Monday, September 27, 2010

Break down of my retirement asset allocation

Finally received my member statement which summarises my retirement fund breakdown.

Unfortunately it's all preserved - meaning, I won't beable to access it until I'm 65 or so. Decades and decades away. Because of this 'you can't reach into the cookie jar' type of control, many of my peers and younger compatriots aren't that interested in contributing extra or trying to maximise contributions. And if we are, it's not up to the $25k limit usually.

Even though it has great tax advantages, locking funds away into super funds can really limit your options in the near future. So when you're undecided about whether to contribute extra into your super funds or not, always consider the short and medium term and whether you will need funds for buying a house, getting married or for a new car. I prefer the way the Americans have structured their retirement funds and the flexibility it has over the OZ structure.

If anyone encountered financial difficulties in America, they can withdraw their retirement funds (at the cost of paying extra taxes), however, at least it can be withdrawn in the first place. Unfortunately for the Aussies, if we encounter any financial difficulties, the most we can access is around $10k and that's after going through rigorous paperwork and having to prove that you're seriously going through hard times and pretty much in arrears on your bills- but you're more likely to be homeless and begging on the street before you can access that $10k.

Here's the asset allocation breakdown of my super/retirement funds:

30% Australian Shares (Risky)
23% Overseas Shares (Risky)
12% Bonds (Semi-risky)
10% Property (Semi-risky)
9% Growth Alternatives (Semi-risky)
6% Cash Securities (Almost risk-free)
5% Defensive Alternatives
(Almost risk-free)
5% Infrastructure (Almost risk-free)

Where 'risky' assets are considered to have a higher possibility of 'actual' asset returns failing to meet and exceed 'expected' returns. With increased risk of course, is the chance of increased returns.

The fund that I have it invested in, is considered to be a 'balanced' type of fund. Pretty much a middle-of-the-road type of fund where it's not too risky that I have massive fluctuations and not so risk-free that I have no gains and no investment growth. Which is perfectly fine for my risk profile. You need to work out your own risk profile before you can decide on which structure is the right one for you.

I don't want to find out next year that it has plummeted 50% and on the other hand, I don't want to discover that it hasn't kept pace with inflation since it was invested in such low yield assets.

With a 5 year average return of 5.52%, it's rather dismal and pathetic.

If you're trying to find a good allocation percentage, the rule of thumb is- the younger you are, the more you can afford to risk, so you can afford to be more heavily invested across stocks(domestic & overseas) and property. If you're older and close to retirement (eg: 50yo and older) then you should probably be rebalancing to something more defensive and less risky, such as more cash securities and cash accounts.

If you're expecting to live until you're 90 and older, you need to bear this in mind and evaluate how much risk you're capable of tolerating before you need your funds. There's nothing scarier than the idea of running out of funds while you're retired and having to rely on social government benefits...and particularly in the future... it's ghastly to contemplate the idea of running out of funds when you're 85yo or something and that there is no social government benefits because the government simply doesn't have any.

Wednesday, September 22, 2010

The retirement conundrum

Amercians should be worried (and the rest of the world too). Especially as the population is aging and the speculation is that by 2016, the US Government will be paying out more in Social Security than what it collects in taxation revenue.

Congressional Budget Office (CBO)'s has reported the US debt to be $US13.4 trillion, approximately 92 per cent of GDP. This figure does not include obligations for Social Security and Medicare.

The situation is unsustainable. Let's hope the Americans are saving hard for their retirement and their future. Just like us here in OZ, neither of us can rely on our respective governments to fund our retirement.

Our own Current Account Deficit (CAD) as of the June quarter was $5.6 billion, which is 1.7% of our GDP. Looks benign compared to the Americans. However, we're pretty much in the same leaking boat since our population is also aging and the pension payments aren't sustainable.

Saturday, September 18, 2010

Finding the courage to be brave and contrarian

A conversation I had today reminds me to remind myself that it takes courage to be brave and contrarian. Particularly in the field of investing. You can't follow the crowd and if you do, don't expect anything more than the average.

Warren Buffet, the wise dude from Omaha is often quoted:
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
The market has really tanked since 2007. Even for myself, a self confessed finance junkie, I find it hard to work up enthusiasm to contribute extra to my superannuation for my eventual retirement that's over 30 years away. And it's also hard to work up enthusiasm to buy stocks in a market that's volatile and swinging around with no clear trend.

No sane person likes to invest $10,000 only to see it drop to $9,000 the next week, for example. Because when that happens, your mind(and my mind) is plagued with slight regret that the $1000 could have been spent on fancy dinners, a new dress or some new toy. That if you hadn't bought that week, you could have bought the same number of stock for a cheaper price.

So in this imperfect world - I do realise that I have to boost either my retirement fund or my portfolio that's invested directly in stocks. Firstly, I'm overweight in property and cash, and underweight in stocks. At my age, I can afford to have a riskier asset allocation. Most of my parents friends are millionaires and they are invested roughly: 70-80% property, 20-30% shares, 0-10% cash.

Personally, I like the way they've invested and also prefer to have similar weightings on my asset allocation.
If you are more risk averse and prefer to increase your returns (risk and volatility), you would change the weightings to a higher percentage in property or stocks. I have met so many people in the past who are either 90% property or 90% stock. It takes effort to learn, understand and invest in both markets. Most investors fear what they don't really understand. Complacency and reluctance to learn means they usually prefer to invest mainly in one or the other. to the stockmarket I go again to buy some more stocks... despite my risk-averse side telling me to invest the majority in property or cash. Property just had a huge boom this past year so the rental yields have dropped significantly in most suburbs. The only thing that worries me about the global market these days, are the huge deficits in the US and most European Nations. In the long run, how can nations grow and afford to spend on infrastructures and social services when their cash flow is leaking out in terms of interest and debt payments? That is one of the biggest reason behind my hesitation to direct more funds towards increasing my stock portfolio.

Mind you, Warrent Buffet's advice is quite handy in times like these. And I couldn't agree more with this quote of his when it comes to buying fundamentally strong companies for the long term:
Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.

We had a wedding to attend today. I stitched two images together from the DSLR to form a panorama since I don't have a camera that can shoot panoramic images(and I'm too lazy to crop the image in Photoshop since it's past 1am now). It was dusk and anyone who had a camera could not resist the beckoning lure of our iconic Opera House, Sydney Harbour Bridge and Centrepoint Tower.

It was such a glorious Spring day with warm weather and I couldn't resist taking a shot of the lilac Wisteria's that were trailing off the trellis :

At the wedding, I met a guy named Dennis and he was chatting to another friend about trading stocks. Dennis mentioned that Peter Lynch's book had a momentous influence on his trading techniques. being me... when I got home, I just had to hop on the net to google Peter Lynch. His name was familiar but I had never heard much about him. Everyone who's into finance has heard of Warren Buffet and George Soros but Peter Lynch?

"Peter Lynch managed the Fidelity Magellan Fund from 1977 to 1990, during which time the fund's assets grew from $20 million to $14 billion... achieving an annual average return of 29%."

It's hard not to be sceptical with any fund returning a very high average return exceeding 15% over several years or decades. Figures like that should always ignite little warning lights - particularly after the Bernard Madoff ponzi. Even for a fund that can return yields like that, it would be foolish to invest 100% of your funds in them. Everyone should be diversified across the asset classes (Property, Stocks, Fixed Interest & Cash), regardless of how tempting it is to invest in a singular asset class because of its attractive returns. Investing 100% in any singular asset class is one of the biggest risk you could ever subject yourself to.

Some people will say..."but I'm diversified...I have all my funds invested across 20 or 30 stocks. " however, you should be diversified across the asset classes and within the asset class. If that doesn't make sense to you, you better keep learning if you want to learn how to minimise your investment risks.

Warren Buffet is probably the most overquoted financial guru. He is however, a very successful investor and the second richest man in the world as a result of business aptitude.

One last photo before calling it a night. The wedding cake was cute. The bride and groom are both fanatical about aquariums, underwater diving and marine animals. This is their beautiful wedding cake, decorated with bride & groom turtles :)

Wednesday, September 15, 2010

Ask, and you shall receive

In most situations in life, if we want something, we have to ask for it. Just like being in a relationship with someone. If you're unhappy about something, you have to talk about it. No-one can read your mind so you have to express yourself or ask for it.

A few years ago, a friend of a friend told me that at her jewellery shop, if a shopper didn't ask for a discount, they never offered it. However, if any shoppers ask for a discount, they will always get some sort of discount. I've always used her very sagacious advice and applied it to a lot of my shopping expeditions and it really works. In terms of personal finance, it also works in the financial banking sphere.

So what am I rambling about? I know that you can negotiate with banks for higher interest rates. In the past, they have increased the interest on my savings however it wasn't always the case. But there is a trick to it. If you just ask for a random interest rate increase, chances are you won't receive the increase. However, if you ask them to match the 'introductory rates' that are offered for new depositors or for 'introductory periods' then there's a 99% chance that they will match the rates. Especially if you've done a bit of research and ask for the specific rate that they are offering to other depositors.

If you're dealing with with a teller or a customer service representative on the phone and they're being stubborn, you can get what you want if you ask to speak to their manager or mention that you'll be transferring your savings to their competitor...the one with the higher rates of course.

Previously, I wrote about opening up my uBank account for their 6.01%-6.51% interest, compounded monthly. My other bank increased my rates, but uBank is a really well-thought out banking subsidiary of NAB's so I'll transfer some savings into their account. May as well keep my deposits diversified... until I find a new acquisition or a stock I want to buy.

It's not like Australian banks will collapse like US banks did in the 1930s. Off the top of my head, I think it was something like 500 banks and financial institutions failed in the US during that period. That's why the governments were so keen to guarantee banking deposits during the financial crisis. There are no banks that can survive a deposit run. They don't hold much in cash (just like most of us), they have loaned out their deposits in order to maximise their returns for shareholders.

There are so many Aussies who hate banks. Don't hate them, join 'em! Buy shares in them. Be a shareholder. Earn dividends. The major class action against the major banks is a bit of a joke. Most people who are constantly incurring late fees, interest and charges can't really blame anyone but themselves and their financial practices.

I'm not defending the banks or anything, but if you're a good steward of your funds, you probably wouldn't have incurred any of those charges. And if you forget occasionally, most of the time, call them up and ask for the fees to be reversed. They will usually reverse the charges.

Ask for it, and you will get it. Simple.

This being a personal finance blog, I guess I should stick to financial topics but... it's so tempting to write about things other than personal finance every now and then. On the weekend, we had gorgeous weather and it's spring :) Gardens are in bloom and of course, I had to go shopping for some new plants since our pot plants died while we were holidaying. Here are some shots that I took over the weekend revealing our Spring in its full glory :)

Beautiful daisies all over the farm in wild abundance:

I bought two Camellia trees and received two as a gift so I've got four trees:

Peach blossoms will always be one of my favourite:

Beautiful posy of blossoms:

As you can see from all those tempting blooms, I went a bit nuts and bought about $313 bucks worth of gardening materials and plants. Not to mention my photo frenzy!

Tuesday, September 14, 2010

Financial Gifts from Parents and Relatives

Have you been the recipient of a financial gift or series of financial gifts?

I stumbled upon the blog of a GenY girl (Meg) living in Texas who receives a financial gift of $24,000 and now $26,000 per annum from her grandparents. She's not the only one receiving monetary gift. It turns out, each of her parents receive $24-$26,000 (approx $52k/annum) and so does her aunties, uncles and all grandchildren! That's some serious wealth sharing practiced by her grandparents indeed.

Although no-one really likes to mention that they've received financial gifts, it does exist and as long as you don't really boast about it, you can fly under the radar unobtrusively without some people resenting you and being jealous.

It did provoke me into reflecting back on the gifts that we (meaning myself, family + friends) have received. Some more substantial than others. The amount depends on how affluent our respective parents are. The gifts aren't always monetary. You've been a recipi
ent if any of these other 'gifts' reasonate with you: dinners paid by parents, cars, jewelleries, holidays paid by your parents, rental/study/living allowances, bills or weddings paid by your parents....

Because I blog and write using my name and not some 'fake' name or anonymous identity, I can't reveal names when it concerns myself. Otherwise I'd be drawn and quartered if anyone knew I was posting up their private financial lives up on the web for the world to read about.

Meg from the 'World of Wealth' blog provides a pretty tasty break down(for those who are interested in snooping about other people's financial health) of her assets and the gifts that she's received. I'd estimate that she's received about $300,000 in monetary gift via the form of trust funds, cash and loans (that are forgiven). Not to mention her family subsidising her travels.

Friend A: Financial gift received $300-$350,000
We all got various birthday presents for our 18th. When we asked her what her best present was, she mentioned that her uncle gave her a house that was worth about $300,000-$350,000(ish). Strangely, I don't think anyone was surprised. A few of us received cars from our parents when we first got our driving licence at 17. We were young and it didn't really mean too much until we attended university.

It turns out that the rental income that she received from her house was paying the fees on her law degree, clothes, entertainment and also with savings to spare. With the two property booms that we've had in 2003 and 2009, the house is probably worth around $500-$700,000 not to mention she's probably earning a significant 100k+ income from practicing law. Not bad at all for a GenY.

Friend B: Financial gift received $300,000
Friend B: He bought a $500,000 house when he was 22 years old. None of us ever explicitly talk about money, income or savings. So we didn't question him about the financing arrangement or anything. I'm not sure how we got talking about property investing but he told me that the $300,000 deposit was a loan from his parents. And now it's a loan that is 'forgiven' so he does not need to pay it back. They were probably waiting to see him mature a bit and behave a bit responsibly with his funds, to stop drinking and partying so much before they let him know he didn't have to pay the loan back. Now the house is fully paid off so that's $500-$600,000 worth of equity that he can pull out to fund future property acquisitions.

He's on the hunt for another property now with his fiance. With a DINKS status and high income for the pair of them, they will probably easily end up in excess of $1m net wealth before their mid thirties.

Friend C: Financial gift received $250,000
Friend C: Same thing as above. $250,000 'loan' that is 'forgiven' and probably was never really a 'loan' in the first place. Between this gift and his own savings, he is another GenY who has amassed $500,000 in net worth and is looking for another property to buy.

Friend D&E: Financial gift received $150,000
Friend D&E: A married couple, one child and stay at home mother. It seems everytime they bring up 'financial issues' to the parents, money is gifted. Both are GenY and have about $360,000 ish in net assets. Not sure what type of 'financial stress' can be felt with assets behind them, but I imagine that if you find yourself spending all that you earn or saving just a small amount, you would feel 'financial stress' regardless of your net asset amount.

Relative A: Financial gifts?? Not sure but the assets sure stack up to a rather significant figure.
My cousins also have affluent parents. And although we never discuss anything too personal between ourselves, occasionally parents like to brag. One proud set of parents induces other parents to start listing their kid's achievements. Family jaunts are always interesting in terms of finding out who is up to what in terms of their investing activities.

Relative A and his wife have accumulated three properties between them. They're both GenY and between the values of their three properties, I'd estimate their gross assets to be $1.44 million. Pretty good. Although I'm not sure if their net assets are also high or whether they're geared up to the eyeballs.

Relative B: 31 years old and has four properties with gross asset values estimated to be about $1.26 million. I would hazard a guess that Relative B is also a recipient of a monetary gift as well.

I could probably go on and on about the friends, relatives and friends of friends that I know who has significant assets. Also, the ones who has received significant monetary gifts. I don't know anyone who is irresponsible. Almost everyone has interesting investment allocations.

Some of my friends aren't as fortunate to have affluent parents and they manage just fine. Without a more invasive discussion though, it's hard to differentiate between the ones that have a massive net wealth and the ones that are massively geared. So on the surface, almost everyone appears to be rather affluent. In summary though, I'd rather ask no question and have no-one asking me questions too. It's a rather private matter really and none of anybody else's business.

Of course, it is an interesting subject :) Financial gifting is a bit like the lottery, except it's usually a lot more reliable. It does open up the question of what a person who is the recipient of the gift will do with the gift. Most friends/family that I know who has received monetary gifts feel guilty if they spent the money on hobbies and holidays. They have used the funds as a deposit for property and to invest and used their own hard earned income to fund their guilty pleasures.

Would you spend or invest if you received a monetary gift of $200,000 or more?