Contents Preface by Alan Kohler The Independent Investor Part I: Look before You Leap The Big Picture The Long and the Short of It What Sort of Investor Are You? The Behaviour of Crowds Ages and Stages of Investing Planning for Success Think Long Term Set Clear Strategic Objectives Building Wealth a Step at a Time When Advice Pays Choosing the Right Adviser Building a Solid Structure Constructing Your Portfolio Diversify and Prosper Too Much of a Good Thing The Importance of Asset Allocation The Right Mix Maintaining Balance Part II: Weighing Up Risk and Returns What’s the Return? Timing the Market Understanding Market Cycles Setting Realistic Objectives Stay Long to Avoid Going Short Yes, but What’s the (Real) Return? The Power of Compounding Getting to Grips with Risk Identifying the Risks Safeguarding Your Portfolio against Inflation Coming to Terms with Volatility Managing Risk The Risk of Outliving Your Investments Reducing Tax and Maximising Returns Of Tax and Returns Tax at the Margins Reducing Tax Legally Making the Most of Your Salary Tax Offsets Investing for Children Borrowing to Invest Good Debt, Bad Debt A Matter of Interest Financing Property Borrowing within a Superannuation Fund Part III: How to Recognise a Class Asset Cash and Fixed Interest The Interest Rate Cycle The Importance of Having a Cash Buffer Where to Stash Your Cash How Bonds Work Government Bonds Corporate Bonds and Mortgage-backed Fringe Dwellers Buying and Selling Bonds Bond Funds Hybrid Securities The Sharemarket A Buyers’ and Sellers’ Market Splicing and Dicing the Market Ordinary Shares and Shares Less Ordinary Listed Managed Investments Share Ownership Short Cuts Bidding the Market Farewell Finding a Broker 10 Getting a Fair Share The Equity Risk Premium Getting to Know Public Companies Selecting Quality Stocks Monitoring Your Portfolio When Selling Makes Sense Tapping into Dividends Dividend Imputation 11 Profiting from Property A Long-term Growth Asset Buying Your Own Home Selecting Residential Investment Property Property Transaction Costs Going Commercial Direct, Listed, Unlisted or Syndicated? Making Tax Work for You 12 Exploring the Alternatives A Smoother Ride Gold and Commodities Infrastructure Hedging Your Bets Derivatives 13 Pooling Resources in Managed Funds What Is a Managed Fund? A Fund for Every Purpose The Active Versus Passive Debate Index Huggers Versus High-conviction Managers How to Separate the Wheat from the Chaff When Costs Outweigh the Benefits Part IV: Many Happy Returns 14 Superannuation Putting Money In What Happens inside Super? Taking Money Out Types of Fund Life-stage Funds How to Choose a Fund Super Strategies to Boost Retirement Income 15 Self-managed Super When Flying Solo Makes Sense When to Hand Over the Controls How to Set Up Your Own Fund The Trusty Trustee Help Is at Hand What It Costs Keep an Eye on the Exit Winding Up Your Fund 16 A Rewarding Retirement The Four Stages of Retirement The Three Pillars How Much Money Will I Need? Producing a Reliable Income Stream The Costs of Aged Care 17 Planning Your Exit What Is an Estate Plan? Exercise Your Will The Powers that Be Assets that Lie outside the Will Choosing the Right Investment Structure Leaving a Legacy Index Preface In 2008 we got one of those periodic reminders that the world of investing is a very dangerous place The markets had already been waning for nearly twelve months because of the subprime mortgage crisis in the United States, but when Lehman Brothers collapsed in September 2008, everything crashed, everywhere in the world It was different from previous reminders of risk—in 1929, 1987, 1991 and 2000, among others—and by the time the sharemarket had finished falling in early 2009, most people’s share portfolios were worth less than half of what they had been eighteen months before Many people had lost everything It was also different in another way: over the previous fifteen years, all Australian workers had become investors—investing wasn’t just the plaything of a few That’s because the Keating government had legislated the superannuation guarantee in 1992, forcing everyone to put per cent, and later per cent, of their salaries into super At the same time, companies were rapidly moving their employees out of ‘defined benefit’ retirement funds, where you knew what you’d get when you retired, and into ‘accumulation funds’, where you only knew for sure what you had put in—it was up to the markets what you got out So by the time the global financial crisis hit the markets in 2008, everyone was in accumulation funds in one way or another If you were in a company fund, you became exposed to market risk in a way you never had been before, and if you weren’t, then the government was forcing you to lock up some of your salary in a big super fund until you retired The first words of the national anthem should have been changed to: ‘Australians all let us invest …’ Within that powerful, all-encompassing storyline there was a subplot: the boom in self-managed super The big problem with the super guarantee legislation of 1992 was that it wasn’t accompanied by better regulation of the financial services industry Where there are seals there are sharks; where there are novice investors, there is a different sort of shark Worse even than the presence of blatant fraudsters, looking to relieve the unwary or unsophisticated of their savings, was the fact that the whole business of advising investors was actually geared towards making sales The financial advisory business evolved out of the selling of life insurance; life agents became financial planners, and switched from selling insurance policies to selling superannuation and other investment products It was a quiet, insidious revolution It meant there was almost no such thing as independent financial advice that wasn’t designed to sell you something Australians had served themselves up to financial planners thinking they were getting advice when in fact they were being sold an investment product, and not necessarily the best one: it was usually the one that paid the best commission to the sales rep I watched this develop with growing disgust and in 2005 launched Eureka Report to campaign against the sales commissions being paid to financial advisers and to provide an alternative that would help Australians avoid the pitfalls of the investment world and to navigate its complexity For six years we have campaigned against the corrupt practices and conflicts of interest infesting financial advice while providing an alternative source of guidance for investors who want to it themselves Then, two years ago, we won a big victory when the government announced that commissions for financial advisers, paid by the promoters of investment products, would be banned Partly as a result of our efforts, financial advice really is becoming independent, with the advisers being paid by their clients rather than the promoters of the products they are selling It means that advice appears to cost people more, but it doesn’t really: the cost was just hidden previously, and anyway, you didn’t really get advice—just a sales pitch in disguise Meanwhile, as a result of all these conflicts of interest in the financial services sector and the poor performance of most large super funds, DIY super—or self-managed super funds—has become the fastest-growing sector of the superannuation industry, with hundreds of thousands of Australians opting to go it alone Eureka Report is going strong and has become by far the biggest-selling investment newsletter in Australia, with nearly 15 000 subscribers Published four times a week, Eureka Report is designed to provide those people with a road map: to guide them through the complexities and traps of financial markets, to provide big-picture strategic insights on the trends to watch, and to provide some tips on what to invest in This book is designed to encapsulate everything we’ve learned about investing over the years, and what other people have learned as well That experience has been used to create a definitive guide for the independent investor This book won’t stop you being affected by crashes like the one in 2008, but it will help you prepare for them and to minimise the effect We believe strongly in managing risk carefully and not treating investing as gambling—putting it all on a win, as it were Investing is not about big wins; it’s about building wealth gradually, over time, at a faster rate than the value of money declines through inflation That’s not too hard, but it requires knowledge Gambling, or speculating, is pretty easy, really, but the house always wins To win with investing requires patience and understanding The patience is up to you; this book will help with the understanding Alan Kohler The Independent Investor You will not learn what investments to buy by reading this book There are no hot tips or insider secrets What you will learn is how to be a better investor That may sound like a bold promise, but the basic principles of investing are not as complex as some finance professionals would like their clients to believe After many years of writing about financial markets and talking to professional and private investors, I have observed that successful investors have a number of things in common They are serious about investing and are willing to dedicate time and money to furthering their skills and knowledge They keep up-to-date with financial and economic developments and understand the difference between investing and speculating They keep an open mind and are willing to learn from their mistakes—even though the principles of sound investing remain the same, markets are constantly changing and evolving and at times they take even the most experienced investors by surprise And, most importantly, successful investors take responsibility for the planning and execution of their own investment strategy, even if they use professional advisers, as most at some stage It is a faith in the ability of independent investors to take responsibility for their own success and to invest well that underlies this book When Eureka Report CEO Alan Kohler approached me in early 2010 about writing a book, he had a very particular book in mind It was barely one year after the financial markets had hit rock-bottom in the wake of the global financial crisis The recovery had begun but the outlook was far from certain From the market peak in 2007 to the trough in 2009, investors had experienced the full gamut of emotions, from optimism and greed to fear, panic, despair and pessimism Many investors were still shell-shocked and reluctant to risk their capital so soon after incurring heavy losses Experienced investors know that some of the best market gains are made in the early phase of recovery, but you need confidence and courage to put that theory into practice when the pain of loss is still fresh in your memory What Alan wanted to produce was a timeless guide to investing, free of the temporary seductions of investment products and market fads, to give investors the confidence to stay the course That is easier said than done when everyone is telling you to sell your shares and move into the safety of term deposits and government bonds The only way to keep your head, when everyone around you is losing theirs, is to strap yourself to the mast like Odysseus The older I get, the more I think that the ancient Greeks were not just good storytellers but also great psychologists In Homer’s epic poem The Odyssey, the hero Odysseus and his men must sail past the island of the sirens on their voyage home from the Trojan War The sirens had a seductive call that had the power to lead men to their doom on the rocky shores of their island So Odysseus plugged his men’s ears with beeswax and then had himself tied to the mast of his ship until they had sailed safely past temptation The siren song of the markets can be just as treacherous for investors on their long journey to retirement These sirens wear suits and sing the praises of investments that ‘can’t fail’ but subsequently From tulip bulbs in seventeenth-century Amsterdam to internet stocks in 2000 and ‘sophisticated’ financial products called collateralised debt obligations and credit default swaps in 2007, investors who ignored the risks paid the price Big market failures are generally followed by a chorus of angry investors complaining ‘We didn’t know’, ‘We were robbed’ In many cases that is true, but it is also true that noone knows what is going to happen in financial markets tomorrow, next year or in ten years time, and anyone who tells you otherwise is lying What we know is that highrisk investments such as shares and property deliver better returns than money left in the bank in the long run In order to make the most of the long-term returns on offer while navigating shortterm risks along the way, investors need a strategy, just like Odysseus That is why this book begins with a section that is designed to get you thinking about what you are hoping to achieve with your investments Unless you identify your long- and short-term goals and cost them, you have no way of knowing if your investments will produce the returns you need in the time you have left It is also a good idea to give some thought to the shape of your investment portfolio early on Experienced investors have probably heard it said that asset allocation accounts for about 90 per cent of investment returns While that is very interesting in theory, in practice you need to work out the right mix of shares, property, cash and fixed-interest investments to produce the returns you need with a level of risk you feel comfortable with Risk, return and time in the market are the concepts that underpin every decision an investor makes, from selecting the right asset mix to deciding whether this stock is a better investment than that one In Part II we look at risk and return in some detail, as well as ways to boost returns with the careful management of tax and a prudent level of borrowing This book steers clear of telling readers where to put their money, but it does explain the risks and returns of the major asset classes and where they fit into a well-constructed investment portfolio In Part III you will find chapters devoted to cash and fixed interest, shares, property and alternative assets We have also included a chapter on managed funds—while not an asset class in their own right, managed funds provide investors with broad exposure to one or more asset classes The long-term goal of investing is to accumulate enough capital to provide income in retirement For the vast majority of working-age Australians, the bulk of their retirement savings will be in superannuation Super plays a central role in Australia’s retirement income system, which is why so many people have decided to take control of their own of income to a spendthrift The advantages of setting up a testamentary trust need to be weighed against the added cost and complexity of using the structure You need to be satisfied that a trust will have real financial benefits for your beneficiaries and not just provide a rich vein of fees for your advisers Leaving a Legacy The next few decades are likely to see a major transfer of wealth from today’s retirees to the baby boomers and their children Many of the recipients of this wealth will be comfortably well off in their own right, prompting more Australians to explore philanthropy Once the ongoing needs of your family are provided for, you may want to consider leaving part of your estate to charity There are many ways of leaving money to charity The decision depends on the amount of money you have available to give and the level of control you wish to exercise over the distribution These are the most common approaches: • A one-off bequest to charity This is the simplest method Once you have included the correct name of the charity in your will, no further involvement on your part is required The disadvantages are that you have no control over how the money is spent and you receive no tax benefit in your lifetime • The setting up of a private ancillary fund (PAF) The first of these tax-deductible private foundations was approved in 2001 and they have quickly become the most popular philanthropic vehicle in Australia for wealthy families They can be set up to operate in perpetuity or for a fixed term Gifts made to a PAF are tax deductible and income earned within the fund is usually tax free The PAF must distribute per cent of its capital value to charity every year, have a formal investment plan and comply with strict guidelines PAFs are most attractive to people who have received large, one-off capital gains, an inheritance or a large bonus This is because they allow investors to spread a tax deduction over five years On a more altruistic note, many people are attracted to PAFs because they can see the benefits of giving during their lifetime and involving children or grandchildren in the process You can download a model trust deed and guidelines from the ATO (http://ato.gov.au) • Leaving money in your will to establish a foundation Philanthropic foundations are essentially a testamentary trust established as part of your will You can create one with a particular sum of money or specific assets, or the residue of your estate once family members have been allocated a fixed sum The money can be used to fund a broad range of charities and individuals, and there may be tax benefits for your estate A foundation may also be used to involve future generations of your family in philanthropy, including the management of the trust itself The Myer Foundation is probably Australia’s best-known example of a charitable foundation For more information on charitable giving, visit the Philanthropy Australia website (www.philanthropy.org.au) Index account-based pensions 63–4, 290 accumulation indices 150–1, 168–9, 227, 230 accumulation phase 245 accumulations funds 249–50 active retirement 282 active vs passive funds 226–9 after-tax returns 85–6 age factors cash strategy and 130 diversification and 44 frail old age 283 in risk tolerance investment strategies and 13–20, 82–3 superannuation funds and 250–1 age pension 20, 283–4, 292 aged care, costs of 292–6 All Ordinaries Accumulation Index 168–9 All Ordinaries Gold Index 210 All Ordinaries Index 149–50 allocated gold bullion 209–10 allocated pension funds 226 alternative assets 38–39, 204–21 anchoring 10 ‘animal spirits’ 71, 157 annualised interest rates 116 annuities 290–2 A-REIT Index 200 Argo Investments 154 assets see also portfolios allocation of xv, 41–2, 48 estate planning 308–11 non-testamentary 305–7 price fluctuations 36 assets test for age pension 188 Association of Financial Advisers 29 Association of Superannuation Funds of Australia 287 ASX see Australian Securities Exchange auctions of real estate 193 auditors for self-managed superannuation 268–9 Australia bond markets 60, 74 cash rate 73 diversification problems 39 dividend yields in 180 inflation rates 72 retirement funding in 280 risk and return in 59–61 Australian Business Number 268 Australian Foundation Investment Company 154 Australian Government bonds 123, 126 Australian Property Monitors 191 Australian real estate investment trusts see real estate investment trusts Australian Securities and Investment Commission MoneySmart website 25, 30, 289 Australian Securities Exchange 148–9 ASX 200 Accumulation Index 227, 230 ASX 200 A-REIT Accumulation Index 227 directory of brokers 30 industry sectors 151 website 165 Australian Tax Office, regulatory role 84–5, 267–8 availability, decisions based on 10 backdoor share listings 162 balanced investment strategies 43, 46–8, 83, 252 bank deposits, for children 102–4 banks, dominate Australian share market 39 bear markets 157, 177–8 before- and after-tax returns 63–4, 85–6 behavioural finance 8–9, 176–7 benchmark indices 150 benchmarked returns 227, 231 Billabong 160 binding nominations 247–8, 276–7, 306 BIS Shrapnel 191 Bogle, Jack 42–3 bond funds 140–1 bonds 133–9 buying and selling 139–40 defined 37–8 returns on 74, 77, 85–6, 123 volatility of 60 bonus shares 152 borrowing costs 194 borrowing to invest see gearing bottom-up fund managers 233 break fees 117 Brock, Peter 297 brokerage 234 brokers for share trading 164–5 Buffett, Warren 47, 172, 176, 179, 218, 299 bull markets 157, 177 bullion 209–10 businesses see partnership tax rate; public companies; small business, capital gains tax buy/sell spread 237 call options 220 Canstar Cannex 133 capital gains, income vs 55 capital gains tax defined 91 negative gearing and 108 on property investment 187, 202 on superannuation funds 184, 245 capital protection 83 capital-indexed bonds 135 cash average risk 78 defined 37–8 investments in 125–33 returns on 73, 85–6 cash buffer 16, 19, 23, 129–30 cash management accounts 132–3 cash management trusts 133 cash-flow planning 28, 175 cash-only takeover bids 163 certainty effect 10 Chant West 256 charities 90, 95, 311–13 Cheney, Dick 61 childcare tax rebate 99 children, investing for 101–4 class assets 123–4 co-contributions 257 collateralised debt obligations 138 commercial property investments 196–201 commission-based fees x, 30–1, 237–8 commodity assets 208–11 Commonwealth Bank 160–1 Commonwealth Department of Health and Ageing 296 Commonwealth Pensioner Concession Card 286 Commonwealth Seniors Health Card 286 companies see partnership tax rate; public companies; small business, capital gains tax company tax rate 89 compounding 66–7 computers, salary packaging for 98 concessional contributions cap 243 confirmation bias 10–11 conservative investors 7, 252 contracts for difference 219–21 contributing shares 152 contribution caps 243–4 control over self-managed superannuation 263 convertible preference shares 143 conveyancing costs 194 Cooper Review 252 corporate bonds 136–9 corporate trustees 270 costs see also fees active vs passive funds 228 exchange-traded funds 229 of aged care 292–6 of borrowing 116 of financial advice 30–1 of fund investing 234–8 of making a will 301 of superannuation 253–4, 264 coupon rates 134 CPA Australia 30 credit cards, reducing debt on 14 crowd behaviour 8–9 currency gains 224 currency hedging 141 customised superannuation 263 dabblers dead cat bounces 157 death benefits 247–8, 269, 305–8 death planning see estate planning debentures 137–9 debt 14, 15–16, 18, 107–16, 175 deductions 90–2 defined benefit funds 250 defined contribution funds 249–50 deflation see inflation delayed pricing 165 delayed retirement 288–9 delegators delisted companies 162–3 demutualisation 161 Department of Health and Ageing 296 dependants, defined 248 dependent spouse rebate 99–100 derivatives 153, 215, 218–21 direct property 185–6 discretionary trusts 310 distress selling 178 distributions 224 diversification 37–9, 81 Diversified Australian Equities Fund 225 dividends dividend cover 181 imputation 87, 182–4 imputation funds 233 reinvestment plans 180 returns via 171, 180–1 divorce, effect on self-managed superannuation 277 ‘diworsification’ 40–1 dollar cost averaging 79–80 dynamic pricing 165 earnings per share ratio 172 economic moats 176 economic risk 71 exchange-traded funds 82 education tax refund 92 emergency funds 14 engaged investors 7–8 entry fees 237 equities 38, 77, 176–7 equity hedges 216 equity risk premium 78, 167–9 estate planning 20, 28, 264, 297–313 death benefits 247–8, 269, 305–8 event-driven hedges 216 exchange rate risk 73–4 exchange-traded funds commodity assets 210 fees for 155–6 property investments 199 returns from 229 ex-dividend date 181 executors, appointing 301 exit fees 237 family home deposit for 24 first-home buyers 188 keeping in retirement 293–4 purchase of 15, 24–5 tax-exempt status 186 family trusts 17, 33 fee-for-service arrangements 30–1 FEE-HELP 15 fees see also costs hedge funds 217 managed funds 155–6 minimising 85 share brokers 164–5 ‘fighter pilot’ investors final dividends 181 financial advisors x–xi consulting 26–8 selecting 29–31 self-managed superannuation 271–2 Financial Planners’ Association 30 Financial Planning Association of Australia 29 financial power of attorney 303 first home see family home First Home Owner Grants 188 First Home Saver Accounts 188 fixed interest rates 117, 125 fixed-interest brokers 140 fixed-interest funds 141 fixed-interest securities 37–8 flat fees 31 flat interest rates 116 floats 149, 159–60 ‘forty-five days’ rule 184 foundations, establishing 312–13 four pillars policy 176 framing effects 11 franking credits 64, 92, 182 see also dividends freeway analogy fringe benefits tax 93–7 full-service brokers 164 fundamental analysis 169–70 funds of funds 217 funeral costs 309 futures contracts 218–19 Galbraith, John Kenneth 157 Gates, Bill 299 gearing 25, 106–22 geared assets 120 in early adulthood 15 in middle age 16 in pre-retirement 18 leverage 216 returns and 66 general market risk 70–1 global financial crisis xiii–xiv, 57 Global Industry Classification Standard 150 goals for investment 58–61, 174–6 gold assets 205–6, 208–11 GOLD fund 210 gold shares 210 ‘Goldilocks’ portfolios 36 government bonds 135–136 see also Australian Government bonds Graham, Benjamin 42 hedging strategies 214 on investor’s worst enemy ‘weighing machine’ analogy 63, 179 growth assets 17, 43 growth fund managers 233 growth superannuation funds 252 guardianship powers 303 health insurance 20, 92, 100–1 HECS-HELP 15 hedge funds 205, 212–17 hedging strategies 216 high-conviction investors 45–6 high-conviction managers 231 home see family home home equity loans 188 home loans, length of 187 hotels and leisure property 196 hybrid securities 142–4 income capital gains vs 55 during retirement 256–60 main sources of protection from inflation 77 reliability of 289–92 income distributions 224 income managers 233 income securities 143 income-protection insurance 15, 254–5 independent investors xiii–xiv index funds 51, 82, 141 index managers 234 industrial property 196 industry sectors 151 inflation as risk 71–2 bonds and 134–5 effect on returns 65 fixed interest rate investments and 127 protection against 76–7 inflation-linked bonds 77 InfoChoice 133 infrastructure investment 77, 156, 211–12 inheritances 299–300 see also estate planning in-house benefits 98 initial public offerings 149, 159–60 instalment warrants 120 Institute of Chartered Accountants in Australia 30 insurance 17–18 as non-testamentary asset 307 bonds, for children 104–5 company demutualisations 161 health insurance 20, 92, 100–1 income-protection insurance 15, 254–5 lender’s mortgage insurance 194–5 life insurance 17, 307 with superannuation funds 254–5 Intelligent Investor, The 42 interest rate risk 72–3 interest rates 116–18 compounding 66–7 cycles in 126–9 negative gearing and 108 on bonds 134 interim dividends 181 intrinsic value 169–70 investment 4–5 see also portfolios age factors in 13–20 by superannuation funds 251–2 deductions for expenses related to 93, 98–9 for children 101–4 goals for 44 key ratios 172–4 personal style 170–1 within superannuation fund 245 written strategy 268 joint assets 309–10 Jones, Alfred Winslow 214, 217 Kahneman, Daniel 12, 176 Keating Labor government ix–x key investment ratios 172–4 Keynes, John Maynard 71 land tax 202–3 ‘large cap’ shares 227, 230–1 Law Societies/Institutes, referral service 30 Lehman Brothers ix lender’s mortgage insurance 194–5 letters of administration 300 leverage see gearing life insurance 17, 307 life-stage funds 250–1 lifestyle, requirements for 4, 287–8 Lifetime Health Cover rules 100 liquidity risk 137 listed infrastructure funds 212 listed investment companies 154–5 listed managed investments 153–8 listed property funds 227 listed property trusts 156–8, 197–9 live pricing 165 loan-to-valuation ratios 112, 221 location of investment property 191–2 Long Term Capital Management 215 long-term planning 22–3, 62 Long-term Investing Report 64 Lonsec 235–6 low-income tax offset 99 luck vs skill 62 macro funds 216 magical thinking 11 managed funds 222–38 diversification and 40–1 for children 102–4 gold assets 210–11 investment plan 50–1 property investment 199–200 management expense ratio 237 management quality 175 margin lending 111–16 marginal tax rates 87–90 market cycles 57–8, 126–9, 177–8 market sentiment 9–12 master trusts 33 mature-age worker offset 99 medical expenses rebate 100–1 medical power of attorney 303 Medicare levy 88–9 Mercer 285 Meriwether, John 215 Merton, Robert 215 mezzanine funds 138 middle age, investment strategies 15–16 Milevsky, Moshe mind games 10–11 MoneySmart website 25, 30, 289 Morningstar 230, 235–6 mortgage-backed securities 137–9 see also debentures mortgages 131, 188, 194 motor vehicles, salary packaging of 96–7 MSCI China Tracker 155 MSCI World Accumulation Index 227 Myer Foundation 313 Myer Holdings 159–60 MySuper 252 negative gearing 89, 107–11 New York share market 12, 147 nominal interest rates 116 non-advisory brokers 164 non-binding nominations 247, 276–7, 306 non-concessional contributions cap 244 non-recourse loans 121 non-reducible interest 116 non-testamentary assets 305–7 not-for-profit superannuation funds 249 novated leases 96 occupational risk profiles Odean, Terrance 12–13, 176–8 office property 196 offsets 92–3, 98–101 online property researchers 190–1 options 218–20 ordinary shares 151–3 outliving your investments 82–3 overtrading 12–13 partly paid shares 152 partnership tax rate 89 part-time work, in pre-retirement 19 passive vs active funds 226–9 PAYG income tax 203 pension and annuity offset 99 pension phase 246 Pensioner Concession Card 286 percentage-based fees 31 personality, investment and 6–8, 170–1 philanthropic bequests 311–13 philanthropic funds, tax rates 90 Philanthropy Australia 313 planning 1–2, 21–35, 48–52 portability of self-managed superannuation 264 portfolios constructing 32–52, 170–4 for children 102–4 monitoring 174–5 protection against inflation 76–7 rebalancing 12, 47 returns on 65 when to sell from 176–7 positive gearing 111 powers of attorney 302–3 preference shares 143, 152 pre-retirement, investment strategies 17–19 ‘preservation’ 246 price risk 76 price-to-earnings ratio 173–4 primary share market 149 private ancillary funds 312 private health insurance rebate 92, 100 private retirement funding 285, 290–1 privatisations 160–1 probate 300 product disclosure statements 224 see also prospectuses property investments 185–203 commercial vs residential 201 conservatism in defined 38 financing 118–19 markets in 190–1 negative gearing 107–11 real estate investment trusts 156–8 returns on 65–6, 85–6 syndicates 200–1 prospect theory 12 prospectuses 139, 160, 224 public companies 169–70 public hospitals, salary packaging 95 put options 219–20 Rainmaker 256 ratings agencies 144–6, 235–6 ‘real’ assets 76 see also alternative assets Real Estate Institute of Australia 191 real estate investment trusts 156–8, 197–9 realised capital gains 224 realistic goals 58–61 rebalancing portfolios 12, 47 regret avoidance 11–13 regulation of self-managed superannuation 267–8 relative value funds 217 rental income 77, 202 representativeness 11 Reserve Bank of Australia adjusts interest rates 72–3, 126 bond purchases from 140 capital-indexed bonds 135 reset preference shares 143 residential aged care 295–6 residential property see family home; property investments Residex 191 residual capital value of annuities 292 resources stocks 39 retail funds 225, 249 retail master trusts, annual returns 205–7 retail property 196 retirement period 280–96 see also age factors; transition to retirement investment strategies 19–20 planning advice 28 savings required for xvi, 25, 285–9 retirement villages 293, 295 return on assets ratio 173 return on equity ratio 172 return on sales ratio 172 returns 55–68 active vs passive funds 226–9 maximising 84–105 on investment property 186, 190 on superannuation funds 252–3 risk versus 53–4 reversion to the mean 59 reversionary beneficiaries 306 Rice Warner 254, 280 rights issues 152–3 risk management of 69–83 planning advice 28 return versus 53–4 tolerance for 5, 44 RP Data 191 Rule of 72: 67–8 salary packaging 93–6 salary sacrifice 26, 94, 257 savings, goals for 4–5 savings accounts, high-interest 131–2 Scholes, Myron 215 scrip-only takeover bids 163 second charge debentures 137–8 second mortgages 138 secondary share market 149 sector indices 150 sector risk 75 secured loans 118 secured notes 137 securitisation 197–201, 211 self-employment, superannuation contributions 243 self-managed superannuation ix–x, 32–3, 249, 261–79 dividend tax rate 182–3 gearing within 119–22 tax minimisation and 86–7 selling shares 176–7 semi-government bonds 135, 140 senior Australian tax offset 99 Seniors Health Card 286 sentiment 9–12 share markets 147–65 average risk 78 dividend yield 180 investment plan 50–1 price fluctuations 175 returns from 59–61, 65, 85–6, 168–9 studying 166 timing and 56–8 share placements 161–2 shareholder buy-outs 163 share-price graphs 170 shares 38, 77, 176–7 see also portfolios short selling 213–14, 216 short-term trends 62 simple interest 116 small business, capital gains tax 91 Small Ordinaries Index 150 small-cap share funds 227, 230 SMSF Trustee Education Program 271 soft dollar payments 238 Soros, George 214 sovereign risk 75 specific risk 75 speculation 177 spouse contributions to superannuation 260 stag investors 158 stamp duty, on property investment 194, 200 Standard & Poor’s A-REIT Index 200 as ratings agency 235 ASX 200 Accumulation Index 227, 230 ASX 200 A-REIT Accumulation Index 227 classifications 150 stapled securities 198–9 steady growth 175 step-up preference shares 143 stocks see portfolios; shares stop losses 221 strategic asset allocation 41–2 strategic objectives 23–4 student loans 15 superannuation 241–60, 284 as non-testamentary asset 305–7 changes under Keating ix–x contributions under 242 early reliance on 14 retirement funding by 284–5 salary sacrifice and 97 splitting 260 tax rates 90 voluntary contributions to 16–18 superannuation funds 226 annual returns 205–7 compounding in 67 investment plans of 52 selecting 25 tax status 86, 182–4 types of 248–50 Superannuation Industry (Supervision) Act 119, 269 SuperRatings 256 supervisory levy 274 tactical asset allocation 42 takeovers 163 target asset allocation 46–8 target-date funds 250–1 tax credits 224 tax file numbers 103, 268 tax issues advice on 28 child earnings 103 dividend imputation 182–4 effect on returns 63–4 income-protection insurance 255 minimisation 20, 84–105 property investments 186–8, 202–3 real estate investment trusts 198 superannuation funds 245 technical analysis 170 Telstra 160–1 tenancy in common 309–10 term deposits 132 testamentary trusts 33, 308, 310 three pillars system 283–85 top-down fund managers 233 trail commissions 237–8 transaction costs 194–5, 274 transition to retirement 18, 282 transition-to-retirement pension 247, 257–9 trusts assets held in 310–11 cash management trusts 133 for children 102 self-managed superannuation 267–71 tax rates 89 testamentary trusts 308 Tversky, Amos 12, 176 unallocated gold bullion 210 uncertainty, inevitability of 61 unfranked dividends 184 unit trusts 223 unlisted property trusts 199–200 unrestricted non-preserved benefits 247 unsecured loans 118 unsecured notes 137–8 vacancy rates 189–90 value fund managers 234 Van Eyk 235 Vanguard Investments 42–3 variable interest rates 117–18 variable rate mortgages 119 volatility of returns 59–60, 78–9, 205–8 see also general market risk voluntary superannuation contributions 243–4 wealthy, conservatism of 35 ‘weighing machine’ analogy 63, 179 Westpac–AFSA Retirement Standard 287 Whitlam Labor government 283 wholesale funds 225 will, making a 300–2 windfalls, financial 3, 159 winding up self-managed superannuation 275–8 work-related deductions 92–3 yield curves 127–9 MELBOURNE UNIVERSITY PRESS An imprint of Melbourne University Publishing Limited 187 Grattan Street, Carlton, Victoria 3053, Australia mup-info@unimelb.edu.au www.mup.com.au First published 2011 Text © Eureka Report, 2011 Design and typography © Melbourne University Publishing Limited, 2011 This book is copyright Apart from any use permitted under the Copyright Act 1968 and subsequent amendments, no part may be reproduced, stored in a retrieval system or transmitted by any means or process whatsoever without the prior written permission of the publisher Every attempt has been made to locate the copyright holders for material quoted in this book Any person or organisation that may have been overlooked or misattributed may contact the publisher The contents of Alan Kohler’s Eureka Report Guide to Personal Investing not constitute financial advice The opinions and information published herein are not intended to influence you in making financial decisions You should seek independent personal financial product advice before making investment decisions Not all investments are appropriate for all people Cover design by Phil Campbell Design Typeset by TypeSkill Printed by Griffin Press, South Australia National Library of Australia Cataloguing-in-Publication entry: Kohler, Alan Alan Kohler’s Eureka Report: guide to personal investing / Barbara Drury 9780522858174 (pbk) 9780522860368 (ebook) Includes index Investments Finance, personal 332.6 ... need confidence and courage to put that theory into practice when the pain of loss is still fresh in your memory What Alan wanted to produce was a timeless guide to investing, free of the temporary... up with little to show for their activity • The delegator The delegator is committed to investing but lacks either the time or the interest to manage their investments Some delegators spread their... best way to avoid these common mental traps is to develop a financial plan tailored to your personal financial circumstances and tolerance for risk, and stick to it It is also important to be flexible