Watch out for those golden handcuffs

The golden handcuffs is an often used expression to describe a workplace that is pretty unpleasant but pays so well that you are actually tied to your job because you would not get paid close to enough anywhere else.  You are, in effect, trapped by how much you earn at that particular place of employment.

Investment banks are one of the classic examples of this but they are certainly not the only one.  In fact there are many industries where this applies.  Strangely enough it tends to apply closer to the top of the hierarchy where the pay is much better and the options for achieving equal pay elsewhere is virtually nil.

The golden handcuffs don't work if your expenditure doesn't rise with income

Another, almost cliché, expression is that expenditure rises with income.  Since I was quite young my parents (and my dad in particular) drilled it into me that you need to watch your expenses and not get ahead of yourself so it was with some surprise that I realised that I had fallen into this trap like a lot of other people.

I recently did a post on what my real 'non essential' expenditure was - that is, the expenditure I was not willing to give up each month.  I ran these numbers past my brother who is studying at university and he was truly shocked at how much money I spent each month.

If you think you have not fallen into this trap then think of this

• How much money did you need to 'get by' when you were in university?  
• How much did you save in your first year of work?
• Have you been spending more in absolute terms as your income has gone up?
• Do you eat at better restaurants?  Go on more frequent holidays? Spend more on these holidays?
• How much do you spend on a night out and where do you go on a night out now?

The chances are, that you are able to justify an

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

Double or Nothing: Not an investment strategy I'm fond of

A few weeks ago I watched a great documentary on ABC's four corners (link here) which went through the spectacular rise and fall of Australian ex-billionaire Nathan Tinkler.  It was an expose as well as having several lessons about investing, keeping what you earn and not blowing it all.

In fact it was almost the quintessential gambling stories.  Those stories of the ordinary people who made it rich winning the lotto and who then lose it all through bad decision making and poor investments.  The episode is really worth watching - I don't know how much longer it will be available at this link so while it is I recommend watching it.

Why is this story capture our imagination?

The reason Nathan Tinkler captured our imaginations so much is that he was an ordinary person, not born into any sort of wealth (unlike the Gina Rinehart's of this world) who made it big.  Further he did it in an extraordinary short period of time and he conformed to all the things we expect of big baller billionaires.

Below is a summary of his rise and fall.  Note that all the information below is from the four corners episode although it gels with much of the news reporting around the time of his risk and fall

• He started as an apprentice electrician and ended up running a company which was supplying tradesmen and services to the coal mining industry
• With the help of friends and family he got $1 million dollars for a deposit on a coal lease and then raised another $30 million
• A year later he sold the company which owned the coal mine to MacArthur Coal for $270 million
• He opted to be paid in shares instead of cash
• Soon after the price of MacArthur Coal price spiked due to an increase in the coal price combined with rumours that the company was subject to a takeover offer
• Tinkler sold out and walked away with $442 million
• A year later it is reported that Tinkler burned through almost all of this money (see what he spent some of it on below)
• Next, Tinkler bought the Maules Creek coal deposit for ~$500 million relying almost entirely on borrowed money (from a Singaporean hedge fund)
• 9 months later as coal prices continued to rise Tinkler floated the holding company for Maules Creek, Aston Resources, for $1.2 billion valuing Tinkler at $1.01 billion
• A year later Whitehaven Coal agreed to merge with Aston Resources to form one of the biggest players in the coal industry
• The share price of Whitehaven Coal fell in tandem with the coal price
• Tinkler had not sold any of his shares to pay back the debt he owed to the Singaporean hedge fund and many of his bills started to go without paying
• The hedge fund called in their debt which was secured by Tinkler's shares in Whitehaven - his last remaining asset of real value

The summary above is super truncated and I apologise for the information it is missing.  It is really worth watching the whole report.  In the midst of making and losing his money Tinkler spent his money on the things that most of us think rich people spend their money on

• He spent millions of dollars on horses 
• He bought fast cars 
• He bought a soccer team
• He bought a rugby team

There is a reason people who are making money don't invest in these endeavours.  They are known sink holes for money.  They are where the rich go to dabble in their hobby and they don't intend to make money out of it. However it all contributes to the story of an ordinary person who suddenly had an extra-ordinary amount of money and who did with it what we ordinary folk expect a person to do with it.

Why am I so critical of what he did?

Tinkler was effectively making the same bet over and over again.  He was

Trickle down economics...separating self interest from good policy

I was on Facebook a few days ago when I noticed one of those annoying 'recommended pages' advertisements that look like your friends updates but are actually subtle advertising.  I was surprised to see Gina Rinehart posting a link to her website with what looked like a blog entry entitled "Gina Rinehart is our least controversial celebrity".

I questioned whether even Ms Rinehart would promote herself so blatantly and in such a crude fashion.  I think it is a fan site and I didn't bother reading it - I was much more interested in the comments under the post itself.  What genuinely surprised me was how much support there was for Ms Rinehart on the entries. There was actually far less trolling than I would have imagined and a rather lively debate on whether the policies and views she espouses were good or bad for Australia and how economic policy should work.

Although it was not clearly stated, I was reading a lay discussion about the relative merits of 'trickle down economics'

Trickle down economics is a term which is often used in a negative sense to refer to the idea that if you stimulate the top end of town - e.g. the wealthy and the business community through incentives, tax cuts and other financial means they will be incentivised to expand their business operations.  Although the immediate benefits in the short term go to business owners and those in the wealthier classes, the 'masses' also benefit as businesses are encouraged to hire people which results in job growth, wage growth and everyone benefits.

This is an argument that is seen much more in America than here in Australia and importantly - they have tried it.  During the Regan era policies designed around trickle down economics were introduced.  Here is a good summary from the Rachel Maddow show - the explanation starts around the 2 minute mark.

These sort of economic policies are promoted by conservatives all the time.  However, it is often hard to separate the truth from self interest and this is where my interest in the Gina Rinehart story came in.  A lot of her supporters were big believers in

More tentative steps into the world of coin collecting (for investment)

A few months ago I wrote about how I overcame my uncertainties and purchased my first collectible coins for investment purposes.  For full details about my rationale and the rules I set myself see my post here.  I just bought my second set of coins and have outlined the details below.

A quick re-cap of the rules and rationale

I am not going to make this a core part of my portfolio but it is an investment class that I hope to build up over the very long term.  To this end I am only going to be contributing $50 a month to the coin collection.  There are a few reasons why I am not going to be spending hundreds of dollars a month on this investment class:

1. I know very little about what drives the value of collectible coins
• I truly believe that people should only invest in what they understand
• I understand at a basic level what causes the prices to move with collectible coins however I do not have the same level of knowledge that I do in the property or housing markets
  
2. I thought about storage and insurance
• Coins are a physical product and like all physical products they need to be stored somewhere
• I am comfortable having a few hundred to a few thousand dollars of coins in my house...but more than that would start to make me nervous
• Also the space considerations need to be taken into account
  
3. They don't generate any income
• Physical commodities do not

Resetting budget expectations in 2013

Last week I sat down and did some calculations and realised why I could never keep up with my budget and my savings plan.  I realised that I actually had much more in quasi non discretionary expenses than I had expected including health insurance, gym membership, rent, car insurance, fuel etc.  Have a look at the post if you want more details and to see how you should think about these expenses.

What this meant though is that I had to reassess my savings and expenditure goals in light of this.  I have attached my 2013 financial goals but basically I was hoping to achieve the following each month

• $3,500 per month towards my home loan offset account
• $2,000 per month towards shares
• $2,200 per month on personal expenditure

Since then things have changed quite significantly...

Not only have I realised that I cannot keep up with this personal expenditure, with the significant falls in interest rates, my investment property is now positively geared and I don't really want to be contributing as much to it each month.  The share market has run pretty hard but I still think there is value to be had here in small pockets and when the market falls.

I am re-adjusting my budget and savings goals to take account for the change in conditions.  When I did this same process last year I mentioned that you should not be dogmatic about your savings goals.  You should try and achieve them but if you have fundamentally not assessed them correctly or if the market changes then you should change your expectations.

...as a result I am changing my goals for the rest of the year

I am therefore updating my savings and expenditure goals.  I thought about leaving fat in my personal expenditure target but I thought that I would rather have a challenge.  Because I have not been achieving my expenditure goals I have become a lot more careful with where I spend money and I think this is a good thing.  The following therefore are more achievable but would still be a challenge.

My new targets for 2013 are as follows:

• Home Loan Offset Account: $2,400 per month (-$1,100)
• Shares: $2,500 per month (+$500)
• Personal Expenditure: $2,800 per month (+600)

Interestingly, I went back

5 tips to make you a better networker

Young professionals, entrepreneurs and really anyone looking to make it in the business world is told that networking is essential.  Your network will be one of the most valuable things that you possess your whole career and your ability to call on your network is a great asset in your back pocket.

Some industries, especially professional services industries, push this more than others - after all, it is in their interests that you have a good network that you can rely and call on when you are trying to create revenue for the firm.

However, as all young professionals know...this is not as easy as it seems...

Networking never seems to go the books suggest it should go.  You are told to find people who are going to help you up in your career and to find mentors and other people who you can suck knowledge from and learn from...however they never say HOW to do this.

Anyone who has attended young professionals events, whether organised by organisations to help their junior staff mingle or by special young professionals groups knows how incredibly fake these types of events are.  You end up chatting superficially to a few people and exchange business cards with a few people and then you totally forget who you spoke to and the business cards never get used.

However the big dilemma is that you can't ignore this aspect of business altogether.  As much as you may like to think otherwise, your ability to advance in the business world is determined not only by your abilities, skill and intelligence but also by your interpersonal skills and your ability to leverage relationships.

Networking is not impossible and does not need to be tedious...

Although the books most of us read only tell you to network and what types of people to find...they rarely tell you how to go about doing this.  I am not an expert on this but I have included a few tips below to help make the process easier and hopefully less tedious.

• Tip 1: Make friends...not contacts
• You never keep in touch with someone who is just a contact...and more importantly you don't really help someone out if you think they only want to know you because you may be useful to them
• The biggest piece of advice I can give you is to try and make friends with those people who you actually want to