Author Archives: Cathy

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A Long Term Lesson in Residential Property as an Investment

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One step at a time.

One summer in college I interned at an investment bank. It was the worst job I ever had.  A co-worker and I survived our days by bonding over a mutual interest in the stock market.

My co-worker was brilliant. Scary brilliant. The kind of guy you feel bad hanging out with because he makes you realize how dumb you are. He could dissect a company’s balance sheet and analyse business strategies like no one else I knew or have known since. He was the smartest investor I ever met.

He went to an Ivy League school, and after college he landed a high-paying gig at an investment firm. He went on to produce some of the worst investment results you can imagine, with an uncanny ability to pile into whatever asset was about to lose half its value.

This guy is a genius on paper. But he didn’t have the disposition to be a successful investor. He had a gambling mentality and couldn’t grasp that his book intelligence didn’t translate into investing intelligence, which made him wildly overconfident. His textbook investing brilliance didn’t matter. His emotional faults led him to be a terrible investor.

He’s a great example of a powerful investing truth: You can be brilliant on one hand but still fail miserably because of what you lack on the other.

There is a hierarchy of investor needs, in other words. Some investing skills have to be mastered before any other skills matter at all.

Here’s a pyramid I made to show what I mean. The most important investing topic is at the bottom. Each topic has to be mastered before the one above it matters:

Every one of these topics is incredibly important. None should be belittled.

But you can be the best stock-picker in the world, yet if you buy high and sell low – the epitome of bad investing behavior – none of it will matter. You will fail as an investor.

You can be a great stock-picker, but if you only have 20% of your assets in stocks – a poor asset allocation for most investors – you’re not going to move the needle.

You can be a super-tax-efficient investor. But if your stock selection is poor, you’re not going to have many capital gains to pay taxes on in the first place. And if you’re paying too much for advice, tax savings can be irrelevant.

A common problem for any investor to stumble on is the temptation to solve one problem without first mastering a more fundamental one. It can drive you crazy, because if you’ve gotten the hang of an advanced topic, you might think that you’re on the road to success, but something more basic like investor behavior or asset allocation could still put you on a road to ruin. Just like my old co-worker.

Morgan Housel
http://www.fool.com/investing/general/2015/07/09/needs.aspx

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A recent article I read reminded me of the importance of investors understanding the crucial factors (more…)

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“The best time to make friends is before you need them”. Ethel Barrymore.
Your advisory team will include some or all of the following people:

• Accountant
• Lawyer
• Financial Planner
• Life Coach
• Business Mentor
• Budget Coach

When choosing your Advisory team you will be looking for people who can demonstrate the following:

• Are trustworthy
• You enjoy working with them
• You are not afraid to ask for explanations that you can understand
• They do what they say they will do
• Work in your best interests not their own
• Are suitably qualified
• Can work together when required
• Provide you with accurate advice
• Provide you with timely advice
• Charge appropriately

Take your time to choose your professional team and interview a few candidates. Be honest that you are shopping around.  Each may allow you a complimentary half hour to an hour of their time to allow you to determine if you can work together.

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“I am living so far beyond my income that we may almost be said to be living apart”. E.E.Cummings.

Why do you think we save for retirement and particularly when it seems so far away? When we first start in the work force, still wet behind the ears, is this something we should be thinking about? Obviously in most cases we do not think of this first.

We face two main risks in life.  The first is that we may not make retirement so we take life cover out to protect our families against this possibility. We may also reach retirement in poor health or have suffered a major illness, which has impacted upon our ability to earn an income before then.  Again, we insure to minimise the impact of this.

The other risk we face is that we retire and live too long!  That is, we outlive our savings.  As none of us know when we will die, we must guess and begin planning to save for our retirement income as soon as possible.  It is not very likely we will all win Lotto. The odds of winning Powerball are less than 1 in 38 million. You could be waiting 730 years before it’s your turn.   As far as us getting a pension in retirement goes, how likely do you think this is?  We have what is known as an ageing population so there will be less people in the work force in twenty years time than there are now, per retired person.  We need these people paying taxes which will provide for our healthcare and government pensions in the future.  The government determines the age of eligibility for such pensions (currently 65) and who is eligible to receive them.  At present the retirement income for a couple is approximately $25,000 p.a. after tax.   Do you think you would like to manage on this?  Why not plan for the sort of retirement you want rather than the sort you are dished out?

It makes sense to start investing as early as possible to take maximum advantage of the time effect – Right? Yes, that’s right.  Below is an example of the effect of investing $10,000 per year for ten years, twenty years and thirty years.  We have assumed a real rate of return of 6%.  This assumes no adjustment for inflation is made.

Ten years investing $10,000  p.a. at 6% = $139,716
Twenty years investing $10,000 p.a. at 6% = $389,927
Thirty years investing $10,000 p.a. at 6% = $838,016

Obviously, every ten years you are investing a further $100,000 but the effect of compounding cannot be ignored.

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• I never claim so why do I need cover? If you never claim then you are one of the lucky ones. Insurance is effectively a group of people who each pay a little to provide for the unlucky few who may suffer a large loss.
• I like having Doctor’s cover in my medical so that I can claim back all my premiums each year? How sustainable do you think this modus operandi is? Why do you require insurance for something you can afford? This merely becomes a dollar swapping exercise between you and the insurer. The cost in administration will be taken into account when premiums are reviewed!
• Insurance companies don’t want to pay claims – This is simply not true.  Unfortunately the cases we all hear about on TV are often cases where claimants may have not fully disclosed all information about their health or circumstances initially, or they may have believed they were covered for something they weren’t.  It is extremely important to ensure you read your policy documents. Your Adviser will familiarise you with the terms of your policy.
• It’s too expensive – Compare the cost of the premiums to the cost of replacing the assets you should cover.  It is important to prioritise your insurance needs and use larger excesses where possible to keep the costs down but DON’T risk a lot for a little and use those emergency funds to self-insure as much of the smaller risks as possible.
• Why should I cover my income when I pay ACC levies? ACC only covers you for accidents and not illnesses.  You are more likely to suffer an illness which will interrupt your ability to work, than you are to have an accident.
• I have house cover and that’s all I need – You don’t question insuring your house which is potentially a lot less valuable than your income.  See the example:Let’s say the average house is worth $500,000.00.  Now, you are 30 years old and earn an income of $70,000.00 p.a. and you think you will retire at age 65.  Without any adjustments for inflation your income is potentially worth $2.1 million until you retire.

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