Never underestimate the Power of Income

Yes that was the key message we were reminded  from Matt who speaks on Sky & a key man for Perpetual, a very major fund manager.

We had heard it before & being reminded was very useful. In fact we have written about it before.

The question always is where is the best place to invest?

The answer always is ‘it depends’.

Two important variables are ‘how long?’ & what is your ‘risk appetite’. 

What can we invest in?

Really there are only four major classes: gold, cash, property & shares.

Yes they all have subsets such as property with residential, office, commercial, industrial, international…

Then there is the time frame . 

If it is for a short term then cash is where we go. i.e. cash, term deposits via banks or bonds from corporates or governments or institutions.

Investment has two outcomes growth & income.

As Matt said & as Rich Dad, Poor Dad wrote.  [A compulsory book for you to read we might  add].

Assets produce income & liabilities cost you. 

Gold doesn’t produce an income & the reason why Warren Buffett doesn’t invest in gold.

Your home doesn’t produce an income & Rich Dad Poor Dad teaches you why that is so.

Very simply your home costs you maintenance, & the interest is bad debt & non deductible. So are the costs of insurance , rates, tradesmen….. There is opportunity cost where your equity could be elsewhere invested

‘A house is like a spouse; it requires money & maintenance.’

Your home is a liability. It is a lifestyle.

If we consider  so called investment property then in most cases the cashflow is negative. So it too is a liability & we have argued that unless you make a nominal 100K over time then you have gone backward.

Let’s look at what Matt demonstrated with both growth & income being the total return.

He took it over a long period of time from the end of 1974.

Gold returned only 14 times the original investment.                       [It pays no income.]

Cash  returned only 20 times.                       [ It does not  grow & the income is variable.]

Residential property 48 times.                 [Matt stated that the costs are 70% of income]

Listed property trusts returned 102 times.        [net income is higher as costs are lower]

Equities produced 180 times.              [profits grow & reinvested which increases prices &      dividends]. [Yes there are industrial shares & resource shares…  but let’s keep it simple.]

 Matt stated that we have the same results over any such long time period.

[The assumptions are very rigorous  & from sources such as RBA & UBS & REIA.]

Yes we can make all the emotional comments which is reflected in our ‘risk profile’.

Investments are like the tides & relationships. They go up & down.

We read today that retirees who have 700K to 1 million houses have on average 200K in their super.

What is 200K or even 500k going to provide in retirement income to you?

Not today’s lifestyle which is why we need to not underestimate the Power of Income.

i.e. asset rich Income poor.

There is too much emphasis on growth. That's impatience.

Remember we as a booming baby expects to  have a long investment horizon of 30+ years.

As we have also read simply reinvesting the income back into the asset & not spending it makes you money over a longer time.

The income & the tax refund is the portfolio & not yours to spend.

 Let’s do it.

‘If we were in your position what would we do so that you are better off in three years time.’

·         We could discuss that your super is not an asset. However if you qualify we might turn it into an asset.

·         We could discuss turning your home into an asset & switching your debt into good deductible debt.

‘It's your responsibility to save so you can enjoy a good standard of living in your retirement’.

You are welcome to call us on 07 3848 1088 or email us or visit our websites.

John McAuliffe

The creators of a new reality TV show featuring financial advisers

The creators of a new reality TV show featuring financial advisers hope the show will do for advisers what MasterChef did for chefs – boosting our profile even if we don't appear on the show. 

The show, Your Best Interests (YBI), goes into pre-production next month and is set to air early 2014.

Negotiations are currently being held with free-to-air channels, which the show’s creators – evolution media group (emg) – declined to name due to commercial sensitivity.

The series will pair Australians currently facing a life-defining moment with financial advisers who can help them. Creators say a broad audience will get to see what advisers do and the value of advice.

“The public traditionally have a poor understanding of what advisers do. Advisers are not understood. But advisers change lives, it’s very, very emotional stuff,” emg managing director Marcus Field told Wealth Professional.

A recent survey  found only 15% of Australians use a financial adviser.

The show, which embeds advice into real consumer story lines, will have an “entertainment core”, said Field.

“Often the life events that prompt people to seek advice – such as marriage, buying a new home or being made redundant – are the events that bring the greatest emotion. This makes good TV.”

According to Field, the eight to 10 advisers featured will become celebrities with significant public profiles.

But advisers in general will gain a boost, much in the same way cooking shows have popularised the chef profession, said Field.

“Hopefully YBI will do for advisers what MasterChef did for chefs.”

The series is complemented by a web version of the show, featuring around 30 to 40 smaller story lines over the course of the year. The Association of Financial Advisers is collaborating, and AFA members will be represented on the show’s website.

AFA chief executive Brad Fox called the series a “game-changer” in making the public aware of what financial advisers really do.  

There has already been great interest in the series, with 93 applications from consumers wishing to appear on the show. Forty-six advisers – chosen from a recent AFA conference – have been through casting calls.




We aren't on the show yet but we have been helping & advising since 1984

You are welcome for lunch as a first step

 John McAuliffe

Can we do better than the bank’s insurance?

Yes we can. In fact we might save them plenty say 3,672  & with a better plan.


How much total saving is that over the 25 years of the mortgage?

But there is more. What if it doesn't come from 'William's' cashflow?

On the 12^th October  ‘William’ went online requesting if we could do better than the bank which had offered mortgage protection on their new loan.

When you have a new mortgage of $591,000 & as always happens with a bank then yes cover is essential. The bank said they had a cooling of period of 21 days & hence some urgency from the bank.

As ‘Margaret’ had a accident a few years ago & it had cost them an out of pocket $100,000 in medical expenses they were very aware of the need for cover.

The bank as they do ‘offered’ them mortgage protection on each  for the debt of 591,000 & for the monthly  repayments of 3865p.m. for up to 5 years.

It also has in the interim policy schedule that the  

‘Policy Period               5 years (60 months) from the policy commencement date.  Renewal may be offered at the end of the 5 year period.’

The total premium is 820.96p.m.

That is a lot from their cashflow & all it does is look after the bank. It cover the debt & the monthly repayments only.

Fair enough & as we were aware of Margaret’s ongoing health challenges we weren’t going to challenge that when cover is needed by both.

If a disability does occur then how do they meet the other living expenses  such as meals, rates petrol,… as they have cover only for the monthly  payments.  These are the payments for 25 years. 

What if they want to accelerate the debt reduction.?

What happens at the end of 5 years if the bank doesn’t offer to continue with the cover?

The loan would hopefully be reduced but it will still be sizeable.

 They still will need the cover & as they will be 5 years older they are even more likely to need it.

 Maybe they won’t be able to buy other cover when they want it as they could be uninsurable.

When it comes to claim time then the real story comes out.

We are aware that the bank application form has few questions on application but a lot more on claim time.

We have listened to an insurer recently who does insurance directly with a few questions & through advisers who ask you 60+ questions.

The insurer stated that with direct insurance that not only do you pay more but on average 45% of claims are declined. 

Now you want to minimise that risk because at claim time it is too late.

With insurance through advisers then the claims declined is a lot lower which is what you would want.

We have just looked at one company each to ‘compare the two’

William’s premium is 267 p.m. i.e. a saving of 162 p.m. or 1944p.a.

Margaret’s through a different company is 256p.m. i.e. a savings of 173p.m. or 2,076p.a.

i.e. subject to underwriting an annual total premium 6,276

the bank mortgage protection  with a discount is 9,948p.a.

i.e. ideally we might save William & Margaret 3,672p.a.

Yes there are differences in premiums in that we guess that the banks premium is the same for 5 years whereas the insurers go up each year.

·         the bank also offers ‘Involuntary employment benefit’  does not cover ceasing work after contract ends·         our comment is that is usually at most 3 months & is just ‘cheese in the trap’.

Remember the insurance policies we action are non cancellable by the company.

Now we have only started our research. 

We are not aligned & we were instructed by William & Margaret so we work for them. We will research more closely the up to 17  companies that we might use.



The savings might be greater as how is this need to be paid for?

Suppose there is a better way for at least some of the premium to be paid from elsewhere.

If William wants us to give advice then we need & are required to 'know the client'.

 Blake asked for a quote recently which doesn't solve his problem as funding it is always  the challenge.

Of course we will wait until Margaret gets her cover & accepts any offer before we start saving the difference.

If you want to ‘compare the two’ or wish for a strategic review then you are welcome to call or email or contact us through our websites. 

Remember

‘if we were in your financial position what would we do so that you are better off financially in three years time’

William did enjoy our cooked breakfast & you too could check out our menu.

William  did comment that he checked us out with his ex colleagues & we passed all their  tests.

We knew that.

He might check up on the banks as they did in the UK.

John  McAuliffe