Why I gave up my Investment Property and moved into it as my own home

A few years ago I asked the question: 'Should move into my investment property?'.  It didn't make the greatest financial sense and in fact it didn't grant me the lifestyle I was looking for as a young, single bachelor.

Fast forward 3 years and all that has changed.  I'm now married and my wife and I we made the decision to move into my investment property...it was the right thing for us to do at this time.

So what changed?

When my wife and I sat down to work out where we wanted to live when we got married we actually decided to keep the investment property as an investment and to move into another rental as we saved for our own place.

This is not what my wife wanted.  Unlike my outlook on life her every decision is not dictated or influenced by financial considerations.  She wanted to live in her own home with a garden.  She didn't mind where it was either.

I was far more picky.  I couldn't be more that 45 minutes from the city, I wanted it to be in a decent area, close to public transport and to amenities. Unfortunately most of the houses which combined decent land size and good areas were well out of our price range...hence the decision to rent.

One concession I did have to make was that we would be in our own home by the time we were looking to have kids.  The property market is so hot in Australia at the moment and buying another property in this kind of environment is definitely not what I was looking to do! 

That being said I made that concession because my wife really doesn't push me all that much in terms of financial issues and this was one thing she was adamant about.

Fate intervened unexpectedly

You may remember that last year I had a mild panic attack when I raised my rent on my tenants and they never responded...had I just lost amazing tenants by being too greedy?  All was well though because on the date the rent increase came into effect they just started transferring the new rent amount.

This year I knew something was up when they didn't sign a new lease even though I offered them the ability to sign a one year lease at exactly the same rent they were on last year.  Sure enough a few weeks before my wedding they gave their notice of intention to vacate and their due date to move out was 4 days after my wedding.

Deciding whether to move in became purely a financial decision

My rental property is great and I've always been glad that I bought a suburban family home however it is not a 10 year house either for my wife or myself.  I'm not the biggest fan of the area and my wife wants more land to garden.

What it is though is a perfect interim place to live.  Somewhere we could live for 3 or 4 years while we save and look for our next place.

So the decision became...is it worth getting another tenant in and us find another place to rent for a shorter period of time or do we give up the rental income and tax deductions and move into our own place?

Pros of moving into the rental

1. I needed to do quite a bit of work on the property and doing this while tenants are in there is quite difficult
• Things like repainting and carpeting as well as replacing a fence have all been on the things to do list for years and being there myself will help me get this done
• 
  
2. Putting off buying another property for a few years
• Earlier I mentioned that I was incredibly wary about the current state of the Australian property market.  If we hadn't moved in the pressure to buy a place from my other half would have been intense!  I have managed to push this inevitability back 2 to 3 years
3. The rent I was receiving on the property was approximately $40 a week less than what we were looking to spend on a rental
• Normally the interest deductibility of your investment loan would needed to be counted in this valuation however my property was positively geared so I wasn't actually getting any benefit from this.

Cons of moving into the investment property

1. It was an area that I wasn't too keen on living in.  
• The area the investment property is in is great if you are raising a family but it is useless if you want things like convenience to the CBD, cafes etc.  However given my wife and I are looking to start a family soon the family aspect of it suddenly becomes far more compelling
2. It reduced the imperative to save hard for our own home.  
• I think people save for a variety of reasons.  My wife is brilliant at saving if she has something to save for.  My major concern was thay by living in our own home already thay she would not have the same motivation to save.  If I'm going to honest this is still a concern and I'm testing ways to keep us on track
3. All the repairs and expenses that are part of home ownership are no longer tax deductible.  
• This is a very real downside and it bit me in the backside almost as soon as I moved into the house
• I suddenly had to paint, fix fences and repair burst water pipes all without the benefit of being able to claim the expenses back on tax.  Some of the bigger jobs I will keep receipts for and add it to the capital value of the property (and depreciate it later when it goes back to being a rental) however smaller jobs I will no longer be able to deduct.

After weighing up all these pros and cons we decided to move into the property...so what swayed it for us?

So why did we decide to move into the Investment Property?

Although we came to the same conclusion my wife and I reached the decision to move into the investment property for quite different reasons:

• I saw it as a financially neutral decision which allowed me to put off buying into a hot property market for a few years.  The risk to this approach is that we take our foot off the wealth building accelerator because we are comfortable.
• My wife saw it as an ability to get into our own home ahead of children which provided stability.  The risk from her point of view is that we don't actually move after a few years and she doesn't get her garden.

I'm learning that relationship finances is as much about finding common ground even if they are for completely different reasons rather than always compromising what you you both want.

So what do you think about my decision to move into my investment property? Would you have done something different?

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I FINALLY made money from a Share Purchase Plan

If you have been reading this blog for a few years now you will know that I almost always get shafted when it comes to share purchase plans (or SPPs).  My investment rationale is always sound however I am always shafted by the mega scale backs that come with guaranteed profits.

Interestingly this time I ended up with a larger profit because the end result wasn't as guaranteed as in the past.

A recap on how to make money from Share Purchase Plans

I have gone through this in a significant amount of detail before but basically you make money from share purchase plans because

• You are able to buy shares at below the current market price (often in excess of your pro rata entitlement)
• If the current market price is higher than your purchase price from the share purchase plan you have made an (almost) instant profit

Basically the bigger the discount is to the current market price the more certain you are of making a profit.

However the big downside to SPPs (as I mentioned above) is that because the profit is so certain everyone wants to take part and everyone applies for their maximum allocation.  Companies often don't need this much money and scale back your allocation significantly.  They also don't issue the shares for a long time and take even longer to return your money.  You therefore lose out by having lost the ability to earn interest on this cash in the interim.

I participated in the recent Macquarie Group SPP...even though the terms didn't look as good

Macquarie Group (ASX: MQG) recently decided to do an institutional equity raising and an SPP to raise cash for a purchase that they had done.  When I first looked at this deal it didn't look great at all:

• Macquarie's share price was already incredibly high.  
• I was actually looking to sell out of my MQG shares after years of holding them
• A high share price isn't great because it can go anywhere in the time it takes for you to be allocated your shares and able to sell them
• The discount was tiny
• The higher the discount the higher the guaranteed profit.  In the case of Macquarie SPP it was only a 1% discount which is not really worth your time and effort (especially if you think the stock is expensive)
• They weren't actually issuing that much capital
• Relative to the size of Macquarie this was actually a really small capital raising.  In smaller capital raisings you are more likely to get scaled back which is the thing you want to avoid at all costs

This deal on the face of it didn't look that good...so why did I participate?

There were a few key points in the fine print which caused me to participate in the deal.  They included:

3 things to consider before investing for dividends

There have always been investors  for whom dividends is the most important element of a share investment.  Growth in share price has not been their primary concern.  Some bloggers (such as Dividend Mantra) have their whole investment strategy built around dividends and replacing their income and achieving financial independence through them.

In the current low interest rate environment this approach has become much more common.  Investors have not been able to get the yield they desire from term deposits and online savings accounts so they have turned to high yielding shares (such as banks and infrastructure shares) in order to get the yield they desire.  Why would you invest in a bank account at 2.5% p.a. when you can easily invest in a bank and get a 5.0% yield on a commercial bank or infrastructure stock?

A problem occurs when some investors look at these stocks and their dividend yields like they would a term deposit which is completely the wrong way to go about it.  This post will try and highlight some of the things you should be looking out for when you invest in stocks for their dividend yield.

Things you should consider when investing for dividends is your focus

There are risks when investing for dividends is your primary focus especially in an environment like this.  Below are just a few of the questions you should be asking yourself whenever you undertake an investment like this

1. If interest rates revert to more 'normal' levels what will happen to the value of this stock?

A lot of high dividend stocks have been driven up in price as people search for yield outside the fixed interest sectors.  If interest rates return to more 'normal' levels and people no longer have to invest in these stocks to get the yield then the value of your investment in these stocks may fall.

This is a function of the current market that you can't avoid and is a risk you need to know that you're taking on by investing in high yielding stocks.

2. What is the outlook for the company that you are investing in?

Dividends can be cut.  It actually happens far more

I have the goal...I have the plan...so now what?

I should start this post by apologising to my regular readers for the significant drop off in posts in the last month or two.

Part of this was related to burn out (I was simply trying to do too much at one type) but a lot of it also had to do with the fact that I was simply executing on the plans I have been writing and talking about for so many years.  Planning is something I can write about all day...but execution stuff is boring and actually fits quite neatly into my monthly net worth and expenditure tracking posts.

The good news is that my financial plan is working...

I guess I shouldn't be surprised but the truth is that it is slightly disconcerting when everything falls into place exactly how you expect it to.  I'm saving where I'm meant to be saving.  I'm investing where I'm meant to be investment (and being more active about taking profits and re-investing other opportunities) and I'm spending within my planned goals and budgets.

The one area where I am perhaps a little bit behind is my long running plan to start my own business.  Last year I started Banker's Pitch - a blog about Investment Banking and my original plan was to turn this into an information resource which could then be used as a platform to sell further services and informational products.  Although I haven't pulled the plug yet I'm thinking of re-focusing my attention and efforts elsewhere for reasons I will go into at a later point.

With the exception of the above though everything is tracking remarkably smoothly.

As a quick aside - the expenditure smoothing approach I took to big expenses a few years ago is probably the best financial thing I have ever done.  My wedding is fully paid for more than 3 months out from the big day and saving for the honeymoon is going to be a walk in the park.  We have managed to fund both these massive expenses without ever having to dip into my savings and investment portfolio which is exactly what I wanted.

The bad news is that a working financial plan is...well...boring

Having a plan that is working exactly how you want it to is exactly what you want...but it does tend to be a bit boring.  There is nothing to 'fix', there are no new strategies I'm keen to try at the moment and everything is tweaking around the edges.

That tends to make for a pretty boring financial blog...but a pretty good financial plan.  Half my effort in recent months has been to stop myself doing things for the sake of doing them.  Combined with this is the fact that I'm in the middle of wedding planning (which is the most painful thing I have ever done) which makes me want to focus on my financial life (or anything else for that matter).

So what's next?

My real focus at the moment has been my share portfolio.  I'm getting incredibly uncomfortable with the level the market is getting to and the valuations in markets.  The big problem I have is that I'm already very long cash and I'd rather not hold cash for long periods of time in a low interest rate environment and I can't find any alternative investments I'd rather be in.

Opportunities do rear their head from time to time but it is certainly not the share buyers market that it was 3 or 4 years ago when I was writing lots of posts about what I wanted to be investing in next.

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Is the currency play finally over?

Is the currency play finally over?

Almost exactly 3 years ago I wrote a post arguing that there was an opportunity to invest in foreign index funds (as an Australian investor) because the exchange rate was far higher than it's historical averages and it seemed to me that this state of affairs wouldn't last forever.

My feeling was right and I have ridden the currency down almost 30% in the last ~5 years (this is before considering the returns that I managed to achieve by being invested in those foreign share markets).  I reassessed these investments 18 months ago and although I had already done very well out of them I felt like it still had further to go.

I'm still holding my foreign investments...but the currency is far closer to fair value

I'm still holding my foreign currency investments and they now account for just under half my share portfolio.  With the AUD / USD exchange rate sitting around the $0.82, I no longer have a strong conviction on the value of the currency.  It may be over-valued (I suspect that it might be a little bit strong) and it may be undervalued....I just don't know.

The currency play is finally over

Scale backs...why do you bother me so?

I recently wrote a post outlining my dilemma about investing in the most recent QBE share purchase plan.  I had already been stung once by a massive scale back and I wasn't keen to go through that experience again.

I phrased my dilemma as 'fool me once shame on you...fool me twice shame on me'.  As it turns out I was fooled twice and this time the fault is definitely my own.  However that being said it wasn't nearly as bad as last time.

I used my last experience to inform my decision this time

While it is true that you can make a lot of money from Share Purchase Plans, it is also true that you can effectively lose money if you get scaled back significantly.  I had experienced a significant scale back on the last QBE SPP and so was very aware that this could happen again.

Investing is all about learning from your previous experiences, and also from your previous mistakes and I was glad to learn from that previous mistake because it informed my decision making in the most recent share purchase plan.

I didn't apply for as many shares

In the last QBE SPP I applied for the maximum amount of shares (set at $15,000) in the hope of maximising my profits.  When I got scaled back this also resulted in me having the greatest opportunity cost loss.  I realised that this could happen to me again and so I only applied for the smallest possible parcel ($5,000).

Why did I do this?

1. I wanted to

Life lesson: Always put buffers into your budget

Having a tight budget this year and trying to achieve a lot with it has had some interesting (and unforeseen consequences) which I only really realised when I looked at myself in the mirror this morning and this was the thought that came to mind:

"I look like I am struggling to make ends meet"

My shirt is frayed, my suit hasn't been dry cleaned in far too long and my tie looks like it has been run over by several cars.  I really wish I was exaggerating but I really do look down on my luck which is crazy...

It's also not great for my career.  The way you dress and carry yourself is incredibly important to how you are perceived and this is definitely not the look I want to be going for.

So how did this come about?

I'm going to blame it on my budget and more accurately my focus on my budget this year.  In prior years I have had a fair bit of flexibility in my budget and when I have run over on some areas it hasn't really affected any other areas.

The big change this year is that I have accounted for almost every dollar I am going to earn and I have some pretty aggressive targets for what I want to achieve including:

1. Buying an engagement ring
2. Buying a sports car
3. Saving for a wedding
4. Going on a big overseas holiday

If I have budgeted for all of this...what's the problem?

We all need to withdraw money from savings...but make sure you put it back!

If you have ever set yourself a budget you will know that things don't always go to plan.  Sometimes there are unexpected expenses and sometimes you just spend more than you wanted to on a night out.

If you have budgeted for almost all of your income this means that one of two things will happen in those months where things don't go to plan:

1. You will not save as much as you intended to in the month; or
2. If things really get out of hand you will need to dip into savings

Don't write off the bad month...

One thing I realised since I started tracking my expenses fairly religiously was that if you 'write off' a month as bad you will never really catch up again.  You need that bad month to be made up by a good month later down the track.

Writing off the month mentally makes you reset to zero and you go back to trying to make your budget in following months.  I think this is a bad way of approaching it.  Bad months need to be compensated for.  You need to replace that amount you have taken out of your savings account or actually contribute that amount you didn't contribute in a previous month.

So how do you do this?

What you need is a way of tracking your unexpected withdrawals from savings...

If you have a way of tracking your unexpected withdrawals from savings then you can keep track of how much you 'owe your savings account' on a real time basis.  Not only does this motivate you to save more or be more wary of your expenses, it also reminds you that when you are having a good month that you may need to contribute a little bit extra to your savings account.

If you want a way of tracking the deviations from your budget I recommend the following method.  I have been using it for a few months and have found it quite effective.

1. Have an excel file which tracks what you do with your money when you get paid.  I call mine my 'wage day' file

This is a super simple spreadsheet which every month tracks what you do with your cash.  It is not a budget of any sort but it interacts with your budget.  For example I get paid monthly so my Wage Day file is updated monthly 

Below is an example of a month where your income doesn't quite cover all the expenses and savings plans that you had for the month

Let's work through this tracker:

• Income
• In this (fictitious) example

I lost money on the last Share Purchase Plan...do I try again?

"Fool me once...shame on you;  Fool me twice...shame on me".   That old proverb is ringing in my mind as I try and decide how much money I want to commit to the QBE share placement plan (SPP) that was announced in mid August 2014.

This is not the first time that I have had to decide to participate in an SPP run by QBE Insurance.  The last time was in 2012 and I saw an opportunity to make a nice little profit.  However, as I documented on this blog I got scaled back to such an extent that I actually made an effective loss if you account for the amount of time that they held my money before returning it.  I had applied for $15,000 in stock but received a paltry $32.10 and had the rest of my cash refunded to me.

A quick refresh on how to make money from Share Purchase Plans (SPPs)

I thought I would quickly run through how you can make money from share purchase plans.  In fact it is quite similar to making money from a rights issue:  You don't make the money from taking up your rights - the share price should adjust for this.  You make your money from the difference between the price at which you buy the shares and the theoretical price the shares should trade after the raising.

For example.  Assume Company A is trading at $10 per share and there are 100 shares.  

• The issued capital of the company is worth $1,000
• Assume that it wants to raise another $500 for acquisitions so it taps it's shareholders for some more money
• The shareholders aren't necessarily going to give the company all of the money that it needs so the company issues shares at a 50% discount to the current value (i.e. for $5) per share.  It needs $500 so it is going to issue another 100 shares
• The company now has an extra $500 of cash and an extra 100 shares.  Therefore the company is worth the original $1000 + $500 = $1,500 and there are now 200 shares on issue making each share worth $7.50
• This $7.50 is the theoretical price the shares should trade at after the raising is done

So how do you make money

Always know why you are invested in a stock...and at what price you would be willing to sell

I rarely make blanket statements on this blog about investing.  I think investing is inherently nuanced and specific to the individual making that investment bias.  However there are some rules which you should never break in the investment world and today I am going to talk about one that I constantly break and which makes me a worse investor as a result.

Here is the rule:

If you invest directly in the share market you should always know why you are invested in a particular stock and at what price you would be willing to sell that stock

 Know why you are invested in a stock

Knowing why you are invested in a stock is very different to knowing why you invested in a stock in the first place.  

Last year I wrote a piece on Reasons and Tips to stay on top of your existing investments and it is as true today as when I wrote it.  That post argued that we are programmed to care about things that are:

1. Exiting (i.e. new investment opportunities)
2. Painful (i.e. investments that are going very badly)

However all to often we don't really care about those investments that hadn't done anything.  The companies could have changed substantially along with their risk profile and the opportunities associated with it however we do nothing because in an investment sense they have not done anything to cause us to turn our attention to them.

Having an investment thesis for

How to save for your home deposit

Have you thought about buying your own home?  Have you done all your maths and worked out that actually...yes you can afford a home and it is the right time for to buy your first house?  Many people get to this situation and then realise that they are missing one big hurdle...they don't have the deposit they need for a house.

This post will give you some practical tips about how to save your deposit and my views on how much you should save for your deposit.

Saving a deposit for your first home is hard...

I actually think saving a deposit for your first home is one of the hardest savings and investing things that you will ever have to do.  There are so many behavioural and practical factors working against you including:

• It is incredibly hard to be disciplined and not the spend the money on other expenses that come up.  Unexpected expenses almost always arise and when you have a pot of cash sitting there it is incredibly easy to dip into this pot of cash
• The goal seems so far away.  Saving for a deposit is rarely something that you can do in a few months.  It takes serious effort over a few years and it is easy to get disenchanted
• You actually need more than you think...I will cover this below but unfortunately due to transaction costs (such as stamp duty and other costs associated with buying a property) you need more money than just the x% of the property value that you were aiming for

I am currently saving for my first place of residence.  If you follow this blog you will know that I already have an investment property however I have 'ring fenced' my investments (not legally but rather as a personal rule) so I am effectively saving for my first investment property all over again.  

Here is a plan to make saving a deposit for your first home easier...

The 5 step plan below is

Paying off debt? Remember that not all debt is created equal

Psychologically debt is a funny thing.  Most of us need it from time to time and debt is not always a bad thing.  In fact even consumer debt can sometimes be acceptable.  Your home loan is a form of consumer debt that most of us need to take out at some point in our life and this is fine.

Debt also needs to be paid back over time however many people do not pay back their debt in a logical manner.  There is an order that you should pay off your loans however many people do not pay off their loans in this way but rather spread their repayments equally over all their debt.

What is the logical order to repay debt?

Debt should always be paid back in the following order:

1. Repay the highest interest non tax deductible debt first
2. Repay other non tax deductible debt in order of interest rate from highest to lowest
3. Repay tax deductible debt (assuming the after tax cost of this debt is lower than the lowest cost non tax deductible debt)

You should not pay the principal on any of the cheaper debt until the most expensive debt is completely paid off.  Of course you should continue to make the interest repayments and allocate the principal component of this debt to the higher cost debt.

Want an example?  Ok assume you have the following debts...what order should you pay them off?

• A $300,000 home loan at 5% p.a.
• B $10,000 credit card loan at 22% p.a.
• C student loan of $20,000 which increases at CPI (inflation)
• D $200,000 tax deductible investment property loan at 6% p.a.

You should pay the principal amounts off in the following order

1. First pay the credit card loan off.  It is the highest cost by a mile.  You should pay only the minimum balance on everything else or convert them to interest only loans until this loan is paid off
2. Then pay off your home loan - it has the next highest after tax cost.  Yes it has the biggest balance but it is also increasing at the fastest rate so you want to get on top of this as fast as you can
3. Then pay off your investment property loan.  Assuming you are on a tax rate of 40%, the after tax cost of this loan is 3.6% 
4. Then pay off your student loans.  Obviously it depends on the rate of inflation in your country but in Australia inflation typically runs at 2-3% so it is easily your cheapest cost of debt

Paying the loans in this order decreases the amount of time that it will take you to pay down your loan balances and reduce the total amount of interest you pay over time.  By targeting the highest cost of debt first you are being the smartest and most efficient with your repayments.

What are some of the reasons that people don't pay their debts in a logical order?

People rarely pay off their loans in the optimal order.  In fact I know very few people that would pay off their loans in the order I suggested above.  Why?  Here are some of the reasons I think people pay off their loans in a sub-optimal way:

People like to see whole debt balances gone so pay off their smallest loans first

Most of us feel better when we have less debts to deal with.  What this leads to is people striving to pay off their smallest debts first even those these debts may not be costing us a great deal.  I know a number of people who have paid off their extremely cheap student debt before they pay off their home loans which are costing them far more.

If you can ignore the 'feel good' feelings that comes with paying off whole balances and concentrate on paying off your debt in a logical manner you will be much better off financially.

People like to see their loan balances decreasing

The painful thing about making minimum repayments (which may actually increase the loan on some types of debt) or by paying interest only, is that your debt balance goes nowhere.  You are paying money towards these loans but your balances aren't going down at all.

People generally prefer to see their loan balances going down from paycheck to paycheck and it can be rather disconcerting to see most of the balances staying the same even though you are making payments. 

In this case what you need to concentrate on is the fact that you are actually paying down your highest cost of debt loan faster as a result of concentrating your payments.  You are paying less total interest tomorrow because you are getting rid of your highest cost of debt today.

People can't be bothered changing their payment plans

Most forms of debt come with a pre-arranged payment plan and it takes effort to change it and most people can't be bothered going to their bank and changing this.  

For example most people would have their home loans and investment loans set up so that their are paying both principal and interest.  If you wanted to pay down your credit card debt faster you would convert these loans to interest only loans and pay the extra amount off your credit card debt.  After your credit card debt was paid off you would convert your home loan debt back to principal and interest.

Doing this takes effort and there is one big trap - you end up with a whole lot more free cash which you can blow.  If you are sensible and committed you should use all of this extra cash to pay down your debts and after the highest cost debt is paid off use all that cash to pay off your next highest cost of debt.

Paying down your debt does have a logical order.  If you follow it you can really improve your financial situation and get your debts under control faster.

How do you pay down your debts?  Do you have a pre-defined order?  Have you ever done anything illogical to 'feel better'?

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June 2014 Annual Net Worth Review

As promised for several months I have compiled an annual net worth review which will attempt to not only give you an insight into how I have performed over the last twelve months but also a better look at how I structure my portfolio and my reasons for doing so.  I have never provided this level of detail before in a post so I hope you find it interesting.

A brief look at my 12 month net worth performance

Over the last 12 months my net worth increased from $368,000 in June 2013 to $503,000 in June 2014 however as you can see from the chart below this was almost all an increase in my assets with my liabilities staying flat reasonably flat.  If you look at my portfolio construction below you will see why my liabilities barely move month to month.

My liabilities stayed flat over this period but my asset performance was what drove my net worth result.  A summary of my net worth performance is as follows:

• My assets increased from $724,000 to $860,000 an increase of 19%
• My liabilities increased from $356,000 to $357,00 an increase of 0.3%
• My net worth as a result increased from $368,000 to $503,000 an increase of 36.5%

My asset mix shifted

I invested in a fraudulent company and lost my money...here is what I learned

Things don't always go to plan when you invest in individual stocks.  Some stocks will make you money and others will lose you money.  This post will cover an investment I made two years ago (and which I wrote about on this blog) which went sour and where I lost my whole investment.  I will cover why I made the investment, why it went south and most importantly what I learned from the whole process.

What was the stock and why did I invest in it?

Almost exactly two years ago I invested in a company called Kinghero.  It was a German listed, Chinese manufacturer and fashion retailer aimed at the growing Chinese middle class.  I invested in it for several reasons:

1. The industry was appealing
• Getting exposure to the

Learn to ignore the distractions on your financial journey

Like many of you, I am on a journey to achieve financial independence.  I slip up from time to time but for the most part I am disciplined and have a strategy to achieve my goals.  There are plenty of distractions along the way and some of them come from unexpected sources.

This post will cover one of the distractions that I received recently...and my tips for ignoring these impediments to achieving your financial goals.

My bank offered me a credit card...by trying to guilt me about not spending 'on myself'

Recently I received the most outrageous letter from a bank.  In fact I honestly thought that banks were more responsible than this.  I have my home loan with a different bank to the one which has my transaction and credit card account.  In order to try and get more business from me, my home loan account bank constantly sends me letters offering me all kinds of products (including credit cards).  That is fine...that is the business they are in.  

However recently I received the letter below (along with a pre-filled credit card application form).  It was so outrageous I actually decided to copy the relevant sections

It is truly incredible that a bank would actually tell people to 'get in touch with their impulsive side'.  That they would discourage savings and people acting sensibly truly

Want to earn a 20%+ return? Pay down that credit card debt!

Wanting to take control of your finances and start to invest your hard earned money is an admirable goal.  Congratulations if you have just started out on this journey and keep going if you have been on it for a while. The first step on any journey to financial freedom, whatever your goals are, should be to pay off your high cost debt.  Nothing is more efficient than this and I'll explain why in this post.

Pay off your high cost credit card debt before you start to invest

I know your goal is to start investing, to start making millions in the share market and to put your financial worries behind you...but the first step on this process is paying off your high cost debt.  Pay day loans and credit card debt will kill you over the long term if you don't deal with it first.  All your financial efforts should go to paying this down first.

The 'problem' with this is that it is not fun...it doesn't feel like your getting ahead financially.  But trust me when I say it is the best investment you can make.

Investment returns are rarely going to equal the effective return you get from paying off your credit card debt

Credit card debt is incredibly expensive.  At rates starting at 19% p.a. it is almost daylight robbery.  The fact is that there are very very few share market investments that will make you this kind of return consistently.  If you get a consistent 10 - 15% from the share market or other investments you are doing very well.  

Getting a 20%+ return on your money is unheard of...but this is

Review: You Can Be A Stock Market Genius by Joel Greenblatt

With a title like "You Can Be A Stock Market Genius" I was expecting this book to be full of marketing hype and not much actual substance.  I thought it would be full of tips on investor psychology (which is actually very important) but very little on how to invest (which is what we all want to know).

For the second time in a row (the last time was The 4-Hour Workweek - see my full review) I was pleasantly surprised.  This is the first book written by Joel Greenblatt, the founder of Gotham Capital and although he later admitted that it was probably to advanced for the beginner investor.  This book is brilliant if you have been investing for a while, understand how stock investments work and how you generally look at companies to value and have been wondering how successful investors actually spot opportunities in the market.

What sort of investments does the book cover?

This book is probably best described as a special situations investment book.  It covers a variety of special situations which consistently deliver stronger than average returns and it goes through how these situations work, why they deliver the returns, what you need to consider and most importantly also backs up every situation with relevant examples and evidence.

The special situations the book covers include:

• Investing in spin-offs and rights issues
• Risk arbitrage and merger securities (although advises not to try this at home)
• Bankruptcy and restructuring investments
• Recapitalisations, LEAPS, Options and Warrants

One of the best thing about reading this book is that Greenblatt goes to the effort of explaining to you what you, as an individual investor, should look at and what you should avoid.  This is invaluable.  Most investment books provide explanations but not actually what you as an individual investor should do.

Does the invest advice actually work?

Everyone provides

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