Continued volatility in the markets | The Finn Review

Recent Events

A lot has happened in the last fortnight. Unfortunately I don’t feel that the actions have achieved much and I don’t have a change of sentiment.

The reserve bank took some action and cut the official cash rate by 0.25% to 3.5%.

Not the action that I think is necessary to spark some life into this economy but at least it helps out those with mortgages.

While everyone was heavily focused on the Greeks, Spain realised that they were in trouble and asked for a $100 Billion bailout to help strengthen their banking economy. This was passed by the European Union last weekend and everyone expected the markets to rally with some large momentum as that is what usually happens after bailouts, isn’t it?

It shows the problems occurring in Europe when a bailout of this size can’t spark any positive momentum in markets. I think the market is starting to get a little smarter and realising that bailouts of this nature are not really positive.

In Australia we have experienced some of our own problems.

Fairfax has gotten themselves in some financial problems and has had to lay off 1,900 staff!

Although I am not surprised that they were struggling a bit, being in an industry that is in a transition from old to new. I was surprised by the extent of their difficulties and how many quick drastic changes they need to make in order to continue.

It makes me wonder what other companies in Australia are in a similar situation and are about to come out from hiding their problems and be honest with their situation.

Outlook ahead

There is going to be continued volatility in the markets.

Just after we had a positive result with the Greek Election where the pro-austerity government stayed in power, attention turned to Spain and Italy where the cost for the government to borrow money surged past 7%. It is unsustainable for a country to pay that much to service their debt and it is often a warning that there is worse to come.

There will be a lot of talk of possible stimulus packages from America’s Federal Reserve however I would not bet on this.

Our stance is still to sit out and use any rally to help get rid of some of your poor investments. I believe we are going to see more Fairfax style events which will not help to reduce the negative sentiment in the market.

Where to invest

Right now I believe there is only one place to invest and that is in yourself.

I always get asked how I can make money and I truly believe there is only one way to build wealth and that is to SPEND LESS!

Taking into consideration the nature of the Australian tax system, every dollar you spend you will need to earn anywhere from $1.50 to $2.00 next year to replace it. You do the maths and you can see automatically that your investments need to get some amazing returns to make up for this.

I am an investment person but I see one of the most valuable exercises in our business is when a strategic advisor makes the client conduct a budget. This simple activity really highlights where all your money is going and how spendthrift and wasteful you have potentially become.

One client recently after putting every expense that he could imagine that he was spending into his budget we found that he should have a $50,000 surplus that technically would be available to invest. However somehow he was in $10,000 credit card debt!

The simple answer and what the advisor told the client is “you spend $50,000 a year on crap.”

So I encourage you all to have a good look at your spending and make some simple changes. You will find yourself in a lot better financial position and maybe then you will have some more money to invest.

Notable investments

Shale gas

There has been a lot of talk about shale gas over the last year.

Shale gas is natural gas formed from being trapped within shale (most common sedimentary rock) formations. Until recently it was very hard to extract this gas however there is now a modern process called hydraulic fracturing (fracking) that can get extract the gas at a commercial cost.

America has a huge supply of shale gas which has huge ramifications for the energy industry. We could see America becoming a net exporter of energy, rather than an importer.

Why am I positive on shale gas? Oil, coal and gas are natural substitutes.

If compared to the oil price, US gas price should be closer to $16/MMBtu. In the US it is currently $2/MMBtu. Now, I don’t think it could go past the $4-6 mark as it will be capped by coal prices. There are big flow-on effects from this option with energy. Potentially mass adoption of gas becoming a transport fuel is very compelling as it is so much cheaper – this will eventually push up the price.

Australia also has a number of shale gas reserves.

One company who has been at the forefront of Shale gas development in Australia is Beach Petroleum (BPT). They have some of the best reserves in Australia and have had success in drilling these reserves.

First Home Savers Account

This is the only investment that I can guarantee you a 17% return on.

If you have not bought a property before you should consider setting up one of these accounts immediately. The government will give you a 17% bonus on savings up to $5,500 each financial year. Tax on earnings within the account are capped at 15%, another compelling factor. Certain companies like ME Bank will also give you 4% interest on the cash in the account as well.

There are restrictions of course.

You can’t access the money for four years. After this time you have to use the money to pay off a mortgage or contribute the money to super. As we are near the end of the financial year if you set it up now it is only just over 3 years you are restricted for. Parents who want to help out their children this is the best way that you can.

Word on the street

There is a lot of disgruntled talk about the recent superannuation changes that were announced in the Budget.

I am one of these people as the Government has once again found a way to make Australia dislike super and more importantly made it harder to put money into Super.

It is vital that if you are over 50 that you take the last opportunity to make a $50,000 concessional (pre-tax) contribution. For everyone else you need to start thinking about maximising your contributions from a young age. You cannot rely on your Employer contributions to provide you enough to live on in retirement.

A scary stat is that if a 35 year old maximises their contributions every year until retirement they still won’t have enough to retire on – start early!

I know it is frustrating that the Government keeps on tinkering with the super rules. Remember this, super will always be a more tax advantaged environment otherwise it won’t exist.

Out and about with TheFinnReview

Platinum asset management breakfast

Platinum is headed up by the Great Investor Kerr Neilson. They have been one of the best performing managers over the years. A number of you may have had exposure through the Asia fund and International Fund.

They tried a different tactic which I thought was interesting.

They spent time educating on the basics of investing – reminding the advisors of the reasons why we invest.

For those of you who have gone through the Investor Education Session with me, you will know that this is one of the first things we discuss. I believe too often we get caught up in short term events and forget why we are investing. They did not spend any time talking about the macro situation. Rather they said there are always companies which are growing. The weakness is providing opportunities to become part owners of these companies at a good price. They are keen on solar energy and shale gas.

Like I discussed above, Kerr finished with the quote “Equities might not make amazing returns but where else is better?”

St Vinnie’s CEO Sleepout

I like to pride myself on my work fashion but this week I appeared in the MX newspaper wearing P.Js in the boardroom!

I can’t say it was the best look, or that I felt that comfortable! But when a charity asks you to help out I think you should always try to assist. Next Thursday I will be participating in the CEO Sleepout at the Docklands. It is to raise money and awareness for one of Australia’s major problems – homelessness.

Did you know?

You can use leverage in your Super.

With the Government focused on making it harder to contribute money to your super, it is getting to the point that even if you maximise your concessional contributions (pre-tax) from a young age you still may not have enough money for retirement.

This situation will only get worse as medical developments improve our life expectancy.

So what can you do?

Until recently you were not able to borrow money in your Super Fund but now you can through Instalment warrants.  There are many listed warrants on the Australia market on large company’s shares.

You buy a parcel of shares but you only have to pay half the cost of the purchase. The rest is made up of a loan. A premium is built into the price of the warrant to cover the cost of the loan. This means that you get twice the exposure to the company. If the share price goes well you get a lot higher return on your initial investment.

Obviously this also works the other way and it can magnify your losses.

You can also use instalment warrants to purchase property in your SMSF.

Banks will lend you money to purchase a property. However, it will be a higher rate than you can get in your personal name as they only have claim over the property not your personal assets. You can make extra concessional contributions to help pay off the loan. Generally it is better to have properties which are positively geared. The tax concessions for negative geared properties are not as beneficial in the Super environment.


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Disclaimer: Information contained within this article is of a general nature. Do not be rely upon it when making financial decisions. Please consult a professional financial advisor or planner (like us!) before acting.