How Grandma got rich | The Finn Review

Recent Events

Another end of financial year has come and gone.

What did we see in FY11/12?

We saw the debt crisis move from America to Europe, the domestic property market take a turn for the worse and the negative effects of a high Australian dollar on the retail industry.

The cash rate reduced from 4.75% to 3.5% (nearly a 30% drop in income), there were delays and cost blowouts in mining projects and the domestic bond market got some action due bank funding getting too expensive.

The Australian Share market was horrible and shed 11.1% and besides a couple of major negative moves was boringly stuck in some tight trading ranges.

Outlook ahead

Unfortunately we have not started the new financial year in any convincing fashion.

The mess in Europe is no closer to being sorted out, there’s an increase in negative data coming out of America with poor unemployment numbers and there has to be some questions raised about the expectations of corporate earnings across the world.

Domestically, I think the pain is only about to start, as companies are, and will continue to, start focusing on their expenses to make up for their lack of revenue growth. We have just seen a number of companies make mass redundancies and I expect this to continue.

Unfortunately in Australia people do not value their salary enough and just expect the companies to keep on giving raises even though they are adding no extra value to the company. I expect this will slowly change as more people start being laid off.

You all know that I have been a BIG BEAR over the last year and I have started off sounding quite negative, however I am actually starting to get more positive towards investing again.


  • The Australian Market is very well supported around the 3800 level due to the high dividend yields available and I expect this to continue. There has been an extremely low volume of trades on the market which means that brokers are hurting and I would not be surprised to see a broking house go under in the next few months as you can only lose money for so long. (Start buying equities when this happens as it will most likely be the low!)
  • The Presidential Election occurs in October and Obama will need to ensure that there is confidence in the recovery to get re-elected. Do not be surprised to see some major action in America over the next few months to spark some life into the markets.
  • China is not as bad as people think. Their Government is doing a great job at trying to control the massive growth that has been occurring. The recent inflation rate in China was a lot lower than expected which allows them a lot more room to provide stimulus if needed.
  • We will all start to accept that Europe is going to be in pain for a long time and we will move on and focus on the rest of the world.
  • There is an extreme amount of cash sitting on the sidelines and with cash rates falling; people are going to be forced to look elsewhere to find the income that they require. The only other asset class that Australians SMSF trustees are comfortable with is Australian Equities so I expect this to support the market. When things look a little bit less scary this could cause quite an aggressive rally as people start following the herd in fear of missing out.

I won’t be rushing out to invest everyone’s money but I will use the old and proven technique of dollar cost averaging in over the next few months.

Where to invest

I am getting quite concerned that we are starting to turn into a bunch of frozen investors due to people being burnt during the GFC and still sitting on a bunch of investments that they are hoping to get back to the purchase price.

I will give you some free advice; they are probably never going to.

If a stock is now worth $1, just because it used to be worth $5 doesn’t mean it is ever going to get back there, there is usually a reason it has gone down that much – it is a rubbish loss making company!

I don’t want to be harsh but if you are a culprit of this you need to bite the dust, take some action and start looking at selling these investments and switching into better quality companies.

How Grandma got rich

I want to share an experience I had with my Grandma recently.

My Grandma is quite wealthy and everyone would think it is because she has been a doctor her whole life (our family jokes it is because she has never given us any presents).

But I have now learnt that it was because of an experience she had when she was a 25-year-old intern chatting to her next door neighbour. He asked her what she was doing with her savings now she was earning a salary. She said that she was saving 20% of her salary and had just bought some debentures.

He asked my Grandma why would you lend money to a company so they can go and just make more money from utilising it to grow their business, why not become a part owner of that company instead? My Gran being a smart young lady took this advice and straight away cashed in her debentures and bought shares in that cement making company. Low and behold that company got taken over a year later and she tripled her money.

This started her love affair with investing and shares and she has done it ever since.

Two things that really stand out for me are that if you start saving 20% of your salary from day one you are always going to have money and the other is a concept that we talk about a lot “be an owner, not a loaner”! You may also like to check out Sarah Riegelhuth’s recent post on this concept too.

When you put money in the bank this is exactly what you are doing.

You are lending money to the bank so they can make those record profits that Australians love to whinge about all the time. Why not have a share in those profits?

One final comment from my Grandma that has stuck with me, we were discussing one of her largest share holdings Woodside Petroleum (WPL) as the share price had gone down that week over 10%.

She said “Why should I care? Nothing has changed with Woodside, they still own great assets and are making money, anyway I have been paid back my money so many times by them over the years that I see only profit and free money.

After she had just spoken about all the shares she owns, and all this free money, the bill arrived. She displayed just how she likes to save money, and I could tell she did not want to pay the bill… I had a win that night though as she reluctantly paid the dinner bill!

In the current environment it is very hard to think long term but try to learn some lessons from my Grandma.

This graph highlights the importance of looking long term, and not relying on term deposits for income.
 how grandma got rich

Notable investments

Australian Equities

With cash rates getting quite low and very low bond yields you need to start getting comfortable with investing in equities. Use the volatility to pick up good quality companies at a reasonably cheap price with an attractive yield. Companies that I will be looking to purchase in the short term are: BHP, WPL, CPU, OSH, WES, TOX, BLY and NAB.

Insurance Bonds

The new financial year provides a great opportunity to make some financial goals and create some action.

Insurance bonds are a great structure to create a regular savings vehicle to plan for a future event such as, your child’s education expenses or aged care for yourself or a family member.

Put simply, an insurance bond is a tax paid investment with a maximum internal tax rate of 30%.

You do not have to declare the income on your tax return and after 10 years you can withdraw all the funds tax free, or create a tax free income stream.

There is also a number of estate planning benefits gained by holding one.

They are one of the oldest and most flexible investment vehicles and anyone who has a tax rate over 30% should consider establishing one. Why not use your tax return to start one? To find out more visit Austock Life.

Word on the street

With the end of the financial year everyone is soon going to be looking at their returns from their personal investments and also their super funds.

After a very poor year like we have just had, this is always an apprehensive time for investment advisors. Our performance gets put in the spotlight.

I personally enjoy this time as you get to have great conversations with clients. Hopefully they appreciate all the hard work you have done over the last year. My biggest concern over this period is the dangerous decisions people can make after seeing their results.

When comparing results between your investments and others it is very important not just to look at the return that you achieved.

You need to look at other factors such as how much volatility occurred in your portfolio. How much risk was in portfolio and what were the tax consequences of your returns?

Here’s a simple example. I would much rather have a portfolio that achieved a 6% return, that barely had any market exposure over the last year, than a portfolio that achieved a 6.5% return that was holding a mixture of risky assets. I guarantee all that stress over the last year was not worth the extra 0.5%.

It is also very important not to look at the year’s results in isolation.

Yes, you may have achieved a small negative return last year and feel like changing your investments or advisor. But if your investments achieved an average of 8% over the last 10 years, I think you are way ahead.

There is a dangerous concept of anchoring where you chase the best returning investment of the previous year. This often causes you to buy assets with overinflated prices. They underperform the next year resulting in you having negative returns.

Out and about with TheFinnReview

CEO Sleepout

On the shortest day and coldest night of the year, 150 CEOs including myself participated in the Vinnies CEO Sleepout at Docklands. The CEO Sleepout raises money and awareness for the serious problem of homelessness in Australia.

It was a great experience. Hearing the stories from the guest speakers who either were or currently are homeless was a huge eye-opener.

What it made me realise is that anyone could end up in this situation. All it takes is a couple of unfortunate situations or a couple of bad business decisions.

The main differentiating factor between the people who end up homeless is often that they were not lucky enough to have the support network that the majority of us have at a time of need. It got me thinking about how many Australian are putting themselves at risk of being confronted with this problem. They may potentially be going bankrupt through not saving, exposing themselves to one asset or taking on too much debt.

I met a number of great CEOs who should be commended for taking their time out of their busy schedules to help raise awareness for such a great cause.

It never ceases to surprise me how critical Australians can be. There were a lot of people who tried to criticise the event as apparently the conditions were too easy. We shouldn’t be getting gratitude for pretending to be homeless for one night.

What do they want us to do? Actually lose our jobs and become homeless?! Of course we don’t know. But at least we are trying to gain an appreciation and help raise money for the cause. It’s better than the ones who are criticising from the comfort of their couch.

In any situation I am always trying to learn something that I can apply to my investment portfolios.

I got the chance to chat to a number of different CEOs from different industries. One conversation stood out to me. A CEO of Liquidator company said that they have never been busier, especially in the small business space. It shows that there a number of businesses hurting out there.

Did you know?

You can access a diversified portfolio of direct shares with as little as $1,000?

To benefit from direct share ownership and still have a diversified portfolio you used to need a minimum of $100,000. The costs involved with having a portfolio (brokerage, investment advice, investment reporting, tax etc.) were too high to justify.

The only way to access investing into shares was through a managed fund.

There is now a structure called a Separately Managed Account (SMA) which enables the best of both worlds. An SMA is similar to a managed fund in that you get a professional making the investment decisions. However, when you invest your money, unlike a managed fund where you get to own units which represents the underlying shares you actually purchase the exact percentages of each share that the fund manager owns in his model.

The big advantages of this are:

  • You have transparency as you will know exactly what shares you own and your exposure to each,
  • Brokerages drastically reduced as it is split across everyone who is in the model investments that day and
  • You also get consolidated tax reporting at the end of each year. So you don’t have to worry about corporate actions.

This is an extremely simple way to start your experience with share investing. You can take as little or as much interest as you want.

We use SMAs regularly to set up a simple and regular investment strategy. We also use them to educate clients on the different facets of share investing.

The other big benefit is once your portfolio is large enough and you want to take control of the investment decisions you can transfer out of the model. It’s won’t trigger any capital gains/losses events as you are still the underlying owner. One provider we use to access these is Blackrock.

Want to chat to Finn and the WE coaches about your money? Book in a time for a Free Strategy Session.


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.