Shush! Financial experts share trade secrets

Redwing · 11-04-2007, 10:44 PM

Shush! Financial experts share trade secrets

Shush! Financial experts share trade secrets - Investment - Money - Business

Quote:

David Potts asks people with financial know-how to spill the beans.

AS I'M about to divulge a few trade secrets of financial advisers, kindly keep them strictly between us or they might not talk to me again.

If it's no deal, just turn the page.

Oh good, you're still there.

So, you probably think that if only you saved a bit more, you'd be a lot wealthier.

Advisers know otherwise. Sure, at some point you have to spend less, but instead of saving it you need to invest it. There's a difference. For a start, you have to take some risk and, yes, I know what happened to Fincorp.
Since you mentioned it, Fincorp is the perfect example of the difference between saving and investing. Chasing high-yielding debentures is a misguided attempt to save. Investing is buying assets that will increase in value.

Now if Fincorp had been listed and you'd bought its shares instead . . . oops, that's not quite where I was going. I mean if you're going to blow your money it's better investing than saving because at least there's the possibility of an upside.

Time please

So, what are you waiting for? The sooner you get started, the better off you'll be.

Tom Murphy, director of private wealth management at Deutsche Bank, says the best strategy if you don't have other assets such as a home is "dollar cost averaging using managed funds".

Dollar cost averaging is up there with the magic of compound interest in the protocols of secret money business. You buy shares or units in funds at regular intervals. By only paying the average market price, it's impossible to pay too much over time. So allocating a set dollar amount means you're buying less when prices are high, and more when they're lower.

It's a natural brake on exuberance or, er, ignorance.

And managed funds come with built-in diversification.

"Many funds offer down to $100 per month for an automatic deduction from your pay," Murphy says.

But make sure you use a discount broker who rebates the entry fee.

And put in any pay rise as well, so your contribution doesn't fall behind inflation.

Best of all, you're always in the market. Advisers like to say it's "time in, not timing" that's the essential secret of share investing, and the record proves they're right.

"Time is your best friend or worst enemy," says Tony Clark, principal of Multiforte Financial Services.

In which case don't be put off by record prices in the sharemarket, or the slump in property.

"Whatever you do, start it now," he said.

Debts ain't debts

The great surprise of secret money business is that paying off the mortgage isn't always the best way of building wealth.

Its biggest virtue is it beats doing nothing. And there's absolutely no downside risk. On the contrary, it reduces it.

But there are better strategies around. Such as running up more debt, would you believe.

The trick is that debt used for an investment (gearing) comes with tax deductible interest, unlike the home loan.

There may even be a case for converting the mortgage into interest-only so that you can service an investment debt. Or put more into super.

Salary sacrificing into super is almost always better than paying off the mortgage in creating wealth, a secret study by Rice Walker Actuaries found.
Well it wasn't secret as such - I just didn't tell you about it before.

Anyway, the longer the time frame, the less paying off the mortgage stacks up against some other strategies.

But there's a catch to gearing. It's inherently risky and can unravel disastrously if the investment proves a dud, or has to be sold at the wrong time for other reasons.

Since gearing is for growth assets, there's little point in an income or balanced fund.

"There's no point in gearing to a fund with 30 per cent cash. You'd be borrowing cash to invest in cash," says HLB Mann Judd's financial adviser Michael Hutton who, along with many advisers, prefers shares to property.
The higher annual returns also mean you can put more in a share portfolio, giving a bigger start.

In top gear

When gearing, there's no contest between shares and property, the only two choices since borrowing for super isn't tax deductible.

Shares provide instant diversification and have a higher yield than residential property, plus a 30 per cent tax break on franked dividends.

A well-performing geared share portfolio can even outdo a conservatively managed super fund for all its tax advantages. Not to mention the bonus of much greater flexibility.

If you're under 40, gearing is probably better than super, where there's always the threat of the rules changing and it can be a long time between drinks.

"Shares aren't as risky as most people think," says Australian Unity's Ross Johnston.

Tracing the sharemarket back to 1910, MLC found "a 50 per cent gearing strategy over 20 years not only beat no gearing on 90 per cent of occasions, it also beat no gearing by 20 per cent or more on 72 per cent of occasions."

The only strategy that compares badly with paying off the mortgage is, of all things, gearing into property.

"I like shares, so I can go for growth," says Anne Graham, managing director of McPhail HLG Financial Planning, who gears as well as using super.
"It's about time in the market. You should have a long-term outlook and review your portfolio regularly," she says.

You need to look at rebalancing every now and then, so the allocation stays what it's supposed to be.

For example, if the prices of some shares have shot up to the point where they represent a much bigger proportion of the total value of your investments than when you first bought them, it's time to sell some of them to get back to the right balance. For laggards, consider buying more or rechecking your strategy.

Big picture

Either way, you're taking profits and dollar cost averaging automatically.
But it's the big picture, or asset allocation as planners call it, that makes the real difference.

You could be sweating on a property or a stock when the real question is whether you should have most of your money in the sharemarket, property, cash or specialist managed funds.

Each one has its time in the sun. You just have to be on the beach at the right time.

The trouble with asset allocation is resisting the temptation to look in the rear-view mirror and see how everything went, say, last year. You have to look ahead.

Then again, if you diversify you'll be covering all bases anyway.

Super

Advisers love super, and not just because it's so complicated you need their advice. It must be good because they're putting their own money in as well.
After July 1, super payouts if you're over 60 will be tax free. Yes, that includes lump sums.

While your money is in super, the income it earns is taxed at only 15 per cent. Since most funds invest in blue-chip stocks that pay franking dividends, in reality it is lower still.

"Superannuation is a highly tax effective way to save, and if you salary sacrifice then you don't get to touch the money first, so it is a lot safer," says Margaret Lomas, author of How To Create An Income For Life and director of Destiny Financial Solutions.

Super comes in all shapes and sizes.

Salary sacrificing is the Rolls-Royce way into super because you're swapping a marginal rate as high as 45 per cent for 15 per cent. Remember, if the sacrifice brings you down to a lower marginal rate, all your other income, including the rest of your salary, is taxed less as well.

On the lowest tax rates salary sacrificing isn't as enticing.

If you or your partner earns less than $28,000 a year, then you can put up to $1000 in super, not salary sacrificed but from after-tax income, and the Government will pay $1500 into your fund.

Six Myths

1 An investment property is the best form of investment.
People who have investment properties as well as owning their own home are not diversifying. One reason this myth has come about is because people use gearing strategies to buy an investment property which means that investors can show a great return on their capital. However, even better results can be gained from gearing in the equity market.

2 Insurance is a waste of money.
Have some form of insurance to protect both your income and your assets. One of the best ways to buy life insurance is through your superannuation fund as it is tax-effective. But it is also a good idea to protect your assets such as the home as well as your own income - particularly for self-employed people.

3 Your mortgage should be no more than three times your annual income.
This advice may have been sound for previous generations, but it's unrealistic in today's property market. Depending on monthly repayments and other debt such as credit cards, a mortgage of up to four or five times your salary could be feasible. The best approach is to set a budget so you know exactly what you can afford.

4 With the compulsory 9 per cent super levy, I don't need to worry about retirement.
Achieving a comfortable retirement depends on when you started working (or paying into super); the age you plan to retire; how much you've put in; and how much super your partner has. Most estimates now suggest that 15 per cent contributed to super throughout your working life is needed for a comfortable retirement.

5 It's a good idea to consolidate debt into your mortgage.
It is a fast-growing myth that the best way to clear high interest debt is to consolidate it into a mortgage. While the interest rates may be lower for a mortgage, the amount repaid over the life of the mortgage will cost you much more.

6 Financial advice is a waste of money.
Research has shown that those who get professional advice usually end up financially better off, with almost three-quarters of those who visit a financial planner saying it has had a positive impact. Using a financial planner to help manage and control finances should be seen as a simple investment in a secure future.

Simon · 11-04-2007, 10:50 PM

Quote:

Originally Posted by Redwing

Shush! Financial experts share trade secrets

Shush! Financial experts share trade secrets - Investment - Money - Business

Think you are preaching to the converted....