee to review the appropriateness of the advice to you.
  • Before acting ensure that you confirm any discrepancies or queries with the original adviser as there probably is a very good reason for the discrepancy.

Be open and upfront with all of the advisers about the process so they know where they stand and will deliver what you need from each of them. Aim to ultimately work with the original adviser unless any discrepancies are unable to be answered to your satisfaction.

Throw a Life Buoy

It should probably be me on the front cover of the newspaper with tears in my eyes – lamenting the crying shame that the financial literacy message is not getting through. Can you think of any of your loved ones who you don’t want to see lose their life savings? If so, please throw them a life buoy by forwarding this article to them. Even encourage them to subscribe so that they benefit from the fortnightly reminder of life saving behaviours.

Advanced Gearing Products

This sixth article in the series on accelerated wealth creation summarises some other products you may have heard help you get rich fast. For example you may have heard of options & warrants, internally geared funds and capital protected funds.

Leveraged products for pussycats and lions

As sure as the sun sets in the west there will always be new wealth creation products launched. Many are suitable for a certain niche, so the trick is to find out which products suit your niche of circumstances.

Today I’m going to cover three that I feel have a broad-ish appeal, namely:

  • Internally geared managed funds
  • Options and warrants
  • Capital protected funds

If you’re a bit of a pussycat who wants a piece of the leverage action then there’s something in this article for you. Kings of the gearing jungle, the lions who want even more leverage will also find some tasty morsels.

Internally Geared Managed Funds

In the last article I mentioned the use of margin loans to use other people’s money to invest using managed funds. Well, there are actually managed funds that borrow money to leverage the money contributed by their investors. So the fund itself is a geared managed fund.

Following are three ways to make use of these products:

  • If you only have a little bit to invest and can’t be bothered getting a margin loan then you can still gear your investments by investing in an internally geared managed fund.
  • Superannuation laws prohibit gearing. However the regulators have said that they are generally satisfied with people investing their superannuation in geared managed funds. So geared managed funds are a way to super-charge your super!
  • Margin lenders will actually allow you to gear into managed funds that are already internally geared. This is a strategy for the lions who like to leverage their leverage.

Options and Warrants

Originally options were created to manage the risk of physically owning something, and they are still used for doing so. For example they gave you the right, but not the obligation, to sell your physical asset at a set date in the future for a set price (perhaps the price you paid for it). So you could buy an option to protect you from losing lots of money if the price of the physical asset went down.

In essence warrants are the same as options. Practically warrants in Australia differ from options based on who issues them, and the terms under which they are issued. (I’m trying not to delve into the complexity of these products.)

Options and Warrants are known as “derivates” since their value derives from the value of a physical asset, such as a share in a company. Whilst they were originally created to manage risk financial folk realised they could make money trading the derivates without owning the physical asset. Because of the way derivates are priced any movement in the price of the physical asset is magnified in the price of the derivative, hence providing you with leverage.

Every week in the newspaper there are courses advertising the wealth creation wonder of derivatives like options and warrants. My personal view is that using them for leverage is a specialist field. If you want to do-it-yourself then you should invest lots of time and money learning. But then I’d say that’s a job as a professional trader, rather than an investment creating passive income.

On the flip side, options are a wonderful tool for managing risk, which leads me to the next product I will write about.

Capital protected funds

Capital protected funds have many different names, probably made up by marketing folk. So let’s focus on understanding the core of how they work. In essence a capital protected fund combines the features of the two previously discussed products: internal gearing and options.

In the marketing spiel for the product you will most often read a pledge that if you invest in the product until maturity (5 to 10 years), then they guarantee you will at least get your initial contribution back. (Albeit, it will have less buying power due to inflation.) If you want to sell before maturity then the guarantee usually is not valid.

How these products facilitate the guarantee is becoming more diverse and complex, making it hard to understand what you’re investing in at times. But one way is the use of options to give them the right to sell the assets at maturity for the same price they initially paid.

One upside of these products is that you get the opportunity to benefit from potentially higher returns from the internal gearing of the investments. The other upside is that you probably won’t lose your money (but you could be worse off in real terms.) The downside is that protection costs money – the guarantee costs you money. So whilst you can get higher returns, you will get less return than if you did not buy protection.

Pussycats may really like these products, once you can get your head around the detail of how they work, since they enable you to potentially get higher returns without that nasty thing that you fear – your money going negative.

Lions may also like these products since many lenders will allow you to borrow the entire amount, yes 100 percent, of your investment in the product. You will need to cover the interest each year. In that sense a lion may liken the cost of protection to the cost of lenders mortgage insurance when investing 100 percent in residential property.

Consider and Learn

As I wrap up this series on strategies and products for accelerating your wealth creation I would like to leave you with two over-arching thoughts.

Consider what is appropriate for you right now. Take into consideration your current circumstances and needs, plus your future goals, and also your level of interest in the nitty gritty detail that some of these strategies require.

Seek out greater knowledge about sexy wealth creation products you hear advertised – maybe with the outcome of eliminating them from your list. Or maybe they’ll be added to your “not right now” list which you use to focus your learning efforts. Continue learning because the knowledge will raise your awareness of the possibilities and also make you comfortable with implementing them.

Right now do something, not nothing; but do what is right for you right now. Plus continue learning to expand the horizon of what is right for you.

Margin Lending: An easy way to start gearing

This fifth article in the series on accelerated wealth creation introduces margin lending, which many may have heard of but not know how to use it to create wealth.

Margin Lending

Margin Lending is a term you may know but perhaps it feels a little bit foreign or even spooky. Perhaps you’re imagining it’s something different to gearing and home equity, which you’ve seen before. Or maybe you’ve heard that it is risky.

Well, if you’ve understood the gearing and home equity concepts discussed in the past few articles then be confident that you also understand margin lending.

That’s because margin lending IS gearing. The main difference to home equity gearing is the security for the loan. With margin lending the security for the loan is usually direct shares and managed funds. So really margin lending is a different name for essentially the same thing – gearing.

One difference is how much you can borrow against your security. For top quality shares and managed funds you can generally borrow up to 70 percent or even 75 percent of the value of the investments. The more speculative your investment the lower the gearing allowed.

Finding a margin loan is quite easy as many of Australia’s largest lenders also have margin lending products. In fact I know of at least one lender who offers a loan that will accept property, shares and managed funds as security, creating a very flexible loan.

Handy features of margin lending

One handy feature of margin lending is that you don’t need to already own a property or shares to start gearing. You just need a small amount of savings. So that makes it a very accessible way of accelerating your wealth creation.

And that leads to the second handy feature – you can start small. You can start some margin loans with as little as $1,000 in savings. The lender will then offer approximately $2,000 as a loan, enabling you to start with a $3,000 portfolio.

These two handy features mean that this is a very accessible strategy, even for people who have just started their first ever job. Read below for how younger people can use margin lending to buy their first home.

Things to be aware of with margin lending

With margin loans the most important distinction to understand is that of the “margin call”. In the interests of brevity I’ll just say that if a margin call occurs you are required to either repay part of the loan, or add more security to the loan. The purpose is to ensure that you have adequate security to keep the lender feeling comfortable.

From a theoretical perspective a margin call could happen with gearing for property investment. But you hear about them in relation to margin loans because the price of the loan security, shares and managed funds, is published on a daily basis.

Whilst over the long term you expect your investment to rise, in the short-term there may be a dip. During the dip you may experience a margin call.

Even if you have maximised your margin lending your investment needs to decrease by around 10 percent before a margin call. So it is not a show-stopping feature. Plus there are plenty of ways to minimise the likelihood of a margin call.

One other feature to be aware of is that the interest rate on margin loans is often a percentage point higher than a home equity loan. So if you have home equity you may like to consider using that first. Plus, with home equity there is less likelihood of a margin call. But on the flip side, if you sell your house you need to refinance the line of credit too.

Instalment gearing for your first home

Instalment gearing is a regular savings plan partnered with a margin loan. Each time you add some of your savings the lender adds some of their money.

You can start an instalment gearing plan with as little as $1,000 in savings and $100 per month contribution. The lender may then offer an initial $2,000 plus $200 per month.

When you are starting in the work force but not ready to buy your first home for 7 years or so, instalment gearing can be fantastic. Many young people I meet are concerned they will never save a deposit as fast as the property prices rise. Instalment gearing is a way to keep up and even fast-track the saving of your deposit.

Super charge your wealth creation

Now, you may be wondering if you can combine gearing with home equity and a margin loan. Well, yes you can and it is a way to super charge your wealth creation plus diversify your portfolio.

For example you could borrow $100,000 against your home and use that as the security for your margin loan. The margin lender may then offer you another $100,000. This gives you $200,000 to invest, none of which is your own. Plus, since your margin loan is only geared to 50 percent you have possibly given yourself a buffer against margin calls.

This strategy is called double gearing and is riskier than single gearing, as you may expect. So proceed with caution and wisdom before considering it.

Create wealth with your home

I hope that you had a wonderful Easter. This fourth article in the series on accelerated wealth creation discusses using the underutilised equity in your home to create wealth.

On reading the title of this newsletter some readers may have asked “hang on, I thought Matt said your home is not an investment asset. So how can I create wealth with my home?”  Well, your home is not the wealth but you can leverage the equity in your home to create wealth elsewhere.

Even if you don’t yet own your own home or have any equity in your home this is still valuable knowledge because one day you will have some equity. So it will be important for you to be prepared for how you can wisely use that equity to create wealth.

Home Equity

Equity is that part of something you own, not the bank. When you buy your first house you may start with a 5 percent or more deposit, and that is how much of your home that you own. That is your equity.

As you repay your home mortgage you own more of your house, and therefore your equity has grown. It is this equity that can potentially be your “underutilised equity” as discussed in the first article.

You can choose to use this equity to create wealth or to create immediate lifestyle.

Home equity funding your lifestyle

Our bank loves to send us suggestive letters about the many delightful things we could do if we went and borrowed more money from them against the equity in our home. So it is quite possible you are already aware of how to access your home equity.

In fact, most people have fully utilised the equity in their home to:

  • Upgrade to a newer, bigger, better located home
  • Fund their holidays
  • Upgrade their cars
  • Improve their current home with major renovations
  • Pay for children’s education

Do any of the above sound familiar?

They possibly do since the banks make it very easy for us through redraw facilities and lines of credit.

But when you use your home equity to fund your lifestyle the money still needs to be repaid, plus interest. So you could be living outside of your means – a champagne lifestyle on a beer budget. Living outside your means potentially sacrifices your future lifestyle rather than creating wealth that funds your future dreams.

Use home equity to create wealth

To get rich faster use your home equity to create wealth. You do this by borrowing against the equity and using the borrowed money to invest. This is called gearing, as discussed in the last article. Since you are borrowing money it is important that you invest in growth assets such as shares and property. That way you aim to earn more than you pay in loan interest.

This strategy helps you create wealth faster by enabling you to be investing even when you may have all of your income focussed on repaying the main part of your mortgage.

Many people think they need to have repaid their home fully before starting to invest. For people with a low tolerance of risk that may be appropriate. However, if you can manage the risk of gearing then using your home equity to invest will get you into wealth creation sooner. The sooner you get in, the longer you are in, and hopefully therefore the more you can earn.

How to access your home equity for investment

One of the most common ways to borrow against the equity in your home is to create a new line of credit loan that is secured against your home. So you will end up with your mortgage plus a separate line of credit.

A line of credit gives you flexibility to invest the amount wherever you like – the bank doesn’t really need to know. Plus, as you buy and sell investments you can withdraw from and repay the line of credit as you wish, much like a bank account.

Once you have established your line of credit it is important to obtain expert advice on the investments you will use. Expert advice is valuable in helping you achieve more return than you pay in loan interest.

Crank Up The Pace With Gearing

This third article in the series on accelerated wealth creation provides an overview of gearing as a wealth creation strategy. Gearing is a strategy that enables you to leverage your income and equity, which may currently be under utilised.

Gearing: You’ve heard of it, but what is it really?

As one attendee at the IPWEA conference noted a few weeks ago, it seems that everyone’s talking about gearing as the holy grail of wealth creation. So it is possible that you have heard of it. But based on questions I’m commonly asked it seems there is only partial understanding of gearing. So here is a quick overview.

Gearing is a term used in wealth creation for leveraging your money. If you’re not familiar with leverage then picture a “see saw”, that wonderful mainstay of children’s playgrounds. Using a “lever” is a way to get more output for the same or less input. Or, to say it another way, leverage helps you get more reward for less effort.

Gearing is using someone else’s money to generate more wealth for you. Usually someone else’s money is provided in the form of a loan from a bank. The security for the loan is often property, direct shares or managed funds.

How Gearing Works

Simplistically, this is how gearing works:

  • You start with some of your own money (e.g. $100,000)
  • The bank adds some of their money as a loan (e.g. another $100,000)
  • You invest the whole lot (e.g. $200,000)
  • Along the way you pay the bank interest on the loan
  • Presuming you’re a wise investor your annual investment return percentage is higher than the loan interest percentage
  • When you sell you repay the bank the amount you borrowed but keep all the investment returns for yourself
  • Your net wealth has grown a lot more than if you didn’t gear, so you are now wealthier.

The Good and the Bad of Gearing

The main advantage of gearing is that you get wealthier quicker. This presumes that your investments go well.

The main disadvantage results from the fact that the lever can go both ways; you can also get poorer quicker. That is the main risk you face for trying to use leverage to get more reward.

Other risks of gearing include:

  • Your investments go up but not as much as you paid in loan interest, meaning you are now not as wealthy as if you’d not geared.
  • You need to meet the regular loan repayments, so therefore need an alternate steady form of income (such as your salary).
  • Even though gearing is a long-term strategy in the short-term you can be asked to repay part of the loan if the lender gets nervous about a drop in your investment value.

On top of the above list of gearing risks you have all the other risks associated with investing. Gearing magnifies the consequences if the risk eventuates. (Your fingers could get burned quicker.)

Gearing Pre-requisites

Gearing should be used appropriately and with caution. Here are some pre-requisites before considering gearing as a strategy for you:

  • You need a very high tolerance of risk
  • You need to have time and patience. This strategy requires you to have at least a seven year horizon before needing the money; in fact at least ten years is best. This time horizon matches the average cycle of investment markets.
  • You should be able to afford to meet the loan repayments from your other income.
  • You are a wise investor or are willing to pay one (i.e. a professional expert)

Gearing Tips

  • Use growth oriented investments such as property and shares or managed funds that invest in those asset classes. These asset classes have a good likelihood of earning you more than you pay in loan interest.
  • Protect your financial situation from disaster that would result in you needing to access your geared portfolio earlier than planned.
  • The top priority for protecting your financial situation is protecting your income. This is two pronged: (1) Protect against injury or illness with income protection insurance; and (2) ensure your skills and knowledge make you very employable.
  • Ensure the rest of your long-term investments are also invested aggressively. It is counter-productive to have conservatively invested superannuation whilst gearing outside of superannuation.

Time to Crank Up the Gears

If you have under utilised equity and cashflow you can accelerate your wealth creation by cranking up with gearing, just like on your bicycle.

Next issue we’ll cover gearing your underutilised home equity and the following issue we’ll talk about margin lending. Margin lending includes a wonderful feature called “instalment gearing” that is a wonderful tool for underutilised income.

Increase your risk tolerance to accelerate like a tiger

My last article was the first in a series on accelerated wealth creation and introduced some ways to identify lazy wealth creation. Many of the ways to crack the whip over lazy wealth creation require a high tolerance of risk. Or to put it another way, you need to be more of a tiger than a pussycat. Today’s article shares some ways for you to increase your tolerance of risk.

Research of tens of thousands of Australians reveals that less than 7 percent have a high or “Aggressive” tolerance of risk.

Therefore, technically speaking this current article series on accelerated wealth creation is only appropriate for about 7 percent of you. But I’m writing it because one of my goals is to help you reap the rewards of increasing your tolerance of risk.

What is Risk Tolerance?

Risk Tolerance is a psychological measure of your willingness to accept uncertainty in your decisions; to handle volatility and the chance of loss.

To help in your understanding here are the definitions of a couple of other related terms that you may have heard.

Risk Capacity is your ability to absorb some downside, both in size of the loss and time available to recover.

Risk Profile is a combination of the above two placed in the context of the goal you are trying to achieve, such as the purpose (end use) and the time before the end use arrives.

Investment products also have a risk profile which is a description of the variability of the rewards from that investment over certain time frames. The investment risk profile is different to your personal risk profile. The process of choosing appropriate strategies and products for your needs includes matching your risk profile to that of the product or strategy.

Assessing your Risk Tolerance

Many of you may have seen the brief multiple choice questionnaires that are included in the Product Disclosure Statements (PDS) of superannuation and other investment products. They supposedly help you assess your risk profile but they are badly flawed as a scientific tool.

They are flawed for a number of reasons: too few questions (20-25 are needed), they are inconsistent and inaccurate, and the questions do not measure what they suggest they are measuring. Warning! Don’t rely on such questionnaires as the basis for your investment decision.

I have only seen three risk tolerance questionnaires that have been rigorously constructed by experts in psychological assessment. The most widely tested one of these is the FinaMetrica questionnaire, which is the one I use with my clients.

FinaMetrica also have a public website where you can assess you tolerance of risk and I recommend that you all complete the questionnaire. Visit http://www.myrisktolerance.com

Increasing your Risk Tolerance

Since risk tolerance is a psychological measure increasing your tolerance of risk involves working on the way you think.

You can work on the way you think by:

  • Examining the information on which your beliefs are based
  • Examining the decisions you make based on your beliefs
  • Educating yourself so that you can make more informed decisions

For example, if you are concerned about a particular event occurring, ask yourself:

  • On what facts do I base the belief that the event could even occur?
  • What is the actual consequence if the event did occur?

A detailed example of working on the way you think

I’ve observed that many people state they are concerned about losing money (the event) and therefore they decide not to invest. When I dig deeper they are generally concerned about total loss of the invested amount.

The facts are that most mainstream investments are highly unlikely to suffer total loss. Plus, the longer the timeframe until you need to use the money to fund your lifestyle, the lower the likelihood you will suffer any loss.

Next you challenge yourself by asking “if my investment does decrease in value one year, so what?” What is the real consequence of it if you don’t plan to use the money for many years?

Then challenge yourself by asking “what are the consequences of not acting or of acting differently?”

If you haven’t yet acquired enough knowledge to make an informed analysis of the consequences and likelihood of the consequences then seek expert assistance in making the decision.

A Final Observation on Risk

Interestingly, in my experience many people are investing using high risk strategies and products without even knowing the risk they are taking. Not understanding what you are doing is the highest risk of them all. For example, many people borrow money to invest in residential property and tell me it is safe. Let me assure you that the facts suggest otherwise.

Just because the risk profile of your investments is high risk doesn’t mean you have a high tolerance of risk or a high risk capacity. Your world could come crumbling down more than you ever imagined if you don’t understand the risks and the consequences if the risk eventuates.

The best investment we can all make is in increasing our knowledge. We can do this both through education and experience.

So today I encourage you to:

  • Assess your tolerance of risk
  • Identify and challenge your existing beliefs about wealth creation
  • Continue your education
  • Forward this article to your loved ones to help them with their education

Is your wealth creation lazy?

Almost every day there is something in the news about the proposed takeover of Qantas by a consortium of private equity companies. This is one of a flurry of private equity bids in the past year. You may also have heard of bids related to Alinta, Coles, Channel Seven and Packer’s media assets.

Interestingly all offers are made quite a bit above the pre-bid share price. This indicates that the private equity companies are confident they can make a lot more money out of their target than the public can make. They are confident of this because they believe the way their target is currently managed is lazy.

When you look at the reasons for viewing a company as “lazy” there are a lot of similarities to personal wealth creation. This is the inspiration for today’s feature article, which is the first in a series of six articles on accelerated wealth creation.

If a private equity company ran their eye over your wealth creation strategy would they think your wealth was a bit lazy and in need of a makeover? Read on to find out.

Feature Article: Is Your Wealth Creation Lazy?

Listed below are some of the reasons your wealth creation may be lazy and in need of a makeover:

  1. Underutilised equity and cashflow
  2. Underperforming assets dragging you down
  3. Generating junkets rather than profits

If you’re dreaming of a lifestyle better than the one you are living now then one way to achieve that is to ensure your wealth creation is working hard. It’s time to crack the whip on maybe one or all of the above elements.

In this article you’ll learn how to identify where your wealth creation may be lazy. Then in the following five articles in the series you’ learn how to crack the whip.

1. Underutilised Equity and Cashflow

Equity and cashflow are two different things, and sometimes only one is underutilised. When both are underutilised you can use them together to accelerate your wealth creation.

Underutilised equity is found in assets you own that could be used to buy additional profit generating assets. One example of underutilised equity is that part of your house that you, not the bank, own.

Underutilised cashflow is surplus income you have that just accumulates in a bank account. It probably doesn’t earn much interest and often eventually gets spent on some lifestyle asset or experience.

2. Underperforming Assets

An underperforming asset is one which may be earning you some money but not enough. Some underperforming assets have great potential and just need you to shine a light on them and get them working harder. For example, maybe you are not charging market rate rent for your investment property.

Other underperforming assets have no hope and are perhaps better off being discarded.

To find out if your assets are underperforming you need to benchmark their performance against other similar assets and also against other alternatives for that money.

3. Generating junkets not profits

If you’ve worked in the corporate world or worked through the 1980s you may be familiar with the term “junket”. I think of a junket as a business event, such as a trip, where the main purpose is fun rather than generating positive outcomes for the business. If the money wasn’t spent by the business it would generate more profits. Private equity companies often seek to reduce their target’s operating expenses.

Related to your personal finances this may be where you are spending much more on lifestyle than perhaps you need to – your expenses are too high. If you reduced your expenses you would generate some (or more) surplus income (profits). Those profits could accumulate in a bank account and become underutilised cashflow. So ensure that in addition to controlling your expenses you also utilise the extra cashflow wisely.

Would you like a cheap holiday?

Achieving your lifestyle dreams is about getting the most lifestyle from your current money as well as about creating wealth.

If you’re like me and most other people I meet then you like the idea of luxurious holidays. And the prospect of not paying full price is a bonus attraction. Add to that an offer of two nights accommodation for just $29 – do I have your attention?

A few weeks ago I received an offer in the mail just like that, and yes it got my attention. (After all it did say that I was “special”.) A part of you may be thinking “that sounds too good to be true; I bet Matt is going to write about not being duped.” Well read on, because this type of offer may suit some people as a way to reduce their expenses while maintaining their lifestyle.

Vacation Clubs

The offer I received was from a company promoting a vacation club. A vacation club is a modern day evolution of the time-share accommodation from a couple of decades ago.

Even though they are called “clubs” it is just a marketing name. In fact these vacation clubs are property investments, often through an unlisted trust structure.

In summary some of the key features include:

  • You pay an amount of money to be a “member” of the “club” (up-front plus annual)
  • The “club” owns many properties in desirable locations
  • You receive annual rights to stay at the club’s properties
  • You also have beneficial ownership in the properties
  • You may receive additional benefits and reciprocal rights to stay at properties owned by other vacation clubs around the world.

Even though you become a part-owner in property the investment basis is very unclear. In fact, no investment characteristics were mentioned in the presentation.

Are they worth considering?

Yes, vacation clubs may suit some people. Particularly if you:

  • Travel a lot, and plan to every year for the rest of your life
  • Generally pay for 4 and 5 star accommodation when you travel
  • Are comfortable with restriction on your destination

How to find out more

To become a member of the club (investor in the property trust) you will probably need to attend a Preview Session to have the investment explained to you. To get invited to such a Preview I suggest that when you are doing anything travel related to always tick boxes that say “yes, please send me marketing material because I love it.”

You will eventually be specially selected to receive an irresistible offer designed entirely to get you to give up a couple of hours of your time to attend a Preview Session. For example, we received an offer to stay for 2 nights at one of their fancy properties all for the low price of a $29 processing fee. (Since we had planned a holiday near one of their properties we decided it was worth two hours of our time.)

(If you are desperate for immediate pay-off then type “Vacation Club” into an internet search engine and that will point you to some clubs. But if you contact clubs directly you may miss out on the irresistible offer.)

Forewarned is Forearmed

Be Aware – you may be told that it is an information session but in fact it is going to be a selling session too. You will probably be offered an amazing set of bonuses to sign up at that very session – and they will be mouth watering.

If you think the concept is of interest to you and therefore you may be inclined to want to join on the night then attend the meeting prepared with actual information on your travel. Think carefully about:

  • How often you’ve travelled in recent years (number of days)
  • The average amount you spend on accommodation per night
  • How many days per year you plan to travel in future years (for the rest of your life)
  • The dates and locations (including hotel or areas) for any travel over the next year.

If you’re serious then there are a couple of other important points to know.

  • This is an investment so you must receive a Product Disclosure Statement (PDS) and Financial Services Guide (FSG)
  • You must be given a cooling off period. Before signing, read the PDS to find out how long the cooling off period lasts. The one we saw had only 5 days which is way too short in my opinion given the selling environment.
  • There is often no easy or set way to sell your investment
  • Many of the bonuses are dependent upon the reciprocal agreements with other vacation clubs. These are not guaranteed so do not base your decision on anything other than the core properties owned by the trust.

Also note that it will probably take longer than the time frame quoted to you, especially if you ask questions or want to read the information before deciding. Plus allow an extra hour for signing up, should you be disposed to do that.

The cheap holiday

Whether membership of the club provides you with cheap holidays will depend upon how you use your investment.

Either way you may get at least one cheap holiday by accepting the tempting offer to attend a preview session.

You may even get a second cheap holiday. On our way out a second sales person had a last ditch attempt at convincing us to consider the club. We were offered another heavily discounted accommodation deal at selected properties. The exchange for this deal was to attend another preview session while on holiday. But you have to decide on the spot. So I suggest that you attend your session knowing where you plan to stay in the next year, the offer may just suit your existing plans.

Receiving marketing material may be a good financial planning decision after all! Enjoy your cheap holiday.

Saving for your children’s education

Research suggests that the cost of raising children can be about a quarter of a million dollars per child over their lifetime. When you add private school fees to the mix (and every associated expense), you can probably increase that by another 50% or more. So it is a wise idea to plan ahead and incorporate future education expenses in your wealth creation plans right from the day the “c” word enters your relationship conversations.

Daddy's Precious Angel (aka Sophie) on my first Father's Day

Our Children: we love them from the depths of our hearts and we dream of the many experiences that we want to give them. I often here parents say “I want to give my children the best start in life that I possibly can.” One of those “best starts” that parents often have in mind is to send their children to private school.

Research suggests that the cost of raising children can be about a quarter of a million dollars per child over their lifetime. When you add private school fees to the mix (and every associated expense), you can probably increase that by another 50% or more. So it is a wise idea to plan ahead and incorporate future education expenses in your wealth creation plans right from the day the “c” word enters your relationship conversations.

How Much Does Education Cost?

Recently The West Australian newspaper released a “Guide to Independent & Catholic Schools, 2006/2007”. They summarise that in fees alone primary school costs ranged from $600 to $8,000 per year, and the secondary school fees ranged from $1,200 to $13,500 per year. In addition you can expect to pay for books, uniforms, laptops, sports, camps and other special tuition, depending on the school.

Looking through the range of fees it appears that a large proportion of the fees for primary school are around $3,000 per year, and around $5,000 per year for secondary school.

I then asked my tutorial students at Curtin University for an idea of university costs and they suggested it costs about $10,000 per year.

A $6,000 per year Savings Plan

Based on those broad averages above if you start saving from the day each child is born you need to save approximately $6,000 per year, for each of their first 21 years. That estimate is in today’s dollars, so each year you need to increase the amount by around 3% to keep up with inflation.

(For those number crunchers reading this there are a bunch of assumptions built into that estimate. I have assumed a balanced portfolio, and that fees increase by 7% p.a. which is the average increase over the last 15 years.)

A Common Savings Plans

It seems that when many people think of education savings plans they think of the formal plans promoted by a couple of prominent groups. Such plans require a regular monthly payment and you only get your money back according to a specific schedule, and under the right circumstances it could be tax free. These plans operate under special provisions in the tax act, and are also known as Education Bonds.

These products have improved in their flexibility in recent years, but they are still not super flexible. For people who are not very disciplined savers (spenders), the rigidity of these plans can be just what the doctor ordered.

An Alternate Approach

If you want the best wealth creation strategy then I suggest you take a broader view. Consider saving for your children’s education in the broader context of your overall lifestyle creation strategy. After all, children’s education is just another lifestyle expense like saving for a big family holiday or a new car.

Other options you could consider include one or a combination of:

  • Saving into a dedicated bank account
  • Saving into a diversified portfolio of managed funds
  • Making extra repayments onto your mortgage, saving loan interest, and then later redrawing from your mortgage to pay school fees or just paying the fees from your income once the loan is repaid
  • Gearing, using a home equity line of credit or a margin loan using instalment gearing

How To Decide

To decide the best strategy for saving for your children’s education you need to find an appropriate balance between such factors as:

  • Your saving/spending discipline and habits
  • If you have any existing lifestyle debts such as mortgages, car loans, personal loans and purchase payment plans
  • Your marginal tax rate
  • Your tolerance of investment risk (also known as your risk profile.)

Your Next Steps

The best way to save for the cost of children is not to do it in isolation. To in fact do it as part of a more comprehensive look at your wealth creation, because in doing so it opens up a broader range of strategies and possibilities to you.

And that all comes down to your goals and dreams.

So the best next steps are:

  • Work out what type of school you want to send your children to
  • Find out how much that will cost
  • Add that to your broader lifestyle dreams
  • Ask a financial planner to help you create a strategy that achieves a balance of them all

Six tips for choosing the best home loan

To help you choose appropriate finance products I interviewed one of Perth’s top mortgage brokers, Damian Day of Ardent Mortgage Services, and asked him to share his top tips.

To help you choose appropriate finance products I interviewed one of Perth’s top mortgage brokers, Damian Day of Ardent Mortgage Services, and asked him to share his top tips.

Here are Damian’s Six Tips:

Tip 1: Be clear on the purpose of the finance

Gone are the days when there were only a few types of mortgage structures to choose from. Now there are lots of products for all the different ways people use their money. So before speaking to a lender be clear on he purpose of the finance you are seeking. For example, is your purpose buying a new home, building, renovating, car, holiday, investing, or bridging several of the above?

Consider not just your immediate purpose but also what may happen in the foreseeable future (say 3 to 5 years).

Tip 2: Make your finance as flexible as you

Our lives change rapidly these days. We change jobs, get married, start families, move suburbs, cities, states, start businesses, buy investments all within short spaces of time. (Or is that just me?)

Over these lifestyle changes, your cash flow needs change quite a bit too. So it is important to ensure that your finance is structured with the amount of flexibility you require. Consider:

  • Is there a limit to the amount of additional repayments?
  • Can I access my extra repayments if I need to?
  • How easily can I refinance the entire arrangement?
  • Can some of the overall loan be fixed, variable, interest only?

Tip 3: Cheapest is not always the best

Tip 3a: Beware hidden fees

Years ago when the regulations on calculating comparison interest rates were introduced it was a good system. But, the lenders have since worked out how to charge you fees which are not required to be included in the calculation of the comparison rates. This makes the loan look cheaper than it really is.

Some hidden fees to be wary of include:

  • Exit fees on early repayment
  • Restructure fees
  • Lump-sum payment fees

Tip 3b: Consider the non-financial features

The money that is lent to you generally costs all lenders about the same amount. So the only way lenders can offer cheaper deals is by being more efficient or cutting out services.

Your loan may be cheap but come with no branch network, no relationship manager who cares about you, only a 1300 phone number operating on east coast time zones and limited transaction facilities. If any of those services are important to you it may be worth paying for them.

Tip 4: Ask for a package deal

Years ago these were called “Professional Packages”, but lenders have smartened up and now offer package deals based on your income and total amount borrowed. Under such deals you pay an annual package fee of around $295 to $400 and receive:

  • Low (or zero) annual fee credit card
  • Deferred establishment fees
  • No loan ongoing fees
  • You can split the total mortgage often into up to 5 parts to tailor each loan to be as flexible as your life.
  • You receive discounted variable rates, and sometimes also discounted fixed interest rates

You can access such packages with an income of around $60,000 per year and/or total amount borrowed of around $150,000. These days most mortgages are for at least that amount, so almost everyone is eligible. You just have to ask!

Tip 5: Negotiate and shop around

Lenders DO negotiate! Branch staff may tell you that it is “policy” not to negotiate. They also may not even offer you the best product from their own company. That is because, in general, they are not rewarded for winning your business and making you a happy, long-term customer. They are paid mostly (or wholly) as salary.

So be prepared to shop around to get the best deal because in Damian’s experience the lenders do negotiate most often. Well they certainly do when a mortgage broker is involved!

If you’ve enjoyed these tips and need finance you can contact Damian Day of Ardent Mortgage Services on 0409 950 975 or by e-mail at .