Refinancing your mortgage can save you THOUSANDS

Home loans are a funny thing.  They are probably the biggest liability that most of us have and we research them to death when we actually get them but once they are set in place most of us fall into the pattern of paying them off as fast as we can without thinking about whether we can get a better deal.

Sometimes the deal we are on is so good that we want to hold onto it for as long as possible.  However when competition heats up between banks in the home loan market (as is currently happening in the Australian market) you can often save a lot of money by renegotiating your home loan or moving to a different provider altogether.

How a great deal when refinancing your mortgage

Getting a great deal when refinancing your mortgage is basically being able to do 3 things:

1. Know exactly what you want and need from your mortgage;
2. Knowing everything you are currently paying for your mortgage and all the benefits you are getting; and
3. Leveraging the best offers in the market with the financial institution you want to deal with

Step 1: Know exactly what you want and need from a mortgage

This is the most important

What is a normal home loan interest rate?

When you look to buy a house, chances are the first question you will ask is "how much can I afford to pay" which is really asking the question "how much can I borrow?".  Once you know how much you can borrow, you can go out house hunting and buy that perfect home.

Unfortunately most people just Google one of those home loan calculators or go into a bank branch and ask them how much they can afford to pay and don't look at the biggest assumption that will determine the answer to the original question...the interest rate on the home loan.

The interest rate is the biggest unknown factor when it comes to taking out a loan

In Australia, most loans are variable rate.  If you are lucky you may be able to lock in a 5 year fixed interest period but for the majority of your loan you will be paying an unknown rate of interest.  Why is this a problem?

The problem is that most 'affordability' calculators assume the prevailing interest rates or they may have a small buffer in there if rates move.  In Australia the current rate of interest is ~5% on 30 year mortgages but will it stay like this forever...and will you be able to afford the interest bill if the interest rate moves?

The question we should be asking is: What is a 'normal' home loan interest rate?

The problem with this question is that there is no right answer.  Economists will argue until the cows come home what a steady state 'normal' interest rate will be but the fact is that it will all depend on the economic conditions and government policy in the future and there is too much uncertainty around that question.

So how do we deal with the uncertainty associated with unknown future interest rates?

The simple answer is to

The Lifetime Health Cover loading can really sting...so think about it before June 30

This post is written for Australians in the lead up to the end of the financial year.  If you turned 31 in the last financial year and don't have health insurance then you should really consider getting it otherwise the Lifetime Health Cover loading will bite you quite badly.

At the end of every financial year you will notice that health insurance companies start advertising quite heavily and advising their customers to get health cover before June 30 in order to avoid the Medicare Levy Surcharge.

I have written before about how you shouldn't get fooled by this.  The surcharge will apply for the percentage of the year that you don't have health insurance.  So if you get coverage on the 29th of June and earn above the threshold ($88,000 for singles and $176,000 for families) you are still going to have to pay the surcharge (1.0% - 1.5% depending on your income) for the 364 days you didn't have coverage.  You should still get the coverage to avoid the tax...but there is no real rush to it.

However the Lifetime Health Cover loading is time dependant and if you don't have health cover and you turned 31 in the last financial year...you definitely need to get health insurance before June 30!

What is the Lifetime Health Cover loading?

The Lifetime Health Cover loading is an initiative by the Australian government to encourage people to take out health insurance when they are still young and keep this health insurance going.  It stings you if you don't have health insurance now but if and when you decide to get it at some point later in your life.

The Lifetime Health Cover loading is a huge stick to encourage you to get health insurance before you turn 31.  Read on to find out how it works.

How does the Lifetime Health Cover loading work?

If you do not have hospital cover on the 1st of July following your 31st birthday (assuming you turned 31 after 1 July 2000) you will have to pay a loading when you do decide to take out health insurance later in life.

The loading is calculated as 2% for every year you are uninsured for every year you are over 30.  For example if you decide to first take out health insurance at age 40 you will have to pay 10 years x 2% = 20% more for your health insurance than someone who was covered the whole way through. This loading lasts for 10 years from the point you first get hospital cover. 

What if I don't want health insurance?

The challenge of tracking your portfolio returns

As you can probably guess from this website - I am a person who likes tracking everything.  I track my financial goals, I track my weight, I track my savings, I track my expenses.  It was therefore rather disconcerting when I found myself wanting to write a post on my 2013 share portfolio return and I was unable to dissect what it actually was.

If your portfolio positions are not static your returns are harder to track than you may imagine

If for any reason your portfolio composition changes, tracking your overall portfolio return becomes a real challenge!  You cannot just take the starting value of your portfolio and then the ending value and then work out what your percentage returns are for several reasons

1. If you have contributed cash into your share account then your returns are going to look a fair bit higher than is really the case
2. If you have sold shares and withdrawn cash then your returns are going to be depressed
3. Any dividends that are not re-invested should count towards your returns however are not going to be using this method
4. Transaction costs should factor into your portfolio returns

All of these challenges are surmountable however if you try and do it in hindsight it is close to impossible.  I tried to do it for 2013 so I could write a post on my 2013 portfolio return and after a day of effort I realised that it was just far too much effort.

If you want to track your portfolio returns therefore, you need to set up a method of doing so at the start of your tracking period which takes into account all of the issues above.

Treat your own portfolio as a fund manager may treat theirs

The best way I found to

Superannuation Funds - How important are fee differences?

All working Australians will have some form of super.  Most of us do not have the time, skills or savings balance necessary for a Self Managed Superannuation Fund so we just go into our employer chosen superannuation fund or another fund of our choice.  These are generally split into retail and industry superannuation funds and all of us would have seen the advertisements on television advocating the superior returns offered by industry funds over retail funds.

Choosing your super fund is not exactly like choosing a managed fund

Super funds most often operate as a fund of funds.  Although some of them are starting to build out their own internal investment capability, most of them actually just outsource the investment task.  That is they pay fund managers (the same people who offer managed products) to invest for them.  Because they are placing such large amounts they can generally do this for quite a low cost.

I have no real preference for superannuation funds which manage the money themselves versus those which outsource the task.  There are pros and cons for both which I will go into in a post next week but they are quite different to evaluate.

If you invest in a superannuation fund that manages money themselves then you will be assessing them in the same way you would assess an ordinary managed fund provider

1. What is the investment process?
2. Who are the people running the fund, how long have they been there and what has their track record been?
3. How stable is the investment team?
4. What sort of alpha are they aiming for?
5. What are the fees they are charging to achieve this alpha (out performance)?

If you are investing in a superannuation fund that uses external fund managers then this is not what you are thinking about.  Fund of fund providers are notoriously

Share Sale Facilities: A great exit opportunity

Occasionally, as an investor, you may end up with a small parcel of shares in a company.  You may end up with this as a result of a share issue by your employer, due to a corporate action in another share you may own or you may even have shares gifted to you.

These small parcels of shares are often annoying...

They are annoying for several reasons

1. They are annoying to sell because trade costs are often fixed up to a certain limit.  
• On a $300 parcel of shares therefore you may be paying ~$30 commission - i.e. you need a 10% return on the shares just to break even
• A friend of mine got an allocation of shares from his part time employer valued at about $300 and he could choose to take them as shares or to sell them through a share sale facility - he thought the shares may go up over time - however he had totally forgotten to take into account the return he would have to get just to make up his transaction costs
2. You may not want to hold them in the first place
• Sometimes a company will spin off a

You should NOT pay more to invest in Ethical Funds

Like many people I know, although I am primarily self interested (i.e. I'm trying to improve my life and financial well being), I am also concerned with how my actions impact those around me as well as the environment.  I think there are very few truly selfish or truly selfless people.  I think everyone falls somewhere between those two extremes.

Although we all try and make a difference, sometimes it is hard to see how "doing our little part" makes a difference when there are such big entities and companies out there who swamp any effort we may have to make a difference.  One of the ways that has become more popular in the last few years is the idea that money talks.  That if you (and a significant number of others) are concerned enough about society then you will direct your savings and investments towards those enterprises which are actually doing good and avoid those which are damaging society or our planet.

It is a fairly simple concept which is incredibly hard to implement for one single reason: We all have different ideas and tolerances for what is good and right. Having said that - if we find a company that we like and believe is doing good then this is where we should put our money.

The Ethical Funds management industry has grown around this concept

A whole industry has grown up around the concept that our investments should reflect our desire to make the world a better place.  The good funds generally provide

Optimising your First Home Saver Account

Recently I wrote about the benefits of the Australian government mandated First Home Saver Account.  If you did not read that piece I recommend having a look as there are quite a few strings attached to the account and the penalties if you do not meet the requirements are quite harsh (the amount you have saved gets rolled into your superannuation and you cannot access this until your retire).

That being said, if you do qualify for this account and you are thinking about buying a home in the near to medium term (at least 2.5 years away) then there are ways that you can maximise your investment in this account.

The superior returns from this account are due to a combination of a significant government co-contribution and concessional taxation

The beauty of this account is that the superior return comes in 2 separate forms:

• A 17c co-contribution (return) on the first $6,000 deposited each financial year
• An incredible return especially given it is risk free
• This return has the biggest impact in the first year on total returns and a diminishing impact as time goes on
• A 15% tax rate on any earnings within the account
• Members Equity has a First Home Saver Account which earns 3.25% p.a. which is a decent return but nothing amazing
• However if you think about the fact that this is taxed at only 15% you would need a significantly higher pre-tax return on any other account to get the same after tax return as this account.  For this different marginal tax rates (including the Medicare Levy)
• If your marginal tax rate is 19% (you're probably not paying the Medicare Levy) so you would need a 3.41% pre tax return to get the same after tax return
• 34% marginal tax rate (32.5%+1.5% levy) = 4.19% pre-tax return equivalent
• 38.5% marginal tax rate (37%+1.5% levy) = 4.49% pre-tax return equivalent
• 46.5% marginal tax rate (45% + 1.5% levy) = 5.16% pre-tax return equivalent

The next thing you need to look at is the alternative for your savings and investment dollars.  The first $6,000 each year is a no brainer - I can guarantee you that you will not get a better return of any other investment (other than paying off high interest credit card debt).  

The next thing you need to ask yourself

First Home Saver Account - Super Return but mind the strings attached

The First Home Saver Account is an initiative by the Australian government which allows people buying their first home (to live in) to get help from the government to save up for a deposit.  I remember being turned off by all the strings attached to the plan when I first looked at it a few years ago but if the timing works for you it can trump any other savings plan / investment in the market.

What is the First Home Savers Account?

The first home savers account is basically a savings account that you hold at your bank or credit union (note that most of the major Australian banks do not offer this any more but you can still get it from credit unions) which you use to save for your first home.

The benefit of this account is that:

• For every dollar you put into the account (up to $6000) in any financial year the government will co contribute $0.17 (i.e. up to $1020)...that's a 17% risk free rate of return on the $6,000 deposited 
• The account earns interest like a normal savings account.  Members Equity had the highest rate I could find at 3.25% p.a.
• The earnings in the account are only taxed at 15%

Trust me when I say there is nothing else out there which gives you a return anything like this.  In fact if it wasn't the government giving you the return I'd wonder if it was a scam.  But there are strings attached...make sure you don't trip over them.

What are the strings attached to the First Home Savers Account?

There are some pretty big strings attached to the account.  Look at the Australian Tax Office website for full details but in order to be eligible

1. You need to be an Australian citizen or Permanent Resident
2. You must not have owned a house in Australia as your primary residence (this is how I still qualify - I own an investment property but it was never my residence)
3. You must not have had a first home saver account before

Then there are the strings attached to being able to withdraw the cash itself:

Don't get ripped off when converting currency

I recently returned from my overseas holiday and realised that although people shop around a lot to reduce the costs for their flights and accommodation we rarely ever really shop around for a good deal on the currency that we exchange.  We normally go for safety and convenience, which are undoubtedly important, but given the amount that you are likely to spend in cash on your travels (from trinkets and souvenirs to meals, drinks and transport) it is always worth remembering that you can save a lot by shopping around for a good exchange rate

You can never change cash for anything like the actual exchange rate

I think we are all used to the idea that we are going to get screwed when we exchange cash.  Anywhere that retail punters typically go, there is a large spread between the buy and the sell rate with the actual exchange rate somewhere in the middle.  The first time it happened to me I was outraged but then I (like most people) got used to the idea of being screwed.

On my recent overseas holiday though I was once again reminded how badly you could get screwed.  I am going to call out one company which was particularly bad: Travelex.  They were offering to convert my currency at 20% less than the official exchange rate. 

Even by the regular standards of exchange rate rip offs - this one seemed particularly bad.  What was even worse was that this was their rate when I was looking to change a rather large amount of cash.  On top of this outrageous rate they were going to charge me a 'transaction fee'...normally this is built into the spread but Travelex believed that they could convince me that this was their charge.

Always shop around for a better rate...you may even do better next door

Obviously I wasn't going to exchange cash at this rate...I walked less than 10 meters to the ANZ branch that was right next to them at the airport and I got a rate that was only a 10% discount to the official exchange rate (with no transaction charge).  I wanted some cash for when I landed at my destination so I exchanged a bit at this (still exorbitant rate).

You can often get a better rate if you wait until you get to your destination

I'm not sure if it is only Australia which rips people off so badly when it comes to exchange rates but I always seem to get a better rate when I exchange cash at my destination rather than before I travel.  I exchanged more cash when I got to my destination airport at a

Interactive Brokers - BPAY makes funding even easier

As regular readers may know, I use interactive brokers for most of my share trades.  It is cheap, simple and easy to use.  It has some big draw backs including not being able to invest in dividend reinvestment plans which they really should fix, however they also have some quirky benefits like being able to get over-allocations for rights plans due to the way in which they hold your shares.

It was always quite easy to fund your account with Interactive Brokers

I have covered before how easy it was to do a wire transfer into Interactive Brokers and how my account funded the very next day.  One of the slightly more frustrating things about wire transfers is that often financial institutions would limit how much you could transfer to another account per day.  These limits were quite large - for my financial institution there was a maximum of $20,000 per day - however there were situations where I wanted to do more than this.

The first time I participated in a rights issue I wanted to transfer about $50,000 into my Interactive Brokers account to apply for an over-allocation.  I had to do this over 3 days which didn't limit my ability to participate, but if I was not on the ball about this issue then it would have become a problem.  If I wanted to participate fully in the over allocation it would have taken me 5 days to transfer all the funds.  This can be a problem, especially when the election window is quite small.

The cap on transfers was not Interactive Brokers' limitation and I thought that there was no solution to this issue and when I went to transfer another $50,000 into my account for my latest rights issue participation I was pleasantly surprised to find out that they had made funding your account even easier.

You can now fund your account using BPAY

Instead of having to

Taking partial profits with shares: A sensible strategy

One of the biggest problems that most people have with investing is knowing when to sell and take the profit they have made on their shares.  If you have bought a share which you thought was cheap and you have a significant margin for error built into your valuation the chances are that you will face the problem of having a share that has performed significantly well in percentage return  terms but still represents value in an absolute sense.

An example of how the issue can come about

I recently faced this problem after FKP (a share that I have posted about extensively on this blog) performed very well.  I first purchased FKP, an Australian retirement and residential property stock because it was trading at a significant discount to it's net asset value (NAV).  However not long after I did so they had some serious debt issues and did an equity raising at a significant discount to the stock price.

I participated in the equity raising and managed to get a significant over allocation because of my particular broker (most people got scaled back which was rather annoying at the time).  In the following months the stock performed terribly which was nerve racking because it represented 1/4 of my share portfolio.  Given how low the price fell I would have liked to purchase more but from a portfolio concentration point of view this didn't make sense.

You may wonder why I didn't sell the stock and just take my losses when it was performing so badly.  I had researched the stock well and I believed that the management team was doing the right thing and the news that was coming out was incrementally positive the whole time even though the market was not recognising it as such.  I was keeping on top of my existing shareholdings which is easy to forget to do.

Recently, after more good news the share market finally responded positively to the stock and the stock moved to a point where I had made a ~20%+ return and I was faced with a dilemma...this stock could go up by another 20 - 40% but I had already made a good profit off it...should I sell it or should I hold onto it?

Taking a partial profit allows you to lock in some of your gains

I decided in the example above to sell about 1/3 of my

High Interest Savings Accounts are starting to pay very low rates

Interest rates are probably the one financial metric that almost everyone has a handle on.  People generally know the official cash rate and also know what they are paying on their mortgage as well as the rate they are getting on their savings.

Conventional wisdom is that decreasing interest rates are good - but this is only for those who have loans - if you have cash savings (especially in bank accounts) - then you are disadvantaged when the official cash rate comes down.

Australia is now starting to experience what many in western economies have been experiencing for a while - interest rates so low that the amount you earn (even on high interest savings accounts) that you are barely keeping up with inflation and you are certainly not earning a decent return on your invested capital.

Check your high interest accounts - you may be surprised how low the rate is

I have a high interest account which I use primarily for expenditure smoothing and I realised recently that I was only receiving 2.5% p.a. on this account.  I did a quick check of other high interest savings accounts and I realised that they had all come down as well.

The best rates I could find were introductory rates which were around ~4.5%.  I have written before about how to roll the best introductory rates available which should help you keep the rate up if you really want to stick with savings accounts.  However these accounts were limited as well - some of them had maximum cash levels for the high rate (e.g. you would only get this high amount up to $10,000) while others would not let you withdraw at all or required a minimum deposit each month without any withdrawals.

The first thing that you need to do is to check your current high interest savings account - find out whether you are getting a rate of interest that you are happy with.  I would suggest that anything less than the inflation rate (~2.5%) is not

Always check the Management Expense Ratio (MER)

A lot of people who do not want to invest in the stock market directly (that is, by buying and selling individual shares themselves) access the market indirectly - that is through managed funds and there are a variety of these including index funds and actively managed funds which cover a variety of sectors, stock types and commodities.

However, in the capital markets, there is no such things as a free lunch so you will always have to pay a fee to the investment manager for providing this service - this is how they make money.  This fee is also called the Management Expense Ratio (MER).

Before investing in a financial product you need to check this MER and decide whether you are willing to pay this amount for the service that is being offered.  You also need to distinguish between flat fees and performance fees as well and consider how much the manager will need to outperform the relevant benchmark for you to be ahead by using them.

What is the MER and how does it affect your returns?

As described above the MER is the amount you pay your fund manager for managing your money.  It is normally stated as a % of funds under management (FUM) which essentially means that you are paying a percentage of the money you give your fund manager to manage (regardless of whether the fund value goes up or down).

There may also be a performance component to your MER.  This is intended to provide incentives for the fund manager to perform better.  You pay a % to the fund manager as a base fee and then an extra amount if they exceed the benchmark they are tracking (presumably by a certain amount).

An example of how it works

• Assume you invest $100,000 with Fund Manager A.  The fund manager charges 1.5% as the base fee with an extra 0.5% if they exceed the benchmark by 1% after fees
• Assume the benchmark increases by 5% over the year but your fund manager does really well and increases the value of the fund by 10%
• Your investment is now worth $110,000
• The fees are calculated as follows
• The base fee expressed above is an annual fee (although it normally accrues monthly) and it is 1.5% of the funds under management which comes to $110,000 * 1.5% = $1,650
• After the base fee is paid your funds are worth 108,350 which is an 8.35% return (which is 2.35% more than the

What are Self Managed Superannuation Funds and are they a good idea?

This is a sponsored post.  It was done in partnership with Clime, an Australian based fund manager.  All the content included in this article is my own and I have not had to have it 'approved' or vetted in any way.  I am happy to do sponsored posts where there is no interference in the content of my post.

This post is all about self managed superannuation funds.  It will cover the topics such as 'what is a self managed super fund (SMSF)?', 'why you would want to use them?' and 'when do they make sense and when do they not?'

What is a self managed super fund?

In essence a self managed super fund is a small superannuation trust which is set up for the benefit of an extremely limited group (1 - 4) of members.  It is a mini version of the large superannuation funds out there but instead of being pooled with thousands of other investors, this superannuation trust is only for the benefit of a select group.

Why would you set up a SMSF?

The primary reason people set up SMSFs is because they want more control over the investment process and assets within the SMSF.  This can be for a variety of reasons including:

• They are able to more closely tailor the investments in the portfolio to their personal circumstances
• For example by duration matching investments compared to when the individual investor will need the cash
• They believe that they are better able to make investment decisions than investment managers
• This is one of the primary reasons that people choose to set up a SMSF however it comes with it's downsides
• It is all well and good to believe that you can do better than the fund managers who are currently managing your superannuation money but have a go at doing it yourself (with a phantom portfolio) and see how you go before doing it
• The extra level of control over the investments also means that you can choose investments that you are confident with
• I argue that people should only invest in what they understand - it also often means that they can get better results than if they trust other people to do their investing
• For example if you want a property investment and are a particularly adept investor in property there is a possibility that you can get a better return from your own investment than a property fund that is part of a large superannuation fund

There are also some other reasons people set up SMSFs including:

• You can save money
• The amount of money you can save often has to do with scale
• There are quite significant fees associated with running an SMSF - see the section below on what you have to do when you have an SMSF - so in order for the fee savings to work you need to have a significant amount in your self managed super fund
• MoneySmart, the Australian government's financial advice website recommends having at least $200,000 in superannuation before setting up an SMSF

What are the downsides to setting up a SMSF?

The real downsides from SMSFs come from the time and effort you need to invest in it.  For many of us, superannuation is just a

Investment review: Did my exchange rate idea work out?

Approximately 18 months ago I did a post on the exchange rate opportunity that could be exploited using foreign index funds because the Australian currency was so strong coupled with extremely weak share markets overseas.   I also ran through a very specific example of an investment I had made in the FTSE100 which was to take advantage of the weak pound as well as the weak English share market.

This post will be a review of that idea 18 months down the track, along with an assessment of how I thought about the investment along the way.

So how did it turn out?

As it turns out, this was a rather good investment to make and I have been very pleased with the results.  The chart below shows the performance of the investment over time.

Performance of the index
The blue line is the performance of the index fund (ISF) in pounds.  In the circa 18 months that I owned it the index returned 16.3% plus another ~2% in dividends over that time so approximately 18.3% return over 18 months.  This is annualised return of ~11.8% which I am very happy with in itself.

Performance including the currency effect
However the kicker (and the original point of the investment) was the return benefit that the exchange rate would give when it returned to 'normal' levels.  It has not yet returned to normal levels but it is certainly going in the right direction.  The A$ depreciated by 9.7% against the GBP in the 18 months.  This resulted in a total A$ return on the ISF investment of 27.6% before dividends or ~29.6% after dividends over the 18 months.  This is an annualised return of ~18.8%.

I had no idea that the performance of the UK share market would be strong over that period, the real underlying reason was that the currency gave me protection on the downside and provided significant upside in the event that it returned to normal levels.

...however during the investment period it did not always look so happy!

The chart below shows the return on investment over time.  The red line represents the A$ performance of the investment and the blue line represents the GBP performance of the investment.

For the first few months of the investment, it did not seem to be a great investment.  Indeed the share price was not really going anywhere and the currency movements made me think I had missed the boat at times.  However I had in mind what I thought a fair price for the currency was so I continued to wait and of late, even though the share price has come off significantly in GBP, the fall in the A$ has been so sharp that this has not had a real impact on the A$ return.

So did I sell out of this investment?

Not yet.  I still do not think the Australian dollar is at fair value even though it has fallen significantly.  I think there is a little way to go.  Although I think the same trade is still available, the level of upside is not what it was 18 months ago so I probably will not be throwing more money into this investment strategy.

Was it just a fluke?

Did I just happen to pick the right currency and the right share market?  Was it just a fluke?  I don't think so.  I actually did the same trade with a much larger amount of money into the US market and the returns from that have been even more impressive than the returns I outlined above.  The reason I went through this example in the post is because it is the one I posted about 18 months ago.

Note that this is one of the investments I made that came off.  Next week I'll post about one that continues to cause me significant pain that I posted about several times in the past. I have no problem admitting my losses and it is worth all those who are new to investing to know that you can still get good portfolio returns even when you have a couple of dogs in your portfolio.

As always this is not investment advice.  Just a demonstration of what I have done and make sure you think through your own investments and use qualified advisers if you require it.

You May Also Be Interested In:
Investing in foreign index funds: an exchange rate opportunity
Foreign index funds: An example
Investment strategy: All Posts
Stocks: All Posts

Why are sector funds so much more expensive than broad based funds?

If you invest in exchange traded index funds (ETFs) at all, you will have noticed that broad based index ETFs (which cover whole markets such as the Australian sharemarket or the US sharemarket) tend to have much lower expense ratios than those exchange traded index funds which cover specific sectors such as utilities, resources or financials.

I only recently started investing in sector ETFs after I saw an opportunity present itself in the resources sector a few months ago.  As I researched the possibilities though, the cost of the sector ETFs, especially in the Australian market really struck me.  Management expense ratio's are incredibly important when it comes to weighting up whether to invest in a particular managed fund (whether exchange traded or not).  In fact, over the long run it has a huge impact on your performance relative to the benchmark you are trying to beat.  The question therefore becomes:

Why do sector specific ETFs cost so much more than index ETFs?

I believe there are several factors which influence the MER for sector funds versus broad based index funds

Can I say upfront, that although I tried to research this I was not able to find any particularly good sources of information out there about why this is the case.  These conclusions are therefore my own. I am happy to be corrected on any of them or for additional reasons to be added.  If you have any suggestions please add them to the comments bar or send me an email and I'll be happy to include them.

I don't think there is any one defining factor which causes the costs for sector index funds to be higher than broad based index funds.  I think it is due to several factors which include:

1. Sector ETFs are typically smaller and so transaction costs are higher as a proportion of funds under management
• There is a significant difference between the

Superannuation is not an investment class...it is an investment vehicle

I was browsing a news website recently and noticed an article which went through the basics of maximising your superannuation for when you retire and the first point the author wrote was to remember that superannuation was not an investment class - it is actually just a tax effective vehicle.  I agreed with the point so didn't spend much time on it.  When I came to the comments section below though I noticed that there were a fair few readers who posted comments disagreeing with this notion as they had most of their retirement funds invested in superannuation.

This post will go through why superannuation is NOT actually an investment class and why the author of the article was quite right in describing it as an investment vehicle.

You do NOT invest IN superannuation...you invest THROUGH superannuation

The biggest misunderstanding comes about because, like me, many people use superannuation as a set and forget type investment.  Most often they are invested in the 'core' or 'balanced' strategy at their fund and the superannuation provider invests their money for them and if they check their superannuation at all it is to make sure that the employer is contributing their funds and to (occasionally) check the balance.

They therefore view superannuation as an investment which whose value they are contributing towards and the valuation of which fluctuates like a normal investment class.

However this is the wrong way of thinking about superannuation.

Superannuation is actually just a tax effective vehicle set up by the government to encourage (and force) people to save for their retirement.  You don't actually invest in the superannuation.  You invest in underlying assets such as shares, property, fixed interest, infrastructure and other alternatives through a superannuation vehicle.

Superannuation is much like a managed fund (which is also a vehicle).  Most people understand that they are not actually investing in a managed fund.  Rather they are giving their money to a fund manager to invest in shares or property or whatever other strategy their fund may have.  Superannuation is much the same.  You are giving your money to a superannuation fund to invest in the same asset classes that you could otherwise invest in outside of your superannuation.

The only difference between investing through superannuation and investing in these asset classes yourself is that:

1. You are not able to withdraw from your superannuation account until you reach retirement age (unless there are very special circumstances)
2. You get significant tax breaks for investing through super instead of investing on your own (e.g. lower taxes on money invested through superannuation)

It is easier to think of superannuation as a vehicle if you remember how self managed super funds work.  This is where you manage your super yourself and invest your superannuation money in whatever you want to invest in (rather than how the superannuation fund invests your money).  It is easy to see in this case how the actual investment classes are the shares, property, alternatives etc. that you invest in rather than the vehicle that you set up yourself.

It is actually an important distinction - and one that forces you to think about what your super fund actually invests in

People who think about superannuation as an investment ignore the fact that they should be actively thinking about what their superannuation fund invests in.  Although I do not advocate doing it too often, you should really think about what sector allocations you have within your superannuation fund and switch it to suit your own risk profile and views.  

That is, a person early in their career should not have the same superannuation choice as one who is nearing retirement.  If you think of superannuation as a blanket investment you are possibly going to ignore the fact that you should be thinking about what and where your money is invested.

How do you think about your superannuation and do you view it as a separate investment class or just as one way in which you invest?

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Controversial investment advice: Only invest in what you understand

This post will cover my firm idea that people should only invest in products and investments which they understand themselves and should not 'trust' others to do hat is in their own best interest.  It is controversial because it suggests that you and I as investors and savers should not be giving over responsibility for our financial well being to others (i.e. those in the investment community).

Why you should ONLY invest in what you understand

You should only invest in what you understand for a few fundamental reasons including:

• You completely understand the risk / reward trade off
• When you invest in financial products there is a risk / reward trade off
• When you understand what you are investing in, you understand both the upside and the downside
• All too often people only focus on the upside, or are only interested in hearing the upside.  If you do not understand the downside or the potential pitfalls of an investments you may take on more risk than you are comfortable with
  
• You will never be taken advantage of
• We all know that there are unscrupulous operators out there and there is ample evidence in the media of  'scams' and dodgy investments which are constantly being uncovered
• I can guarantee you that the people who get taken in by the scams are those who do not understand what they are investing in, or the true nature of the investment
• It is one thing to lose money because the market moved against you, it is quite another to be taken in by a fraudster because you were promised returns without understand exactly how you  were getting them
  
• You are responsible for your OWN financial well being
• The finance world is one in which survival of the fittest is the rule of thumb  
• We can argue about whether this is right or wrong and whether it should be this way but unfortunately finance is a zero sum game - for someone to win someone else needs to lose
• Although governments and regulators can try and protect against unscrupulous operators they cannot change the win / lose nature of the market
• To be on the winning side therefore you need to be acting in your own best interests 
• I do not think you can act in your own best interests if you do not understand what you are investing in

Note that my focus on understanding what you invest in does not mean that you

What are Bitcoins and should you invest in them?

I recently got sent an article about Bitcoins and the way in which they are going to revolutionise the way in which the financial system works.  There seems to be a lot of buzz about them at the moment and the following post will cover what they are and should you invest in them.

What are Bitcoins?

A Bitcoin is a decentralised virtual currency which means that it exists only online and is not regulated by any central bank.  There are a finite number of Bitcoin in the world.  They are currently generated by Bitcoin miners and there is an upper limit of 21 million Bitcoins which will be reached by 2040.

They have no fundamental value and are exchanged by users over a P2P network.  They are generated by a program on your computer which 'mines' Bitcoins but the amount generated decreases as more users join the network and as the number of Bitcoins approaches the upper maximum of 21 million.

They are untraceable and can be used in transactions with anyone else that will accept them.  This is the whole crux of 'what is a Bitcoin'.  In fact anything can be used as 'money' or a currency.  Something does not have value because a government says it has value.  It has value because people are willing to accept it in exchange of something else.  Thus as more places accept Bitcoin as currency, the more mainstream they will become.

The big questions around Bitcoin is whether it will become a lasting currency and one that is widely accepted.  There is plenty of speculation in them out there at the moment with the slightest hint of a problem causing crashes (see the chart below).  In my personal opinion the only reason that you would use Bitcoin instead of a mainstream currency is because you do not want your purchase tracked or otherwise traceable (e.g. if you are using it to buy illicit substances).  Otherwise why wouldn't you use a more stable currency (even one that is not your home currency).  However in the section below I have found more and more mainstream businesses that are willing to accept them as a method of payment so perhaps I will be left behind on this particular trend.

The video below is how the founders of Bitcoin pitch their product which obviously only highlights the benefits and none of the cons of Bitcoins.  It is interesting to see however, how they think about Bitcoins and the role they can play in the financial system:

Are Bitcoin a good investment?

At the moment Bitcoins are nothing more than pure speculation.  

There is no fundamental value underlying the currency other than the idea that the product is scarce and this scarcity along with the inability for a government or other agency to issue more currency (other than as specified above) gives it some sort of lasting value.

In this sense Bitcoins are a lot like gold.  There is a limited quantity and its value is largely based on people's perception of what it will be worth in the future.  The only difference is that gold has a floor under it because gold can and is used for other purposes such as jewellery.  Bitcoins have no alternative use which could provide a floor under the price if confidence in the product slumps.

If and when the currency stabilises (it is incredibly volatile at the moment based on speculation - the chart below is just the last month!) and is used widely for trade (see the section below) then as a medium of trade it will have an inherent value.  When it gets to this point, though, the potential for massive gains and losses will have largely evaporated.

I wouldn't invest in this product - I can see that Bitcoins will have value to some people who are sick of their currency being depreciated by governments looking to stimulate growth.  The lack of an underlying use for the product and thus a floor in the valuation is the biggest stumbling block for me and one that I can't reconcile.  I can just as easily see people moving onto another 'currency' like this and Bitcoins becoming pointless and irrelevant.

It is the inability to value this currency on fundamentals and the uncertainty around the longevity of the currency which is keeping me on the sidelines.

Can I actually use Bitcoins to buy anything?

This used to be one of the biggest criticisms of the Bitcoin market - it was purely built for 'investment' (read: speculation) and that you could not actually do anything in the real world with it.  Then people clicked onto the fact that the anonymous factor would make it perfect for things such as drugs and other illegal transactions.

However recently more and more vendors are starting to accept Bitcoins as currency.  For example a relatively new website that I came across - BitFash - allows you to