Tuesday 6th May 2008
The Financial Fortnight That Was
In This Issue
Financial Topic Demystified - Making extra contributions into super
Fascinating Financial Fact
Market News
On the Lighter Side
Buffett's repeated advice: Stick to index funds and buy these over time
Monday's Money Minute Podcasts
Quick Links
 
 

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Greetings! 
 
Welcome to the latest edition of The Financial Fortnight That Was.  Apologies for the slightly later publication but we wanted to wait to see what the Researve Bank decided regarding interest rates.  They have decided to keep official interest rates at 7.25%.
 
In this edition we looks at the considerations around making extra conributions into superannuation, provide a summary of the movements in markets over the past fortnight and look at Warren Buffett's latest piece of advice. We hope that you find the material informative and relevant.  As always, if you have any comments or suggestions for future editions please do not hesitate to be in contact.
 
Enjoy the read!

A Quote for Consideration

"There are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type of investor - the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know."

William Bernstein

The Intelligent Asset Allocator

 
Financial Topic Demystified 
Making extra contributions into superannuation
 

It's that time of year again when we start thinking about tax time and what we can do to legally reduce the amount of tax we are paying.  Part of this analysis should inevitably turn our attention to our superannuation accounts.  So now is a good time for a brief summary of some of the factors to consider when looking at superannuation.

 

The following provides a brief summary of the superannuation environment.  If you would like more details please do not hesitate to get in contact.

 

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The benefits of making extra contributions into super above your employer's contributions are outlined below:

 

1) Tax effectiveness

The greatest benefit of contributing more into superannuation is for those earning more than $30,000 of assessable income.  Salary sacrifice superannuation contributions into super are taxed at 15% rather than this income being taxed at marginal tax rates of 31.5%, 41.5% or 46.5%.  On top of this, investment income earned within superannuation is taxed at a maximum rate of 15% another significant improvement compared to marginal tax rates.

 

2) Investing for the long term

By investing through superannuation you effectively ensure that these savings are left untouched until retirement (or the lead up to retirement).  The benefit of locking savings away is that they are exposes to the compounding effect of investments.  Not only do your investments earn income, you earn income on your income.

 

Another benefit if you choose to make extra regular contributions over time is that you are using a dollar cost averaging method to buy into investments.  What we see as a very prudent way of increasing exposures to volatile assets such as Australian share, international shares and listed property.

 

3) Government Co-contribution

If you earn less than $58,980 of assessable income you are eligible to receive at least some government co-contribution into your superannuation account.  To receive this co-contribution you need to make a personal contribution into superannuation (i.e. after tax contribution).  The government will contribute $1.50 for every $1 personal contribution up to a maximum limit depending on your assessable income.  If you earn less than $28,980 you can contribute up to $1,000 to receive a co-contribution of $1,500.  For every dollar of income greater than $28,980 the maximum government co-contributed reduces by 5 cents.  As an example, if you earned $38,980 you would be eligible to receive a maximum $1,000 government co-contribution.

 

4) Self employed tax concessions

If you make personal contributions and are self-employed, or earn most of your income from non-employment sources, you may be eligible for a tax deduction for your contributions.

 

5) Spouse contribution rebate for spouses of low income earners

If you are a low income earner, earning less than $13,800, your spouse may be entitled to a tax rebate, up to a maximum of $540, for contributions they make on your behalf.  If you earn less than $10,800 your spouse may claim a rebate of 18% on the first $3,000 they contribute on your behalf, i.e. $540.  If your income exceeds $10,800 the maximum contribution that attracts a rebate is reduced below $3,000 by $1 for every $1 by which your annual income exceeds $10,800. i.e. no rebate once your annual income exceeds $13,800.

 

There are some conditions to watch out for before jumping into making extra contributions:

 

1) Beware of the contribution caps

Concessional contributions, those that are taxed in the fund when they are made (e.g. employer contributions) are limited to $50,000 per financial year. If you are aged 50 or more at any time in the current financial year, your concessional contributions cap is $100,000.  This exception will be valid until the financial year ending 30 June 2012.

 

If you go over these limits, every extra dollar will be taxed an extra 31.5% (effectively the highest marginal tax rate of 46.5%)

 

Non-concessional contributions, those from after-tax money including contributions made on your behalf by your spouse, are limited to $150,000 per financial year.  If you are 64 for or under at any time during the financial year you are able to bring forward up to 2 future year's contribution and thereby contribute a maximum of $450,000.  For instance you made a $450,000 contribution in June this year.  You would not be able to make another personal contribution until July 2010.

 

2) Beware of the age based limits

If you are under 65 there are no restrictions on making contributions aside from the contribution caps.

 

Once you turn 65, your super fund can continue to accept mandated employer contributions, but to accept non-mandated contributions (such as salary sacrifice contributions), personal contributions and spouse contributions you must meet the work test - worked at least 40 hours in 30 consecutive days.

If you are 70 and over but under 75, the same conditions apply except that your fund cannot accept spouse contributions.

 

For those 75 and over, the only contributions your fund can accept are mandated employer contributions.  (Your fund can accept personal and non-mandated employer contributions after you turn 75 if they are made before the end of 28 days following the month in which you turn 75 and provided you have met the work test.)

 

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The decision to contribute extra into superannuation has to be weighed up against the inability to access that money until you reach your preservation age.  As an example, for those with mortgages it would need to be weighed up against the alternative of reducing the mortgage and thus reducing the non-deductible debt that you have in your situation.  This will be a delicate balancing act dependant on your ability to continue to service your mortgage into the future and your own tolerance to debt levels.

 

How do we apply this?

 

It is our job as financial advisors to assist our clients thinking through the ramifications of making extra contributions into superannuation.  If a decision is made to make extra contributions we assist with determining how best to invest those contributions.

Fascinating Financial Fact
 

Fairfax newspapers are currently running their 4 week stock picking contest.  At the beginning of the 4 weeks, 8 contestants are asked to allocate $10,000 towards 10 stock picks, $100,000 in total.  The contestants include media commentators and stock analysts along with a random selection identified as the Dartboard.

 

The latest report (29th April) on the progress of the competition has the Dartboard as a clear leader, $9,000 ahead of second place David Potts - a financial journalist.  Four of the share racers are in negative territory.

 

This surely anything but a strong affirmation of the usefulness of individual stock picking!!

Market News
 

Market Indices

Since our previous edition, Australian and global sharemarkets have both experienced positive movements over the past fortnight.  The S&P ASX200 Index has risen 4.99% from the 18th to the 2nd of May.  It is now down 8.61% from the same time last year and down 10.09% for the calendar year (2008) so far.  The MSCI World - ex Australia, a measure of the global market, has risen 2.35% over the same period.  The index is down 5.34% from the same time last year and down 8.16% for the calendar year so far.

 

Emerging markets have also experienced positive movement with the MSCI Emerging Markets Index rising 2.78% since the 18th of April.  It is up 18.44% from the same time last year but down 4.09% for the calendar year so far.

 

Property trusts have also risen since the 18th of April with the S&P ASX 200 A-Reit Index (formerly known as the Property Trust Index) rising by 6.95%.  The index is down 27.08% from the same time last year and also down 15.49% for the calendar year so far..  The S&P/Citigroup Global Real Estate Investment Trust (REIT) Index, a measure of the global property market, has risen 2.24% over the same period.  It is down 17.52% from the same time last year but now up 1.74% for the calendar year so far.

 

Exchange Rates

As of 4pm the 2nd of May, the value of the Australian dollar has had mixed movements.  It has fallen against the US Dollar since the 18th of April being down 0.70% at .9318.   It is up 12.99% from the same time last year and up 5.69% for the calendar year so far.  Since April 18th the Aussie has risen 0.43% against the Trade Weighted Index now at 70.8.  This puts it up by5.83% since the same time last year and up 3.06% for the calendar year so far.  (The Trade Weighted Index measures The Australian dollar against a basket of foreign currencies.)

 

General News

Since our last edition the Australian Bureau of Statistics has released the latest consumer price index data.  The March quarter of 2008 has seen prices rise 1.3% with this taking the annual inflation rate to 4.2%.

 

The board of the Reserve Bank of Australia met today and has decided to keep official interest rates steady at 7.25%.  The RBA governor, Glenn Stevens, in his statement has suggested that previous interest rate rises have gone some way to reduce the pressure on inflation by slowing aggregate demand levels in the economy.  He predicts that inflation will remain relatively high in the shortterm but should decline over time.  However he suggests that if demand does not slow to predicted levels future interest rate rises may need to be considered.

 

On the Lighter Side

Everybody who predicts the future with a straight face should be required (by law) to change out of the business suit, wrap him/herself in a gypsy shawl, wear one of those pointed wizard's hats with a picture of a crescent moon on it, and make conjuring sounds over a crystal ball. That way, everybody would know exactly what's going on and how much credibility to give the answer!

Buffett's repeated advice: Stick to index funds and buy these over time
Scott's Financial Happenings Blog - Posted Sunday 27 April
 

The Australian Financial Review ran a piece in Thursday's paper reporting on Warren Buffett's latest seminar with business students in the USA.  He holds such events some 15 times a year and he students get to tour one or two of Berkshire Hathaway's businesses and then proceed to Berkshire's headquarters in downtown Omaha.  While there Buffett provides the students with a two hour question and answer session. This time the sage of Omaha hosted 150 students from the University of Pennsylvania's Wharton School.  My wife's cousin is currently attending Wharton completing an MBA and I will be following up whether he grabbed hold of any other tips in a later blog!!

 

Buffett also invited along Fortune who reported on the event from which Barrie Dunstan in the AFR has based his comments.  A link to the Fortune article follows - What Warren thinks.

 

The article the AFR focus on the following comments made by Buffett:

 

"Well, if they're not going to be an active investor - and very few should try to do that - then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They're not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don't buy all at one time."

 

Buffett followed up these comments with these pearls:

 

"... you don't want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that (a) if you knew what was going to happen in the economy, you still wouldn't necessarily know what was going to happen in the stock market. And (b) they can't pick stocks that are better than average. Stocks are a good thing to own over time. There's only two things you can do wrong: You can buy the wrong ones, and you can buy or sell them at the wrong time. And the truth is you never need to sell them, basically. But they could buy a cross section of American industry, and if a cross section of American industry doesn't work, certainly trying to pick the little beauties here and there isn't going to work either. Then they just have to worry about getting greedy. You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that's too much to expect. Of course, you shouldn't get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that."

 

Two final answers from Buffett were reported:

 

"By your rule, now seems like a good time to be greedy. People are pretty fearful.

You're right. They are going in that direction. That's why stocks are cheaper. Stocks are a better buy today than they were a year ago. Or three years ago.
 

But you're still bullish about the U.S. for the long term?

The American economy is going to do fine. But it won't do fine every year and every week and every month. I mean, if you don't believe that, forget about buying stocks anyway. But it stands to reason. I mean, we get more productive every year, you know. It's a positive-sum game, long term. And the only way an investor can get killed is by high fees or by trying to outsmart the market."

 

Buffett's comments are very sound.  They back up what we have distilled from the academic / scientific research that has been conducted.  A summary of this can be found on Our Research Based Approach web page.

 

The only change for Australian investors is to exchange American business with Australian business and they are on a winning strategy.

 

Regards,

Scott Keefer

 

Click here to be directed to Scott's Financial Happenings Blog

 

Other blogs over the past fortnight:

 

30th April - Best way to pick share winners - use a dartboard

5th May - Forecasts for the remainder of 2008

 
Monday's Money Minute Podcasts Update
 

In the most recent podcasts, Scott Keefer discusses recent comments by Warren Buffett to a group of 150 Wharton business students - Buffett's Latest Advice and outlines the benefits of making extra contributions into superannuation - Benefits of Extra Superannuation Contributions.

 

Click here to be forwarded to the Monday's Money Minute Podcasts

 
We hope you have enjoyed reading the latest edition.  If you have any comments or suggestions for future topics please do not hesitate to get in contact.
 
Have a great fortnight!
 
Cheers,
The Two Scotts
 

The Financial Fortnight is a publication of A Clear Direction Financial Planning.  It contains general financial advice.  Readers should check this advice with a professional financial adviser before acting on any of the material contained in this email.

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