Revolving mortgages and leverage

I know a number of you will have revolving mortgages or offset mortgages. Of course the advantage of an offset mortgage is that you only pay interest on the difference between your borrowings and your savings.

A big trap though with a revolving credit mortgage is to use it as an ATM machine. In my view borrowing to spend on holidays, cars and boats or non appreciating assets is not a smart financial decision. These type of things should be paid for out of savings and if those savings don’t exist then these items should be deferred until savings can pay for them.  Of course increasing your debt to invest in appreciating assets such as investment property or shares is ok as long as the debt can be comfortably serviced. 

Note though that borrowing to invest in shares is risky given the greater volatility that the share market has versus property. Of course one real benefit of borrowing to invest is that the interest is tax deductible. If you are not looking to use your mortgage for additional investment purposes i.e. property or shares my advice would be to take a standard mortgage that cannot be increased, that you pay down over time on a regular basis. Note that in a rising market a mortgage will give you leverage. The assumption here is that the capital gain in your property is greater than the cost of borrowing which of course has been the case in Auckland over the last few years. A house that has no borrowing on it will only increase at the rate of capital gain. 

This leads me to comment that in a low interest and rising market environment there is some downside in paying your mortgage off quickly. Doing so will negate the leverage effect of a mortgage. Of course there are peace of mind reasons for paying a mortgage off early. Note too that in a falling market environment having leverage (a mortgage) worsens the return.

AMP Kiwisaver Essentials Insurance Cover

For those of you who have AMP Kiwisaver, AMP has just launched the Essentials Insurance package. This is a low cost opportunity to take a modest level of life and disability cover.

The details are as follows:

• No lengthy forms
• Two easy medical questions
• No medical exams
• 100% online

I would recommend you take up this offer if you:

• Need cover and currently have none
• Have cover however feel cover is not sufficient
• Have medical issues and up to now have been unable to obtain cover

I am happy to discuss though your individual insurance situation with you so feel free to contact me.

Hey, Big Spenders

How does someone who earns $500,000 a year land themselves in a situation where they are living month to month, with no assets and credit card debt?

That’s the scenario Peter*, a Sydney barrister, found himself in a couple of years ago. When you a regular, high income, “it’s not as hard as you think to fall into the habit of spending everything you earn”, he says.

Eating two to four times a week at hatted restaurants ($30,000-plus over a year) catching taxis around town and keeping a lease car for mini-breaks ($25,000-plus) having meals prepared and delivered ($25,000-plus) hiring a personal trainer for mornings ($22,000) and outsourcing drycleaning home cleaning and gardening ($20,000-plus) add up quickly. (See example at end of article)

Peter is not alone in spending up. A recent MLC survey found most people don’t think having $1 million makes you rich any more, many consider eating out and private schooling essential costs and one in five households with incomes of more than $200,000 report living pay cheque to pay cheque.

It’s not uncommon for individuals who earn a lot to think they are not wealthy, financial planner Justin Hooper of Sentinel Wealth, says. “They say, ‘I know I earn a lot, I know I am in the top half per cent, but I don’t feel wealthy and I am not accumulating assets’. The other interesting thing they say is, ‘I don’t think I have a lavish lifestyle’.”

Indeed, there is a big disparity between high incomes and wealth, say financial planners, who find people who overspend and fail to accrue wealth are often successful business people who are simply time-poor and not cognisant of how much they are spending. They are masters or mistresses of their careers, but not of their wealth. “Spending significant amounts of money is quite prevalent among professionals, particularly in the legal profession,” Hooper says.

Others might assume the money goes on luxury holidays and mansions, but that’s not always correct. Often it’s fine dining, rental accommodation and hired help that are the culprits.

The problem starts early in professionals’ careers, a young legal professional says. It’s the lack of preparedness for substantial jumps in salary. You go from being a frugal university student to earning more than $100,000 and suddenly it’s like you’ve won the lottery she says. And so the cycle continues, until a circuit breaker enters. 

For Peter that circuit breaker was being on the cusp of 40. About to have his first child and getting worried phone calls from family. He did his first stocktake and realised some lifestyle changes would have to be made. For others, the circuit breaker might be realising you don’t want to rely on your parents – or children - when you have your own income and so it’s time to build your wealth, Hooper says.

Not using your top earning years to build wealth is an enormous waste of a very valuable resource – a high salary. Fortunately, it’s not too difficult to correct these wealth-sabotaging habits.

Advisers use a variety of strategies to help their clients build wealth, from using spending trackers and secret accounts to disabling internet redraws. Some of the tricks planner Suzanne Haddan, of BFG Financial Services, uses include encouraging her clients to siphon a proportion of their salary straight from payroll into a locked account, or, better still, their superannuation through salary sacrificing. “If they can’t see it, they can’t spend it and they don’t feel like they’re missing out on it, “she says.

For credit cards, she says the limit should be one, with an automatic repayment set up. She also tries to ban advances offered to clients for quickly paying down their loans by removing internet redraw options. “Budget can be a dirty word in the minds of some high-income earners, say Haddan and Hooper and clients sometimes feel they should be rewarded or compensated for their long hours by being able to buy what they want.

Hooper instead prefers to start by tracking spending and then linking it to various outcomes. Some clients realise they are not actually spending more than they should to achieve their goals while others find themselves on “disastrous paths”, he says. “I try to show them what the future looks like through projections if they continue to spend that way, then we set targets linked to goals and objectives.” 

Another strategy for building wealth is understanding how to use debt, financial planner Olivia Maragna of Aspire Retire Financial Services, says. “Maximise your good debt (where you can claim the interest expense as a tax deduction) and concentrate on reducing the interest on your bad debt. The strategic use of an offset account can reduce your interest on your bad debt but maintain the principal debt amount, which can potentially be used later on to claim tax benefits from, should you wish to,” she says.

Haddan agrees top earners are psychologically more likely to want to pay down debt quickly than put money into a savings account and says this can be used to their advantage with investment loans.

Financial planner Ben Smythe, of Smythe Financial Management, puts his clients on Xero Cashbook, which he says helps them manage their cash flow and wealth planning more like a business. Xero, which is best known for its small business and accounting functions is linked to bank accounts and credit cards to keep a record of spending. It then categorises receipts and lets the user know how close they are to their spending or saving target. You start by setting up categories, like mortgage, school fees, food, entertainment, and then your transactions start flowing in live and fall into their respective groups. Patterns are then formed to show you where you are overspending and how that will affect your goals.

“It gives them a very transparent picture of what cash flow is available for building wealth,” Smythe says. Once clients are set up on Xero, he puts them on a plan and links it to emotional outcomes, like a family holiday. One of Smythe’s clients Sharon*, the owner of a small business, says the program saves her the three hours that she previously spent on a Saturday morning reconciling her transactions. The main benefit for her is not the financial savings but the time it saves. You also don’t have to have that conversation with your partner about whether those shoes were really $200, because it’s in the budget,” she says.

However, a significant barrier for some prospective users is the fact you have to surrender private bank account details to the cloud. Xero acknowledges these concerns and says though the cloud isn’t totally safe from hackers, there are things users can do to reduce the threat, like multi-factor authentication and installing anti-malware devices. Smythe says he’s never seen or heard anything that would make him worry his clients’ security was being breached.  “It’s always a risk with a lot of things, but there’s nothing that makes me uncomfortable (with Xero).”

Xero costs about $50 a month, which for some people might be a fraction of what they would save but for others already wary of spending it might not be worthwhile. It’s available as a free trial through its website. For those who don’t want to pay that there are other free applications emerging for personal wealth management, including PocketBook, MoneySmart’s TrackMySpend and MoneyPad.

Finder.com.au says its searches for bugeting apps more than doubled between December and January, which signifies the growing awareness for these tools.
 
Apps to budget by:

• PocketBook
• GoodBudget
• Wally
• TrackMySpend
• MoneyPad 

An example of over spending:

Couple with two children at high school, single income of $400,000

Article: AFR Weekend 12-13 March 2016

Returns fall but still running

It would be premature to call an end to the bull market, but investors need to pare back their return expectations amid an increasingly volatile environment.

And central bankers, rather than China’s flagging economy, pose the biggest risk to equity markets in the longer term.

Those are some of the risks highlighted by JBWere New Zealand’s Investment Strategy Group, whose latest asset allocation update describes the global economy as “stuck in third gear”.

Last week, the United States Federal Reserve opted to keep interest rates unchanged within a zero to 0.25 per cent range due to heightened uncertainty in world markets.

The US interest rate setting has been a major contributor to the equity bull run that has taken place over the past several years.

JBWere said an eventual US rate hike was not an “insurmountable hurdle” for equities.

“Our focus is the dynamic between wages, growth and inflation. Strong growth, accelerating wages and rising inflation are what have historically hurt equity markets. Why? Because it is this dynamic that turns the Federal Reserve from growth cheerleader to punch-bowl remover.”

JBWere strategist Bernard Doyle said central bankers became dangerous for equity investors when they began worrying about inflation and hiking rates accordingly.

“At the moment no central banker in the world has that as a real concern,” Doyle said. “It’s when we get far closer to that point that we’ll start worrying about an end of the bull market.”

But Doyle said JBWere had been “dialling down” clients’ return expectations. “A double-digit (return) year in equities is not the norm.”

The S&P/NZX 50 Index gained 18 per cent in 2014, following a 16.5 per cent lift in the previous year.

As of Friday afternoon, the index was up only 2.7 per cent in the year to date and 4 per cent below its August 3 peak.

JBWere’s New Zealand equity manager, Rickey Ward, said investors often associated bull markets with double-digit returns.

“A bull market can still be high single-digit returns – it’s just positive sentiment around a market rather than the actual return you get from it,” Ward said.

But, with volatility increasing, JBWere has been putting clients into overseas hedge funds, which can profit in both rising and falling markets.

“A big push for us has been filling out our suite of low-correlation assets, including hedge funds,” Doyle said, adding that seven of the eight hedge funds JBWere clients were invested in had positive returns in August, one of the most volatile months for equity markets in recent years.

Ward said the local sharemarket’s recent “pull back” was creating buying opportunities. “Fletcher Building is a good example – look back a year ago and it was trading above $9, or close to. It went to $6.95 the other day and on what new news? The economy’s still pretty strong and Fletcher has got a forward order book of $2.4 billion … for any long-term investor that presents an opportunity in a very good company.”

Doyle said he didn’t think the Chinese economy was heading for a so-called “hard-landing”.

“We think it’s a bumpy, managed slowdown,” he said, adding that a severe downturn would put political stability at risk. “A (Chinese) recession would have political ramifications that they’re keen to avoid.”

NZ Herald – 21 September 2015

Writing a will

A will is an important document for all of you to have. It is the foundation of estate planning. Below are some important aspects of writing a will.

A will is a written document. It is a statement by a person about how his or her personal affairs should be actioned after death. The person making the will is a testator (if male) or a testatrix (if female). The will contains directions which are not just limited to financial affairs but to other matters such as guardianship of children or desired funeral arrangements. A codicil is also a written document. It adds to, alters, explains or confirms an existing will and is made by the same person who made the will. A codicil is prepared signed and witnessed just like a will, and it is read in conjunction with a will.

A will must be signed and witnessed. A verbal will is not usually valid. It must be signed and clearly dated at the end by the testator or testatrix. There must be at least two witnesses present when the signing is done. These people also sign that they are witnesses. This is done in the attestation clause. All the signing is done together in the presence and sight of each other. The witnesses also add their addresses and occupations. The testator or testatrix and the witnesses also initial the preceding pages. Alterations in the will must be clearly defined in the attestation clause and have the signatures of the testator or testatrix, and the witnesses alongside the alteration. Alterations cannot be made to a will after it has been attested, except by a codicil or by revoking the will.

Beneficiaries under a will should not act as witnesses. They will forfeit their benefit when the estate is distributed although, since 1977, this need not happen if there are at least two other valid witnesses who have signed as witnesses.

Too many things can go wrong when an amateur writes a will without professional assistance. Mistakes can cause stress among beneficiaries because a method of distribution is too restrictive or incomplete or there might be unforeseen taxation difficulties.

Any person aged 18 years and over or any person of any age if that person is or has been married, and any minors aged over 16 years with the approval of the Public Trustee or the District Court has testamentary capacity and can make or revoke a valid will. It may be revoked any time before then death of the testator or testatrix, usually through writing a will at a subsequent date, although a subsequent marriage can revoke a will.

Guide to New Zealand Estate Planning and Tax – Clifford Mancer, 1994

Tax structures for those who are doing private work in addition to their DHB work

Sole Trader

Many people when they first start out in some small business, trade in their own name. This is called being a sole trader.All income comes to you personally and you also claim any expenses against that income in your own name. Because the business is personal you do not need to get a new IRD number (assuming that you already have one).

Many sole traders continue to operate through their own personal bank account. There are some, however, who have a separate bank account nominated as a trading account and called something like ‘John Smith trading as Ace Panelbeaters’. Keeping a separate account like this can make record-keeping much simpler. Sole trader is one of the most convenient and certainly least expensive ownership structures. Accounting and compliance costs are minimal and there is no cost involved in establishing the vehicle in the first place.

For tax purposes the income from your business (after expenses have been deducted) is added to any other income that you might have, perhaps from paid employment or from investments. If you are unfortunate enough to make losses as a sole trader it may be some compensation that they are deducted directly from any other income you may have, reducing your taxable total income. This perhaps is one of the greatest  advantages sole traders have over companies, for which tax losses can at times be difficult (although usually not impossible) to offset against other income. For example, if your newly established retail business makes a loss you may usually offset that loss against the taxable profit from your property investments or from your salary if you have kept your job. You may also usually carry losses that you make in any one year forward to a future year. Thus losses made in the 1998 tax year may be carried forward to 1999. You cannot, however, roll losses back to a previous year. So, if you make a loss in the 1999 year but made a healthy profit in 1998, you cannot re-assess the tax you paid in 1998 and ask for a refund.

Perhaps the greatest disadvantage of trading as a sole trader is the limited ability to income-split with other members of your family. While a sole trader may employ his spouse to assist him and pay a wage for that work (thus in effect income-splitting) there needs to be justification in terms of work actually done (personal exertion) for the income to be passed to the spouse, and prior approval from the IRD. Such prior approval will only be forthcoming if the IRD is satisfied that the spouse is truly working in the business. In addition, if tax rates are changed so that the personal rate is higher than the company rate sole traders will be significantly disadvantaged. On balance, I think that most people should trade through a company or a trust. Sole traders enjoy no limited liability and are therefore directly responsible for all debts, be they to the Inland Revenue Department for unpaid taxes, or to some other creditor.

Limited Liability Company

There are many reasons to trade though a limited liability company, tax advantage being one. In spite of the changes made by the Companies Act 1993, personal liability protection is still afforded by limited liability companies: shareholders have no liability beyond the funds put in as share capital. In this, companies differ from sole traders and partnerships, where liabilities are personal. With a company, any debts are debts of the company, not its shareholders or directors unless the company has been trading recklessly.

Many business people prefer the separation of business and personal activities, as well as appreciating the more established and more serious corporate image that a company presents.

A limited liability company is a complete separate entity from its shareholders. As such, it requires an IRD number and a GST number (if applicable). It cost around $300 to establish a company, and there will be some additional ongoing compliance costs. For a start, every company must furnish the Ministry of Commerce with an annual return of company details, as well as details of any changes of directors and shareholders. Accounting costs will also generally be higher because of the need for compliance with the various acts regulating companies. But because it is a complete separate legal entity, a company can offer some benefits in its ability to minimise tax.

The income of a company is taxed separately from the income of its shareholders. However, the shareholders who are working in the company, or are directors of the company, are often paid a salary once the profit of the company has been calculated. Even though the salary is calculated after the end of the company’s income tax year it is allowed as a deduction in that tax year. The shareholders will pay tax on that income at rates lower than the company would.

If New Zealand ever returns to having a higher personal rate of tax than the company tax (as has been proposed by some political parties) this will obviously have implications in the division of profits between shareholders and the company. Paying the salary at the end of the year also prevents you drawing a salary that may turn out to be greater than the company’s profit for the year. Thus you have the flexibility of deciding how much profit will be taken out personally by the shareholders and how much will be left to be taxed in the company.

Tax in New Zealand – Martin Hawes 1996

Financial planning tools

A number of doctors ask me what their Super and Kiwisaver will be worth at age 65. I am happy to calculate this for you so please let me know or use the calculators on the sorted website which is www.sorted.org.nz. There is also useful information about retirement planning on the commission for financial capability website which is www.cffc.org.nz.

A useful book to read is called “Being Mortal” by Atul Gawande. In Being Mortal author and also surgeon Atul Gawande tackles the hardest challenge of his profession: How medicine can not only improve life but also the process of its ending.

Another website worth looking at is www.mylongevity.com.au. This site takes into a range of factors about yourself and predicts your age at death, quite scary however very useful in terms of planning your life. I have included my results, click here to view. Looks like I’ll be around for a while.

Sky high stocks point to coming crash

Here’s a somewhat scary statistic for those meant to know about these things. After a six year bull market, the typical stock in America’s S&P 500 shares index is valued on a multiple of more than 18 times estimated forward earnings. This is not just expensive by historic standards but super expensive. In fact, according to analysis by Goldman Sachs it ranks in the top 98th percentile of historic valuations since 1976 – or in other words one of the highest in nearly 40 years.

It scarcely needs saying that these peaks tend to signal the top of the cycle, with some kind of bear market or crash just around the corner. But hold on a moment, you might say, we’ve barley recovered from the last downturn. It surely cannot already be time for another? Regrettably it can. Most business cycles last little more than seven years and if anything they tend to be getting even shorter. The US economy contracted in the first quarter and has shown few signs of significant recovery since. As for the eurozone, spring has brought a rare burst of growth, but few believe it will last, let alone be strong enough to undo the damage caused by the crisis.

Meanwhile, the prospect of Greek default continues to hover over everything like a permanent sword of Damocles, threatening at any moment to plunge much of the advanced world back into financial and economic turmoil. If economic prospects look so precarious, why are stocks, bonds and other asset prices so high? Part of the answer lies in central bank money printing, or so called “quantitative easing”. This has now all but ceased in Britain and America, but where the Anglo-Saxon world has left off, Europe, Japan and China have taken over. The world is awash with cheap liquidity.

This in turn is creating new sources of financial instability to replace the old incubators of it in the banking system. History rarely repeats itself exactly, and if looking for crisis there is absolutely no point in looking for them in the last one. Banks are no longer a threat to the financial system or the economy. To the contrary, they have become so shrunken by credit loss and neutered by regulation that they have gone be the other way, and if called on to help counter renewed turbulence elsewhere in financial markets would no longer be up to the job. As Kevin Corrigan, head of fixed income a Lombard Odier, puts it: “New regulation designed to make the financial sector less risky has paradoxically damaged  the shock absorbing capabilities of the banking sector, and thereby made other parts of the system more risky.”

Banks are no longer willing to act as warehouses for ordinary buyers and sellers of financial assets. Denied this ‘market making” capacity volatility in some markets has already picked up significantly, with often violent swings in prices and yields form one day to the next. With eurozone bond yields climbing sharply this week, Mario Draghi, president of the European Central Bank, warns us to expect further turbulence to come. So where do the new threats come from?  Hedge funds and other leveraged operators such as private equity – according to popular imagination, the original evil of finance- can reasonably be excluded. Even if they were thought dangerous, they are too small to be systematically important. Rather the main threat comes from conventional asset managers. Their portfolios have been swollen to bursting since the onset of the crisis by central bank money printing. Recent analysis by the International Monetary Fund found that globally these funds today hold intermediate assets worth some US$76 trillion ($106 trillion), equivalent to 100 per cent of world GDP. Via burgeoning bond markets, they have come to replace the banks as primary sources of finance for governments, corporations and even households. The upshot is that great chunks of credit intermediation have shifted from the banking to the non-bank sector. Assets under management of some of the bigger players in advanced economies are as large as those of the largest banks, and show similar levels of concentration. Now add to these markets the wholly price incentive buying power of the central bank printing press, and all the conditions are again in place for a major train crash. Normally an investor judges value on the basis of perceived prospects for the asset involved – credit – worthiness, market position, the outlook for growth, inflation, interest rates and so on.

The central bank printing press has rendered these market judgments substantially meaningless, and by flooding the system with cheap money, encouraged indiscriminate, herd-like pursuit by asset managers of credit risk almost any price. Worse, the downtrodden banks no longer have the capacity to act as effective market makers if and when perceptions change. In a panic, prices would plummet, with nothing to act as financial fire breaks. Nobody can tell you when the next crisis will come, but the notion that governments have somehow got on top of the forces of financial instability is for the birds. Credit expansion obeys the water bed principle – push it down in one area, and it merely rises up somewhere else. Central bank money printing undoubtedly helped stem the last crisis, but if it has also sown the seeds for the next one, you have to wonder about its long term consequences.

Article from NZ Herald, Thursday 11 June 2015 – Telegraph Group Ltd

There's a riot going on

Markets are crowds and behave like crowds. Both are simply collections of people and both can be wise or irrational. The behaviour of the Auckland housing market is starting to resemble a crowd gone rowdy and riotous; not too different from a few hundred teenagers on a Coromandel beach on New Year’s Eve. It may not be at the drunken, bottle-throwing stage yet but by all appearances, one more step and it’s out of control. The Reserve Bank is shouting for everyone to go home, property investors and other interested parties are still handing out the liquor.

Crowds of all kinds become extreme because they work on social approval: when one person throws a bottle it is OK for others to so; one person paying $1 million for a dilapidated shack justifies others to do the same.

I am always looking for good investments but I have chosen not to join the Auckland housing riot – the hysteria in no way reflects underlying value. This is a speculative binge where people are paying fortunes for houses because everybody is doing it. By any sensible measure, this bash should have ended years ago and it should never have spilled out on the streets with cops involved. I remain hopeful that it will end nicely but when a crowd gets to this stage, you just never know how the party will finish up.

Article from Sunday Star Times, 31 May 2015 – Martin Hawes

Reserve Bank right to fight housing bubble

There has recently been considerable commentary and even criticism of the Reserve Bank of New Zealand for holding interest rates above other countries despite CPI inflation being temporarily below the 1-3 per cent target range. The RBNZ has also been criticised by Treasury for failing to make a robust case to “intervene” against the housing market with policies such as LVR that attempt to curb the most aggressive lending practices.

Some have even called the RBNZ Muldoonist. Is the criticism justified? Should the RBNZ simply leave the market to its own devices and allow Aucklanders to indulge in our favourite pastime of swapping debt funded houses among ourselves at ever high prices? There are many arguments and stories justifying the Auckland housing bubble. Immigration is perhaps the most frequent cited. Try telling somebody in Florida, Nevada, Spain or Ireland that this factor will prevent a subsequent bust. Likewise construction costs. Likewise restrictive planning rules…. the list goes on.

The Auckland bubble is big. Deutsche Bank estimates overall NZ housing is 30 per cent overpriced relative to income and 82 per cent versus rent, with Auckland presumably being worse. However such extremities are nothing that the world has not seen before and nor are the usual stories that temporarily justify it.

A recent study involving the Federal Reserve Bank of San Francisco looked at 17 advanced economies since 1870 and examines the long term economic impact of housing bubbles, equity market bubbles and bank loan booms. The findings are that the financial stability risks of a moderately leveraged equity market boom/bust are very small but the risks from a loan financed housing boom are huge. In recent times, the impact of the Nasdaq crash in 2000 was painful for those who paid absurd prices for companies specialising in vapour ware but the wider economic impact was limited. Indeed, the sharp interest rate cuts by the Fed to limit its aftermath arguably paved the way for the remarkable housing and credit boom that followed and whose bust in 2008 is still being recovered from today. The study finds that over time, real house prices experienced a number of booms and busts but largely trended sideways from the 1870s to the 1950s, after which they have risen substantially in conjunction with bank loans. Examples of past boom/busts include the Australian real estate boom of the 1880s financed by overseas inflows and immigration which blew apart in the early 1890s and caused a deep recession verging on depression.

A US real estate boom/bust in the 1920s centred on outside money investing in Florida and preceded the equity market crash of 1929 by several years. Rather than immigration financial deregulation was the driver of the Scandinavian boom of the 1980s and bust of the 1990s.

Japanese real estate peaked in 1991 and the study points out that by 2012, the nominal value of real estate was about half of its 1991 level. House prices always go up … yeah right. Contrastingly, the study finds numerous examples of popped equity bubbles that did not turn into wider financial crises because they had very little bank finance underpinning them. Without a parallel credit boom, equity bubbles have no statistically significant effect on the depth of the economic recession that follows their bust or the speed of recovery.

The study finds that when an equity bubble coincides with a credit boom, the subsequent economic recession lasts a year longer than it would otherwise have and there is a 3 per cent drag on the level of GDP per capita after five years; that is, the economy is 3 per cent smaller than it would otherwise have been. As an example, NZ in the aftermath of the 1987 crash springs to mind. Conversely, house price bubbles have been less frequent but their busts have been far more damaging due to their loan financing frequently taking the banking system down with them. A house price and credit bubble crash, “can sink the economy for several years running so that even by year five the economy is still operating below the level at the start of the recession.”

Spain and Ireland since 2009 are clear recent examples along with those cited earlier. Hopefully, NZ will not join them in the period ahead. These findings are stark. Auckland’s credit financed housing bubble is a grave threat to the NZ economic outlook – never mind the “reasons” of immigration, building costs, land availability and so forth. Every bubble in history has had its reasons. These pass but the permanent effects of the bubble bursting most certainly do not. Immigration may weaken; planning rules can change but the mortgage debt that has funded the price bubble remains. Thank goodness that Graeme Wheeler and the RBNZ are beginning to pay attention to the issue. It is simply bizarre that they are being criticised for being the one official institution to show some leadership and tentatively use their limited tools to lean against Auckland house prices.

The RBNZ’s tools need to be sharpened rather than tempered, with other countries providing plenty of evidence for the success or failure of tools such as stamp duty, removing the tax advantages of so called investors, overseas investment restrictions, loan restrictions et al. The evidence is compelling that the aftermath of a credit financed housing bust is dire. Those who do not learn the lessons of history are doomed to repeat them.

Article from NZ Herald Thursday 2 July 2015 – Matthew Goodson

Other Services

I thought it would be useful to point out services I offer in addition to the subsidised DHB and Business Superannuation.

Insurance

If you have bought or about to buy a house you would be advised to take out life and disability insurance. Also if you have started a family you would be advised to look at these also. I can assist with these by doing an analysis of your situation and recommending an appropriate solution. I appreciate in these cases of a house purchase banks often direct you to their insurance providers. Based on some results I have seen here the advice given has had shortcomings.

Lump sum or regular investment

Should you have a lump sum via perhaps the maturing of a term deposit or an inheritance, I can offer advice on a portfolio service. This service is with OneAnswer (owned by ANZ Bank) and takes care of buying, selling and holding investment products on your instructions.

You have access to a wide range of investments from managed funds, NZ and International shares and fixed interest through to NZ cash and major foreign currencies. I also offer a range of unit trusts which are ideal for regular investment.

Financial Planning

You are always more likely to achieve your goals if you plan things. Having a financial plan means you are more likely to achieve your financial goals. I can provide a financial plan which will incorporate retirement planning, risk management, tax, budgeting and estate planning. I charge a fee for this service which typically is in the range of $600-$1000 depending on the complexity.

Residential mortgage finance

Should you be looking for residential mortgage finance for a new property or looking to refinance, myself and a colleague can assist with this. My colleague is a trained lawyer so can assist in avoiding pitfalls and give value added advice. We deal with two major lenders.

Balancing act for funding your retirement is a tricky test

One of the most difficult – and important – calculations in finance is how much investment capital you will need for retirement.

To be able to calculate the savings needed, people need to make some assumptions about the amount of income they can safely draw from their retirement capital. This means finding the retirement income Goldilocks spot, drawing neither too much nor too little.

On the one hand, in retirement you want to have the best possible life, while on the other, you do not want the money to run out before you do.

Like Goldilocks’s porridge, chair and bed, the amount that you take and spend from your capital needs to be just right.

There is a rule of thumb in finance which says that in retirement, you can draw 4 per cent of your savings to live on each year. The 4 per cent rule tells you that for every $100,000 you have saved, you can take $4000 in income each year for 30 years.

Given its importance to retired people’s finances, this 4 per cent rule has been much studied. Although it has been criticised by some, it is largely still considered by most to be a fairly useful tool for modelling what a retired investor can expect to be able to live on.

It may be a bit rough and ready, but having a rule of thumb like that is very useful when planning your finances.

There are several things that could make the 4 per cent rule either too optimistic or too pessimistic.

Firstly, the 4 per cent drawdown rule is based on someone having a balanced portfolio (50 per cent of the portfolio in shares and property, with the other 50 per cent in bonds and cash). If you arrange the portfolio so that it is more conservative than this, your returns are likely to be lower, and so your drawings should be correspondingly lower. Such a conservative portfolio will have less volatility, but the money is more likely to run out before you do.

Conversely, if you invest more aggressively, your money might last longer but the volatility risk will be higher.

Secondly, the sequence of your returns may not be good. Returns from any portfolio will be volatile, but the timing of the volatility may be unfortunate. For example, if there is a major market fall shortly before or after retirement, it will be difficult to maintain the planned income drawdown.

It is close to retirement when the portfolio is at its highest value, so a major market fall then will see the greatest loss of money.

This is why it is often wise to start to lower your investment risk as you approach retirement.

Thirdly, some people are uncomfortable watching their capital decline.

Drawing 4 per cent will usually mean that not just investment returns are being spent, but the capital itself is being used to the extent that nothing is left after 30 years. If you want to maintain investment capital for inheritances, your drawdown rate will need to be less than 4 per cent.

Planning this decumulation phase is as tricky as it is important – and, unlike Goldilocks, there is not much room for experimentation.

Article from Sunday Star Times by Martin Hawes

Bull market still has legs after 6 years

This article outlines in my view the need to be cautious/careful of share markets. As you are no doubt aware markets go in cycles and when markets get too frothy they correct. With this in mind thought should be given to capital preservation.

In 2009 the stock market was filled with panic. The housing market had gone under and General Motors was on the verge of bankruptcy reorganisation. The United States was in a deep recession, and stocks had plunged 57 per cent from their high in October 2007.

Fast-forward six years, and investors are enjoying one of the longest bull markets since 1940’s. The Standard and Poor’s 500 index has more than tripled since bottoming out at 676.53 on March 9, 2009. The bull has pushed through a US debt crisis, an escalating conflict in the Middle East, renewed tensions with Russia over Ukraine and Europe’s stagnating economy.

So has this bull run its course? Most market strategists have not yet seen the signs that typically accompany a market peak. Investors are yet to become rash, or overconfident.

“Bull markets end not because they grow old. They end because some excesses build,” says Stephen Freedman, head of cross-asset strategy at UBS Wealth Management.

Why do stocks keep rising?

It’s a powerful combination of higher corporate profits and a growing economy. The main driver is company earnings. Companies slashed costs in response to the recession that began in December 2007. That helped boost profit margins when demand began to recover. As a result, earnings per share have risen consistently since the end of the recession in 2009. Companies in the S&P 500 are forecast to generate record earnings of US$119.35 ($163.40) a share this year, nearly double what they earned in 2009.

Hiring is picking up and costs are down, and that means Americans are more confident about the economy that at any time since the recession. Unemployment has fallen to 5.5 per cent from a peak of 10 per cent in 2009. A plunge in the price of oil has pushed down petrol prices and put more money in people’s pockets. Most economists forecast growth of more than 3 per cent this year. As investors become more confident about growth, they are willing to pay more for stocks.

What role has the Federal Reserve played?

The Federal Reserve has held its main lending rate close to zero since 2008. It has bought trillions of dollars in bonds to help hold down long-term interest rates. By cutting rates, policy-makers have encouraged businesses and consumers to borrow and spend. The historically low interest rates in the bond market have also made stocks look better in comparison.

How does this run compare with previous bull markets?

There have been 12 bull markets since the end of World War II, with the average run lasting 58 months, according to S&P Capital IQ. At 72 months, the current streak is the fourth longest in that period. While this run could be described as middle-aged, it is still a few years short of the longest streak, which started in 1990 and stretched 113 months into 2000.

If you invested US$10,000 at the bottom, how much would you have made?

The S&P 500 has returned 253 percent since March 9, 2009. That means an investment of $10,000 would now be worth $25,262. Investing the same amount in the Dow Jones industrial average over the same time would have turned $10,000 into $22,428.

How long can it continue

All bull markets must end. That’s simply the nature of financial markets. However, few analysts are calling the end of this one just yet.

The U.S. economy is continuing to strengthen and inflation remains tame. And while the Fed has ended its bond-buying program, other global central banks, like the European Central Bank and the Bank of Japan, are still providing stimulus to their economies.

“I don’t anticipate that stocks will face any challenges in the near-term,” says Michael Arone, chief investment strategist for State Street Global Advisors. “If there were some type of a recession, or a slowdown in the U.S., that would hurt for sure … but I don’t see that on the horizon.”

Also, many of the excesses that accompany bull-market peaks haven’t surfaced, says UBS Wealth Management’s Freedman. Think of the housing boom that preceded the bust that began in 2007, or the dot-com mania of 1999 and early 2000.

“Because the recovery has been so sluggish, nobody has had time to go overboard with the type of behavior that’s come back to haunt the markets,” he says.

What kills bull markets?

Typically, it’s a recession. Four of the five bull markets since 1970 ended as investors got spooked by a recession, or the anticipation of one.

Bank of America analysts say that the most likely threat to the bull market would be rising inflation. That could cause a sell-off in bonds, sending shock waves throughout financial markets.

Another threat is a slump in earnings. That could happen if the surging dollar, already at a 12-year high against the euro, grows even stronger, making U.S. goods more expensive to customers overseas and translating into fewer dollars to corporate bottom lines.

Article from NZ Herald 11 March 2015 by Steve Rothwell

Time to be selfish

I appreciate this is an American magazine; however I strongly suspect the trends spoken about are quite similar.

Baby boomers are putting their retirements at risk by spending too much on their adult children. With real wages stagnant and unemployment among those age 16 to 24 running above 12 percent, large numbers of households continue to dole out cash to children no longer in school, covering rent, cell phones, cars, and vacations.

A July 2014 survey by American Consumer Credit Counseling, a Boston nonprofit, found that a higher proportion of U.S. households (1 in 3) provide financial assistance to adult children than support for elderly parents (1 in 5). “This is putting a huge wrench into retirement savings,” says Pamela Villarreal, a senior fellow with the National Center for Policy Analysis in Dallas. “The more boomers put out for adult kids, the less they can put aside for themselves, which is scary as they live longer and need savings to last them into their 80s and 90s.”

More than a third of adult millennials receive regular financial support from their parents, and 1 in 5 still live at home and don’t pay rent or expenses, according to a November 2014 survey by Bank of America. It isn’t just the unemployed or the low-paid who are needy. The poll, which had 1,000 respondents between the ages of 18 and 34, found that among those earning more than $75,000 a year, 25 percent had their parents pay for groceries at some point and 21 percent got money for clothing.

If parents have extra money left over each month, they should be maxing out their contributions to 401(k) plans or paying down mortgages or other debt, not subsidizing their kids, financial advisers say. “You can’t take out a loan for retirement,” says John Sweeney, executive vice president for retirement and investing strategies at Fidelity Investments. “So the less well-off you are, the more you have to say to grown children, ‘I don’t have it to give.’ ”

Gillian Anderson, head of Anderson Wealth Management in Westport, Conn., says so many of her clients are helping their 20- and 30-something kids financially that she advises other parents who consult her to budget for the possibility that they may have to do the same. “It runs the gamut from giving regular allowances because millennials often aren’t earning enough to cover rent and food, to help with legal bills if a child is going through a divorce, to occasional payments for a coat or plane ticket,” she says.

Whatever the reason, this prolonged support is squeezing even affluent boomers. The executive director of a nonprofit in Seattle gave her daughter and son-in-law a total of $12,000 in 2014 to pay for child care, home repairs, and other bills—and plans to give at least as much this year. The 66-year-old woman earns $230,000 a year, while the couple are working professionals in their 30s with a combined annual income of about $115,000. The mother, who asked not to be identified because she didn’t want friends and work colleagues to know about her situation, says she’d like to retire, but her financial planner has warned her that the $2.5 million she’s set aside will run out by her early 80’s at her current rate of spending.

Fidelity’s Sweeney says it’s a bad idea even for affluent parents, to fund their adult kids. “Giving them tens of thousands of dollars a year for apartments, cars, and restaurant meals sends the message that you’ll keep paying for a lifestyle they can’t afford on their own—and you probably can’t or don’t want to fund forever,” he says. “Better to teach them to burn less than they earn, and save all you need for a long old age.”

Article from Business Week Magazine 9 – 15 March 2015 by Carol Hymowitz

AMP Adviser Awards 2014

At a gala dinner on Friday night, 20 February 2015, around 200 Advisers and employees from across the AMP business, including AMP, AMP Financial Adviser Network (AFAN), Independent Financial Advisers (IFA), Spicers and AdviceFirst, gathered to celebrate their achievements from the past year at the 2014 AMP Awards Dinner.

The AMP Awards recognise the top performing Advisers and Adviser Businesses across 20 categories. The award selection is based on achieving outstanding sales performance, customer retention and attracting new business, and the winners have demonstrated solid results in their respective categories.

Tonkin Financial Services was awarded – Independent Financial Adviser Business of the Year

There were other awards and ribbons awarded on the evening for other categories too.

NZRT Transfer Update

For all doctors at ADHB and WDHB your Super which was previously in AMP Business Super has been transitioned to AMP New Zealand Retirement Trust.

You would have received a letter from AMP stating funds had been withdrawn from your AMP Business Super. No need to be alarmed about this as the funds have merely been withdrawn and transferred to the NZ Retirement Trust Plan. The NZ Retirement Trust Plan offers an online facility which allows you to check your balance, contributions and investment choices.

You should have received a welcome letter recently with login details. For those of you at CMDHB the transfer to NZRT will take place in February.

John's Portfolio

I have some direct share investments and I thought I’d provide an update on changes in my portfolio and the reasons for these.

During 2014 I bought some Google shares at US$1201 per share. They have since split into A and C shares. The reason for investing in these is that Google is now well established and has substantial cash flows and numerous business interests in growth areas of the technology world. Staying on the technology theme I invested in E Road which is a NZ Technology company which supplies software to the transport industry. I paid $3.55 a share for these which are currently sitting at $3.79. I recently sold my Santos shares (at a small loss) for $11.66 based on the drop in oil prices. I am pleased I did as they are now sitting at $7.55 a share. I used the proceeds to buy Sirtex Medical which is a company that makes a product that treats liver cancer. I took the opportunity to sell a small number of my Tower shares (for a profit) in their share buy back offer. I made a modest investment at float time in Orion Healthcare which I am sure you are all familiar with (Hospital software among other products). Lastly I added funds to my investment in the Devon Alpha Fund.

OneAnswer Portfolio Service

Some of you may have a lump sum of money that you are wondering how best to invest it. The One Answer Portfolio Service gives you a range (over 100) of investments. You receive information through regular and comprehensive reports and statements. You can also have online access to your portfolio information. Lastly it provides the convenience of having your investments in one place hence reduced paperwork.

If you are interested in exploring this please contact me and I can supply you additional information.

Global Markets

The global economy is likely to show improved growth in 2015, despite no shortage of gloomy headlines, according to Credit Suisse, with growth expectations and central banks likely to set the tone for sharemarkets.

This is even though China is slowing and Japan and Europe need significant stimulus to improve off a low base. But the investment bank says the headwind of lower energy prices will help global industrial production and goods demand lift by 3 to 5 per cent next year, led by the US, which should be able to post growth of at least 3 per cent. Combined with China reporting a growth rate in the high 6 per cent range, this should be enough to boost global gross domestic product growth to 3.4 per cent in 2015, compared with an expected 3.1 per cent in  2014.

“I’m surprised by the degree of negativity at the moment among investors and also policymakers,” says Robert Parker, senior adviser in the investment, strategy and research group, Credit Suisse. “The reason why I say I’m surprised is first of all, if you look at the United States, the economy data is actually very good. Whether you look at investment spending, consumer spending, export numbers, everything is consistent with 3 per cent-plus growth for the next 12 months in the US,”

The second plank in Parker’s positive case is that the negative perception of Europe is changing. “The reason for that is because a lot of stimulus is being thrown at the European economy at the moment. We are very confident that the European Central Bank will keep interest rates close to zero for at least two years. It is expanding its balance sheet from 2 trillion Euro ($3 trillion) to close to 3 trillion Euro probably by the second half of next year.”

Parker also expects to see “in the next month or two’ some easing in fiscal policy by Germany. “Germany is under intense pressure to ease fiscal policy. This is what’s changed, I think, in the last six months in Europe, is that policymakers have seen voters moving away from conventional centralist policies to either extreme left or extreme rights parties. That’s pushing the policymaker, both at the ECB and the ministries of finance, to adopt a much easier policy and really throw stimulus at the euro zone economy because we can’t tolerate the weakness in the economy that we’ve seen in the last six months” he says. Credit Suisse forecasts average real GDP growth of 1 per cent in the euro zone 2015.

Then there is China. “This year, China will grow at over 7 per cent but next year, China will probably grow somewhere just below 7 per cent. We’re looking at a gentle glide path downward in terms of the outlook for Chinese growth – but to a soft landing, nota hard landing,” Parker says.

As for Japan, which unexpectedly slipped into recession in the third quarter of 2014 while the poor third-quarter GDP number caused Credit Suisse to revise down its 2014 growth forecast form 0.9 per cent to 0.5 per cent, the postponement of the value-added tax hike planned for 2015, the continued aggressive monetary easing, as well as signs of the weak yen is finally beginning to boost exports, have induced the bank to lift its growth forecasts for both 2014*15 (up to 0.9 per cent) and 2015-16 (up 1.1 per cent).

Subsequent to that call, Japanese Prime Minister Shinzo Abe won a sweeping victory in the snap elections he called for December consolidating his power in the Diet and giving him a further mandate for deep reforms.

Parker says the growth outlook is being stimulated by the late-2014 fall in energy prices, which he describes as a “tax cut” for the world, although it is not good news for the budgets of producer nations such as Russia or Saudi Arabia. “It is a stimulus for some sectors that really matter, for example manufacturing, and the US household sector, which accounts for the bulk of US GDP.

“On the back of what we think is sustainable recovery in the US jobs market, there are positive feedback effects into credit growth, consumer confidence, and business confidence on the back of that,” Parker says. “Most importantly, gains in employment and wages and the resulting improvement in consumer spending are finally encouraging companies to raise investment spending.” And means the Federal Reserve can begin, at some stage in 2015, to normalise – that is, raise – interest rates. Credit Suisse expects this process to begin around midyear.

The Fed will act – cautiously – because the US unemployment rate and core inflation trend are both close to their expected long-run trend,” Parker says. The Bank of England will follow suit with tighter monetary policy, but easing will continue in Europe and Japan. “This is likely to result in both a weaker euro – and yen –  against the US dollar but, notwithstanding the concerns over ‘competitive devaluation’.”  Parker says currency weakness will boost the export earnings of Japan and Europe, particularly Germany, which has been hurt by both Chinese slowdown and its sanctions on Russia. “You cannot escape these linkages. Yes, the slowdown in China has had an impact on German exports, but not a shock impact. The point to make on German exports and particularly the capital goods producers like the car makers, is that as the euro comes down against the dollar, their profitability and profit margins are expanding very fast indeed. If we get further declines in the euro against the US dollar, which I think is inevitable, the profitability of German industry is going to be extremely positive,” Parker says.

While ECB governor Mario Draghi’s top priority is to eliminate deflation and risk, Parker says the ECB would like to see a much weaker euro. Credit Suisse is calling the euro at $US1.20 by the second quarter of 2015, against $US1.25 at present, after flirting with $US1.40 earlier in the year. “The point about that is that it’s simultaneously very good for offsetting deflation risk, and for export competitiveness,” he says.

For reasons of improved export competitiveness on currency weakness, Europe and Japan are Credit Suisse’s preferred equity markets in 2015. “Both are under-valued in terms of their fundamentals, and we expect both  to benefit from monetary policy and low commodity prices – especially for energy,” Parker says.

Article from www.afr.com James Dunn 20-26 December 2014

AMP Capital Quarterly Strategic Outlook

Click below to download a copy of the AMP Capital Quarterly Strategic Outlook for October 2014.