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Everyone aspires to being rich. Of course we do. But what is being rich?
What does it take to be rich?
In response to these questions, answers include ‘Having a secure, well-paid job’; ‘Owning your own home’; ‘Having no debts’; and of course ‘Winning the Lottery.’
And whilst all of these answers contain a large degree of truth, they don’t really tell us why, or how, they would make us rich.
So, what IS being rich?
If you have a secure, well-paid job, are you rich? Well, not if you don’t own a home. Not if you owe an arm and a leg to a finance company. Lots of people have highly-paid jobs, but with mortgages, credit-cards and car loans, are they rich?
If you own you own home – with no mortgage, and no debts – are you rich? Not if you can’t afford to buy decent food, pay your electricity bill, or run your car! Australia has a vast number of retired people who live in high-value, un-mortgaged homes, but who are trying to eke out a living on the Age Pension. Are they rich?
And if you’ve just won the Lottery? Well you’ve certainly got the money. But what will you need to do with it to live a great life-style, to enjoy absolute financial security?
Of course, you’ll spend some of it; maybe have a spending spree; cars, clothes, holidays. And you’ll buy a house (or pay off your mortgage), and get rid of all your debts. Fantastic! Then what will you do?
Yes, you’ll invest it – never mind how at this stage – even just to keep it ready for the next spending spree. But why else? Well, you wouldn’t want to lose it would you, or even find you’ve spent it all. Perish the thought!
Assume you were sensible. You would want your investment to earn income. To earn enough income to maintain your standard of living and life-style, and to continue doing so for the rest of your life, and without having to ask for your job back!
So. In a nutshell, you would be rich, because you own all your assets. And, more importantly, you have a secure, lifetime income-stream.
Assets alone are not the key to being rich. Having an adequate and assured investment income is the key to having a lifetime of comfort, financial security and Peace of Mind.
And Financial planning is about attaining this goal.
Are You Looking For A More Meaningful Return?
If today you hold any funds in a Term Deposit – in your Superfund, Pensionfund, or in your own name – you would be aware of the continuing downward pressure on interest rates, and your attendant lower income.
An Attractive Alternative
Given that one of the major attractions of a Term Deposit is the certainty and continuity of interest earnings, is there a more competitive alternative?
Yes, there is.
Really, the key consideration is CERTAINTY AND RELIABILITY OF INCOME.
And equally importantly, the LEVEL OF INCOME.
A product that certainly satisfies both of these requirements is MLC’s Income Builder Fund.
This fund generated a handsome SEVEN PERCENT return to investors over the past 12 months. (In fact, even higher in a superfund or pensionfund, due to tax concessions.)
Income Builder is an exclusively Australian Industrial share-fund. Its investments are selected for their long-established track-record of high and consistent dividend payments. Such investments may typically include ANZ, CBA, NAB, Westpac, Woolworths, Telstra, etc.
How Reliable Is This Income?
For example, had you invested $100,000 across these six companies in January 2001, you would have received $5,570 (5.57%) over the year.
Over the 2012 year, you would have received $11,281 (11.28%) income.
Today, a typical* Term Deposit would pay you $3,550.
If you are seeking solid, consistent and rising income,
Income Builder may be your answer.
*NAB 12 Month rate as at 28/5/2014
Call us on (02) 9416 7544, or contact us here.
See the latest Income Builder Report (31/3/2014).
Asset Allocation is the key to securing your future retirement income.
What is Asset Allocation?
We use this term to describe the amounts of money allocated to the different types of investment available in an investment portfolio. Broadly, these fall into three categories; these being company shares, real-estate, and interest-bearing deposits.
As you would expect, returns on these different investments vary over time. For example, over the past few years, Australian industrial shares have paid higher investment income than bank deposits and property rental income.
Many economic factors determine which investments perform better over different time periods. It is vital hold your funds in the right assets at the right time; that is, to have the right Asset Allocation.
The vast majority of SuperFunds have a 'default' asset allocation; this being how your fund is invested unless you give your fund manager explicit instructions to the contrary. (This default allocation is now known as the 'MySuper' option.)
Generally, the asset allocation of a default/MySuper option does not vary over time. Clearly, therefore, it stands to reason that there will always be some proportion of such a fund which is performing less than optimally. This weakness will ultimately be reflected in a less-than-satisfactory pension-income when you retire.
A competent Financial Adviser will inform and guide you as to how your funds should be allocated, and periodically adjusted, according to economic conditions, as they change over time.
Appropriate Asset Allocation - and its ongoing management - is the key to ensuring you get the very best performance out of your SuperFunds.
And that means securing the best pension-income by the time you retire.
Far better than leaving it to MySuper - and chance.
Five years down the track after the greatest credit crisis in living memory, and from which the world has yet to fully recover, thank God for the fabulously valuable lessons we've learned - or yet to realise they are fabulously great.
(I'm addressing investors here. That includes (emphatically) every person, working or retired, with money in their super or pension account.)
What's the biggest, most relevant lesson?
SHARE PRICE CHANGES ARE NOT AN INVESTMENT RETURN.
Yes, it's quite true that most people - including superfund managers - regard changes in share price as investment return, but in our view this is both a cop out, and a deception.
The only true investment return is the INCOME generated by that investment. Income is real money (ie, not 'on paper') . Share-price changes are purely 'on paper'. Unless, that is, you sell your shares. But why would you sell your source of investment income?
When you hear (or read on a report) that 'your investment has increased in value', it may look good, and it may feel good, but it really is only 'on paper'. It is valueless unless you cash it in. And unless you cash it in, it is there to earn income.
Do not make the fundamental error of thinking that increased share-prices means increased income. (Or decreased share prices means reduced income, for that matter). No, no, no!
Share-income (dividends) are paid 'per share', not per dollar value. So increases or decreases in share-prices do not affect the amount of your dividend income. That's the great beauty of holding shares for investment income.
Unless you are a gambler (what? - with your life savings??), that is.
The ONLY, REAL, investment return - in ANY investment (unless you're a gambler) is the INCOME earned by your investment.
To be continued...
I never cease to be amazed by how the whole financial services industry manages to generate an aura of mystery and complexity for itself.
Maybe it's a built-in self-preservation mechanism.
This applies to stock brokers, the Stock Exchange, superfund managers, real estate sellers, accountants and many (if not most) financial advisers. And of course the media.
I recently attended a seminar at the ASX on Tax effective Income Investing. (This was about investing for income, not about investing income; again ambiguous terminology - and this is the ASX!!)
This was a lunch-time presentation (free to the public). Commendable. There was a good attendance - close to 300.
At the conclusion, I couldn't escape the impression that most attendees were in 'information overload', and would have left with no appreciable benefit.
But they would have gone back to running their own portfolios and self-managed super funds. And - with few exceptions - continued to experience the same mediocre investment returns. And still under the delusion that they could 'beat the experts'. And at minimal cost.
Then again, they may have held a few company shares, and which - through no expertise or good management on their part, may have experienced price-increases, due - as always, and only due - to increased buying demand. And yet, unless they are thinking of selling, produces no real benefit, other than 'warm fuzzy' feelings.
The point is, that if the dividend earnings hadn't improved, then the only benefit would be if they sold out at a profit. But if they are good, dividend-producing shares, why would anyone want to sell them? And unless they did have good dividend earnings (or expected future good dividends), why else would the shares have been in demand and risen in price?
To summarise, unless you're a speculator and aim to make a capital profit, you hold an investment for its income-earning potential. You can assess an investment on its income earning potential. If you can trust the income, you can trust the investment.
This is not rocket science. You don't need a degree in economics. You don't need to do courses at the ASX.
The simple facts are
- You can't go past Australian 'blue chip' industrial shares for a consistent, reliable, growing income-stream.
- Dividends are paid 'per share'. They are not determined by whatever the share price happens to be. If you are investing for income, share prices don't matter; its dividends that count.
- It isn't worth 'doing it yourself'; It's too much bother. It can become a book-keeping nightmare. And need costly tax returns. And complicate your estate in the bargain.
- A managed fund shouldn't cost you more than 1% of your funds, per year.
- Managed funds come 'packaged'; that is, they do all the record-keeping, book-keeping and tax-accounting for you. They also have constantly available, up to the minute reporting. And liquidity is never a problem.
An adviser comes at another 1%. And assists you with everything from selecting funds, monitoring, conferring, explaining, reporting and keeping you on track. And more than covers the cost of his/ her services in economies and better investment results.
Whether you’re retired, and living on your savings, or still working and saving for retirement, read on.
The key to your financial security and well-being is investment INCOME. Investment INCOME, not capital gains.
So, it follows that you need to ensure your funds are invested to generate the optimal level of reliable, continuing investment INCOME.
In regard to capital gains, unless these are MASSIVE - say 10 to 15% per year, and can be relied upon to remain so, year in year out - you can’t realise on them without jeopardising (selling off) the very source of your income.
In other words, to benefit from capital gains, you have to part with your capital!
Superannuation funds report their investment returns in terms of ‘growth’; that is, how much the amount of your funds has increased (or decreased) over the reporting period - normally the financial year, July to June.
This means the “returns” may include capital growth (or contraction) and investment Income.
Bear in mind they don’t tell you how much capital growth, nor how much investment income, but give you a consolidated figure.
This used to seem OK - even irrelevant - when we had high inflation, and share-prices and property were rising in value year after year. But today inflation is only 2%pa, share-prices are still 35% below their 2007 levels, and property prices remain equally subdued.
Also, lets bear in mind that even the ‘massive’ gains were illusory - they were eroded by inflation! What mattered then (though we didn’t appreciate it), and what matters now, is Investment Income! Not capital gains. Investment Income.
So, if we are to rely on investment Income for our present and future security, where do we find the highest levels, the most consistent source, the greatest likelihood of increasing income?
Here’s what the banks are paying – December 2012
|Bank Savings account||0.5 - 3% pa (variable)|
|Term Deposits (eg. NAB, 12 months)||4.45% pa|
|ING Direct||3.5% pa (variable)|
|Ubank||4.21% pa (variable)|
|BankWest CMT||3.25% pa (variable)|
Residential rental property is yielding between 3 and 5%pa (gross)
Australian Industrial shares (previous 12 months’ gross dividend –: 26/11/12 prices), typically present in Superannuation share-funds
So choose wisely; the consequences of an unwise choice can be disastrous. To illustrate:
- $300,000 in a 4.45%pa term deposit will give you $256.73 per week pension (but never increasing, unless interest rates change).
- $300,000 earning 6% dividend income will give you $346 per week (with every prospect of increasing year by year).
- $100 per week, invested at 3.5%per year for 40 years will give $507 per week pension.
- $100 per week invested at 6% per year for 40 years will give $928 per week pension.
The Reality Dividends of typical Australian ‘blue chip’ companies have increased 2.8 fold over the past 15 years.
Has your income?
Your Will is a legal document that names the people you want to receive your property and possessions at the date of your death.
These people are known as your beneficiaries. Your property and possessions include everything you own: your home, land, car, money in the bank, superannuation and insurance policies, shares, jewellery, household contents, antiques, collections, intellectual property and so on.
It is particularly important to make a will if you have a family or other dependants. Even if you are married with dependants you need a Will. If husband and wife die together, for instance in a motor accident, the older person is normally presumed to have died first. If you were the younger person, you might have inherited assets from your spouse – even though you were by then deceased – but, if you had not made a Will, your assets would be distributed under a rigid formula regardless of what you might have wished.
If you don’t have a Will, you’re not alone – a recent Newspoll survey revealed that 43 per cent of the adult population in NSW does not have a Will. And yet writing a Will is something every Australian aged 18 or over should do.
An up to date and legally valid Will is the best way of making sure you look after your loved ones, and leave them with the things you love.
Equally as important as your Will, a ‘Power of Attorney’ is a written document in which you (the ‘principal’) appoint someone else (‘attorney’) to act for you. Your attorney can do any legal act you ask him or her to perform.
Everyone should consider having a Power of Attorney.
The power of attorney allows you to pick someone you trust to handle your affairs if you cannot do so yourself. It gives you peace of mind, reassuring you that in an emergency, someone you choose will have the authority to act for you.
If you don’t have a power of attorney and you are suddenly incapacitated, your family may have to go through an expensive and time-consuming court action to appoint a guardian or conservator to make decisions for you.
Please contact our office should you require any additional information regarding Wills or Powers of Attorney.
2013 marks the 45th year of my being a practicing financial adviser, and 38 as Wellings & Associates. I thought it fitting to set out one or two things I have learnt, and that may be of value to any one interested.
Firstly, financial advice is not about “creating wealth”. It is about attaining and conserving financial security, and thereby a contented life.
Secondly, the ‘secret’ of building financial security is that it’s a matter of saving first and spending what’s left. The other way round just doesn’t work.
Thirdly, invest for Income. Anything else is speculative. If the investment has a reliable, consistent, and growing income-stream, you can trust
Superannuation is important. It is insurance - against poverty when you’re too old to work and too young to die. It shouldn’t be clever, sophisticated and complex. Keep it simple and it will work. Neglect it at your peril!
Managed funds are by far the most appropriate means of investing. Well-chosen, they are cost-effective, provide most reliable value, and they work. Australian Industrial shares offer the most reliable, consistent, and growing income-stream for long-term investment.
Income Protection Insurance is imperative - if you work for a living. So is Life Insurance, if you have Loved Ones, and/or Debts.
Finally, Australia is, without doubt, the Lucky Country. It’s a wonderful place to live, to work, and to invest! Lets be thankful.
My Best Wishes for 2013
Let’s make sure...
- You will be able to retire when you’re still fit, healthy and full of fun.
- You will be totally debt-free, by the time you retire.
- You will be able to enjoy life to the full when you retire – a nice home, cars, holidays, travel, great hobbies, and an adequate pension.
Do you have this type of insurance?
Well, if not, you really have a very serious problem.
In fact, you are running the risk of financial failure. It’s that simple.
But where do you get it?
What’s it called?
Does it exist?
The answer is yes, but it doesn’t come from an insurance company.
It’s called a Financial Plan; a fully-analysed and fully-documented Financial Plan.
It’s your insurance against financial failure. And, like any well-designed plan, it has to be managed.
We design and manage financial plans. It’s what we do.
Don’t risk your future – it’s your most valuable asset!
Come and see us or contact us anytime.