Tuesday 27th January 2009
The Financial Fortnight That Was
In This Issue
Quote for Consideration
Financial Topic Demystified - Fixed Interest Investments
Fascinating Financial Fact - 2009 School Costs
Market News
10 Tips on Avoiding Investment Fraud
Other Website of Interest - IFA on You Tube
Eureka Report articles
Monday's Money Minute Podcasts - Back on Air - Watch Out for the New Income Tests
Case Study - The Pension Bonus Scheme
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Greetings! 
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Welcome to the latest edition of The Financial Fortnight That Was.

In this edition we:

  • consider the use of fixed interest investments in a portfolio,
  • take a look at 2009 School Costs as a guide to planning for future education costs for your children,
  • provide a summary of the movements in markets over the past fortnight including 3, 5 and 10 year return history,
  • look at 10 tips on avoiding investment fraud,
  • provide a link to some useful videos on You Tube,
  • provide a link to Scott's latest Eureka Report article,
  • welcome back the Monday's Money Minute Podcasts, and
  • look at a case study involving the Pension Bonus Scheme.
Enjoy the read!!

A Quote for Consideration 

"The average long-term experience in investing is never surprising, but the short-term experience is always surprising.  We now know to focus not on the rate of return, but on the informed management of risk."

Charles Ellis

Investment Policy, 1985 

Financial Topic Demystified 
Fixed Interest Investments
 

In the current climate of downward pressure on interest rates the attractiveness of holding cash is fast losing its luster.  Last edition we looked at the benefit of Australian shares and the income they produce over time and the compelling argument behind continuing to hold those investments in portfolios.  Unfortunately the down side of growth assets such as Australian shares is that their asset price is volatile over the short to medium term.  2008 has provided a stark reminder of this.  So it does continue to make sense to hold defensive assets like cash and fixed interest to smooth out this volatility and also to provide assets that can be drawn down on if required knowing that you will not be drawing down on these assets at low prices.

 

But is there a better alternative to cash in the present climate that still provides a low volatility exposure?

 

The answer to this question is yes, if managed well, through using fixed interest investments.  To first provide some anecdotal evidence, the high quality fixed interest trust we suggest to clients has returned 2.82% over the past 3 months to the end of December 2008 as compared to 1.69% for a relevant cash index - UBS Warburg 90-Day Bank Bill Index.

 

Why this is so goes to the rules of how fixed interest investments, commonly referred to as bonds, are priced.  In times of falling interest rates, bond prices should rise all else being equal.  This is because holders of the bond are promised a fixed rate of return for providing that debt to the government or a company.  As interest rates in the economy fall, the rate receivable on these bonds become more attractive, therefore prices adjust to reflect this attractiveness and returns improve.

 

This is a very simple explanation and more detail should be considered before jumping into fixed interest investments.

 

The following is an extract from our book - A Clear Direction - Your Guide to Being a Successful CEO of Your Life which we hope provides more detail around the topic of holding fixed interest.

 

Fixed interest securities are traditionally loans made by investors to governments or companies.  These types of securities represent a loan to the issuer usually in return for periodic fixed interest payments.  These payments continue until the security is redeemed by the issuer at maturity or earlier if called.  Under law, holders of debt have the first call on the income and assets of a company.  Specifically interest payments have priority over any dividend payments to shareholders.  As a consequence such investments are generally viewed as less risky than equity investments because holders must be paid first before any returns are paid to shareholders.  However, fixed interest securities are not risk-free and may carry many different kinds of risk.  As a result these investments are riskier than holding cash.

 

We would therefore expect, over time, that the expected returns on fixed interest securities would be less than returns to owners of shares in a company but more than simply leaving cash in the bank.

 

Use of these types of securities sounds simple.  However there is much more to the story.

 

Rather than include the whole chapter within this email we have included a copy on our website: Fixed Interest Investments

 

Fascinating Financial Fact

2009 School Costs


A client recently made contact to commence planning for their child's future education needs.  This encouraged me to track down the latest research into the costs of educating a child in Australia.  The most up to date resource I have come across so far is the Australian Scholarships Group 2009 School Costs fact sheet.  It suggests that the total costs for 2009 will be:

 

 

Preschool Schooling

Primary Schooling

Secondary Schooling

Government schools

2,779

5,536

5,938

Systemic schools

4,520

7,442

12,144

Private schools

7,195

13,130

22,436

 

This provides a decent starting point for those parents considering what they need to plan for in terms of education costs for their children in future years.

 
To read the full fact file along with underlying assumptions please click on the following link - 2009 School Costs.  You will need Adobe Acrobat installed on your computer to view this file.

 
Market News
 

ASX P/E Ratio and Dividend Yields

 

The P/E ratio is a common broad indicator of the price of shares.  It is a calculation of the price of shares compared to expected earnings.   A higher ratio indicates that share prices are more expensive.  The historical P/E ratio for the ASX has been between 14 & 15.  The dividend yield is the calculation of dividend payments divided by the market capitalisation of the company or index.  The historical average in Australia is around 4%.

 

As of January 20th the P/E ratio for the S&P/ASX 200 was 8.74.  The dividend yield was 6.44%.


Volatility Index (VIX)

 

Another index we are keeping an eye on in the USA is the CBOE Volatility Index.  This index purports to be a key measure of market expectations of near term volatility conveyed by the S&P 500 share index.  The higher the level of index, the higher are expectations for volatility in the S&P 500 index.  For more information on how the VIX is calculated please take a look at  - www.cboe.com/micro/vix/introduction.aspx

 

As at the 23rd of January the index closed at a level of 47.27.  This is significantly down from the 80.1 level it had reached at its peak but slightly up from the levelreported last fortnight.

 

Market Indices

 

This year I have tabulated the index results and included extra time frames for returns.

 

 

Since last ed.

Since Start of 2009

1 Year

3 Year

5 Year

10 Year

Australian Shares

 

 

 

 

 

 

S&P - ASX 200

-10.52%

-10.20%

-38.24%

-11.44%

0.05%

NA *

International Shares

 

 

 

 

 

 

MSCI World - Ex Australia

-8.24%

-8.09%

-35.60%

-11.87%

-2.85%

-1.65%

MSCI Emerging Markets

-8.81%

-6.92%

-40.83%

-5.83%

5.31%

10.36%

Property

 

 

 

 

 

 

S&P - ASX 200 REIT

-15.03%

-10.95%

-52.66%

-24.68%

-12.14%

NA *

S&P/Citigroup Global REIT - Ex Australia - World - AUD

-2.51%

-7.26%

-30.11%

-12.37%

1.32%

5.79%

Currency

 

 

 

 

 

 

US Exchange Rate

-7.81%

-5.92%

-24.54%

-4.73%

-3.46%

0.19%

Trade Weighted Index

-5.94%

-3.24%

-19.58%

-5.28%

-3.80%

-0.27%

 * - Data unavailable as ASX 200 only commenced on 31st March 2000

 


 
10 Tips on Avoiding Investment Fraud
Scott's Financial Happenings Blog - Posted Saturday 24 January
 

Unfortunately investment fraud is most certainly a risk for investors to consider when setting up and maintaining investment portfolios.  The Madoff affair in the USA has caused waves throughout the world.  In Australia, some might say that even though the Storm Financial saga was not about fraud, misleading behaviour might have been at play. (This looks set to be tested in the courts.)  So how do investors protect themselves from getting caught out by fraud or misleading behaviour?
 
I am a candidate in the Chartered Financial Analyst (CFA) program.  As part of this I get access to some very useful resources that I hope to share with my clients and users of this website.  One of the latest publications from the CFA Institute looks at 10 tips on avoiding investment fraud and this was written in response to the Bernard Madoff Hedge fund Ponzi scheme in the USA. (for the original article - http://www.cfainstitute.org/aboutus/press/release/09releases/20090121_01.html )

Here are the 10 tips and a response to how our approach rates on each tip:
To read the remainder of this blog please click here - link to blog
 

Regards,
Scott Keefer

Other blogs over the past fortnight have included:

Other Website of Interest
Index Fund Advisors on You Tube
 
A website from the USA which we have previously highlighted is the Index Fund Advisors site - www.ifa.com.  IFA is a fee only independent financial advisor. They have a particular approach named the 12 Steps Program for Active Investors that highlights the research behind an index based approach to investing.  IFA have uploaded a range of videos onto You Tube which explains this approach.  For those who prefer to watch and listen rather than read, these videos are well worth a look.   The fist of the series can be found here - Introduction to Index Funds: The 12-Step Program for Active Investors
Eureka Report Articles

Since our last edition Scott Francis has contributed another article to Alan Kohler's Eureka Report.  Click on the link below to be taken to this item:
 

15th January - Funds structure in big trouble - Invented by hedge funds and embraced in by wider investment circles, the fund of funds structure is now under fire.


 
Case Study 
Accessing the Pension Bonus Scheme
 

A recent enquiry was received asking the following - I am soon to reach Age Pension age.  I intend to keep working for a few more years.  Should I apply for the Pension Bonus Scheme?

 

The Pension Bonus Scheme was introduced 1st July 1998.  It was introduced as an encouragement for those of age pension age to continue working and put off claiming the age pension for a period of at least 1 year.  If you do so and you are eligible to claim the age pension at a later date, you will receive a lump sum benefit for not claiming the pension.

 

How much is this lump sum benefit?

 

The amount of bonus you get depends on:

·  the amount of basic Age Pension you are entitled to when you eventually claim

·  the length of time you have been an accruing member of the Pension Bonus Scheme, and

·  whether you were single or partnered during the time you deferred your Age Pension.

 

You must be an accruing member for at least one year to be paid a bonus. A maximum of five years accruing membership can be taken into account when working out your bonus. Work after 75 years of age cannot be included.

 

If you are entitled to a part-rate Age Pension, you may be entitled to a part-rate bonus. For example, if you receive 75 per cent of the basic rate of Age Pension when you retire, your bonus will be 75 per cent of the amounts in the following table.

 

Maximum amounts of bonus payable (accurate as at April 2008) where the maximum rate of Age Pension is granted

Number of bonus years

For a single
person

For partnered people (each)

1

$1 336.40

$1 116.40

2

$5 345.50

$4 465.70

3

$12 027.40

$10 047.80

4

$21 382.10

$17 862.70

5

$33 409.50

$27 910.50

 

The relationship between the initial pension rate and the amount of bonus means; members will generally benefit by claiming their pension and bonus after employment income ceases.

 

The bonus you get is a multiple of 9.4 per cent of your basic Age Pension rate for each accruing bonus period.

 

Example of how the Pension Bonus is calculated

Glen registered for the Pension Bonus Scheme on 3 March 2003 at 65 years of age. He was self-employed and worked an average of 35 hours a week until he retired on 2 March 2008, accruing five full bonus years.

 

Glen is single and has never given away any income or assets. He claimed Age Pension and the Pension Bonus on 1 April 2008 within 13 weeks of his retirement.

 

Glen has other income and assets. After the income and assets tests are applied, he receives 56 per cent of the maximum rate of basic Age Pension or $7,961.40 (after rounding). His bonus is calculated as follows - 56% of the full 5 year bonus lump sum for a single person of $33,409.50.

 

This gives Glen a total bonus of $18 709.30 (after rounding).

 

For some, you may be better off claiming the Age pension immediately rather than deferring in order t receive the pension bonus at a later date.  Particularly, if the pension payments you would receive if you claimed the pension immediately are greater than the pension bonus you would receive at the time you intend to claim it then you may well be better off claiming the pension immediately.

 

This decision would depend on a range of issues including your current level of income and assets, the amount of income you need in retirement, taxation, superannuation and health and lifestyle issues.

 

If you think you will be well placed to receive the Pension bonus then Centrelink recommend that you register as soon as possible.  To register for the Pension Bonus you need to visit your local Centrelink office or by phoning 13 2300.

 

You do not need to be eligible for the age pension at time of registration, the pension bonus is calculated based on your age pension when you apply to receive the age pension for the first time. Most likely this will be when you fully retire from work and your income from working will be minimal.

 

For more information please take a look at the Centrelink website -

http://www.centrelink.gov.au/internet/internet.nsf/payments/pension_bonus.htm

 

 

What are these case studies all about?

Over the past few months a number of users of our website have requested for us to include a section on case studies.  We are keen to be able to provide this for users of our website and email newsletter.  To help develop this part of the website it would be great to receive subscriber requests as to particular questions they might have regarding their financial situation.  Our plan would be to include a sample in each future edition of the newsletter along with copies on our website.  All respondents would remain totally anonymous with the understanding that any responses provided being general financial advice only.

 

If you were interested in getting involved please send through an email outlining your scenario or question.

 
Return to Top
Monday's Money Minute Podcasts - Back On Air
 
We are pleased to announce that the podcast section of our website has been cranked back to life.  We look forward to providing insights into financial planning and investment strategy over the coming weeks.

To get he podcasts started for the year we take a look at the proposed changes to the income tests that are applied to a range of government offsets and benefits.  These changes may have a significant impact for those receiving these benefits.

27th January - Watch out for the new federal government income tests
 
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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.

Scott Francis & Scott Keefer
1 Park Road - PO Box 1688
Milton QLD 4064
(07) 3876 6223

A Clear Direction Financial Planning is an Authorised Representative (No. 283723)

of FYG Planners Pty Ltd ABN 55 094 972 540

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