Good Morning Reader,
We are very pleased to launch the new look Eden Wealth Coaching Review; now called "The Eden Wealth Report".
This new format allows us to deliver a more user-friendly, multi-media savvy newsletter, that also provides us with statistical feedback on our most popular articles. This information will allow us to improve the quality, relevance, and convenience of our ongoing investment and wealth creation education.
We encourage you to refer The Eden Wealth Report to anybody who you think will enjoy any particular articles of interest, or who may like to subscribe on an ongoing basis.
Warm regards,
Eden Wealth Management
Eden continues to add significant value with above-average investment returns via our individually managed portfolio service.
Our success though, is our greatest cause for concern – what unrealistic expectations are being set in this period of hyper-inflating asset prices.
No, 36+% average investment returns are not realistic over the very long term …
"High returns, guaranteed by bricks and mortar!" – sound familiar?
Perhaps the high profile advertisements should have read:
"We promise high returns > backed by yet-to-be-developed property projects > funded with high levels of unsecured money > based on optimistic forecasts > but if our 'guesstimates' are wrong this may lead to multiple million dollar losses" - doesn't sound quite so sexy does it?.
Thankfully for one very grateful client, our words of caution were heeded nearly 4 years ago ...
Eden is working with a number of clients to take full advantage of the recent changes to superannuation.
With a number of clients still asking for clarity on what the changes mean for them, we provide the "key investor highlights" of the recent budget/super announcements.
We also discuss some 'value-enhancing wealth creation strategies' that may come into play over the coming months/years.
Investment Returns – What Are Your Expectations?
Warren Buffett (arguably the world’s greatest investor) has famously said that the secret to long-term investment success is to:
“Be fearful when others are greedy, and greedy when others are fearful”.
That is why in this ‘greedy and seemingly irrational market’, our concern grows with each new price increase across the Eden investment portfolio.
Our concern has nothing to do with falling prices in the Eden portfolio.
In fact, we feel little about the market-price of our investment assets (other than excited when prices drop significantly and allow us to increase our holdings in our favourite investments) because price tells us little about the quality of the investments themselves.
| "As far as I am concerned, the stock market doesn't exist. It is only a reference to see if anybody is offering to do anything foolish [bargain prices for quality businesses]." ~ Warren Buffett |
We know that when it comes to investing, “price is what you pay, value is what you get”. It is the inherent value (sustainable profitability) of the underlying investment that will determine its long term capital growth and cashflow generation. We are extremely confident of the value inherent in the investments accumulated by us and our clients over the years.
Our concern is actually for you.
We know there will be a time ahead where asset prices in general will be falling. A time where extreme patience will be required to see the fruits of well purchased investments. A time where a deep conviction and understanding of 'investment value' will need to be a beacon that guides us all through oppressingly negative sentiment.
| “The most common cause of low prices is pessimism -- some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer.” ~ Warren Buffett |
How will you fair in a sustained period of falling asset prices?
Will you be able to put aside your emotions? Will you be able to filter out the 'noise' and pessimism of the media, your family, your colleagues? Will you be open to purchasing more of your quality investments even when prices seem to decline further after every new nibble?
| “A market downturn, doesn’t bother us. For us and our long term investors, it is an opportunity to increase our ownership of great companies with great management at good prices. Only for short term investors and market timers is a correction not an opportunity.” ~ Warren Buffett |
Will you focus on 'Value' or 'Price'?
Over the past 4 years, the annualised compound returns achieved across most of our investments have been far from 'normal' …
| The Reject Shop |
+ 123% |
| Lihir Gold |
+ 108% |
| Credit Corp |
+ 71% |
| Just Group |
+ 63% |
| Transonic Travel |
+ 60% |
| Harvey Norman |
+ 51% |
| Fleetwood Corp |
+ 54% |
| BHP |
+ 34% |
| Oil Search |
+ 59% |
| Toll Holdings |
+ 43% |
| Blackmores |
+ 54% |
| Cabcharge |
+ 75% |
| PCH Group |
+ 61% |
| Westfield Group |
+ 21% |
| Woodside Petroleum |
+ 41% |
... and are simply unsustainable long term.
So, what is a reasonable expectation?
The "Long-Term Investing Report" issued by the ASX and Russell Investment Group shows that over 10 and 20 years, growth assets (property and shares) have displayed compound rates of growth of around 11% to 14%. And these returns have been posted during a time of unprecedented economic prosperity and benign interest rates. Most market analysts feel that it will be difficult to sustain double digit compound growth over the next decade.
We know there will be a 'leveling out' of the long-term investment returns achieved by the Eden portfolio; we have planned for it.
With reference to “the long term norm”, Eden uses an average 'growth asset' investment return of 9% when modeling financial projections for our clients. We feel that this conservative approach provides our clients with a 'margin of safety' when it comes to planning for what is most important to them.
A prudent approach to investment forecasting should also provide our clients with ‘piece of mind’ when we go through the inevitable period of subdued investment prices.
During both rising and falling investment markets, Eden’s sincere desire is that our clients will remember the wise words of the world's greatest investor:
"The business performance determines the value, the price [simply] creates the opportunity" ~ Warren Buffett.
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Australian Capital Reserve – signs of irrational exuberance!
In the wake of Fincorp and Westpoint, administrators have recently been appointed to property investment company Australian Capital Reserve (ACR). More than $300 million dollars could be wiped out, affecting 7000 largely small investors.
As with Westpoint and Fincorp, ACR's advertising promised above market rates of interest backed by property investments, and was aimed at mum & dad investors via high-profile radio and TV commercials.
Again, by taking advantage of the common belief that “property is always a rock-solid investment”, ACR was able to raise significant sums from small investors based on over-inflated property valuations and optimistic development projects.
A grateful client makes our day
It truly did make our day when a client called us recently with a sincere ‘thank you’.
Four years ago she had wanted to put a significant portion of her retirement savings into Australian Capital Reserve. At the time we assessed the risks and advised her to instead take out an allocated pension with a diversified investments portfolio; not including ACR as an investment.
Today that client has retained her capital, generates solid tax-effective cashflow, and sleeps well at night.
Reward vs. Risk
This latest collapse serves as a timely reminder that any promise of investment returns over the basic cash rate of interest carries with it significant investment risk. That risk needs to be assessed and understood, and the potential reward must provide adequate compensation for the investor (the risk taker).
| There are clear signs of a lack of risk assessment and understanding across all investment markets at present. |
Often when advising clients, Eden's value-add is simply the ability to look through the ‘noise’ of the marketing hype, to calmly assess the options available, and to objectively and unemotionally determine the path that provides the best “reward vs risk” opportunity for our client.
Even without our assistance, potential investors in such projects should at least ask themselves “Why, with borrowing costs so low, is this investment promoter seeking funding from me and not the bank?” Generally you will find they have exhausted their bank funding, the banks are unprepared to lend any more (too much risk), and so they roll out the high-gloss brochures and slick adds to court mum & dad.
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The Budget, Super, and You
Although we have been advising clients individually on opportunities arising from the recent Superannuation and Federal Budget announcements, we thought we would provide an ‘investor focused snapshot’ of the key outcomes and wealth-creation strategies likely to come into play over the coming month's/years.
The Budget
The recent budget announcements were good news on a number of fronts:
Personal income tax cuts
From 1 July 2007, the 15% marginal tax rate threshold will increase from $25,000 to $30,000, meaning that everybody earning above $25,000 p.a. will receive a tax cut. A sustained tax cut like this over a 10+ year period can add thousands of dollars of capital to your retirement nest egg.
Further threshold increases have been tabled from 2008/09 (see table below) that will provide significant tax cuts to middle and high income earners.
| Current tax thresholds (2006/07) |
Tax rate |
New tax thresholds (2007/08) |
Tax rate |
New tax thresholds (2008/09) |
Tax rate |
| $0 - $6,000 |
0% |
$0 - $6,000 |
0% |
$0 - $6,000 |
0% |
| $6,001 - $25,000 |
15% |
$6,001 - $30,000 |
15% |
$6,001 - $30,000 |
15% |
| $25,001 - $75,000 |
30% |
$30,001 - $75,000 |
30% |
$30,001 - $80,000 |
30% |
| $75,001 - $150,000 |
40% |
$75,001 - $150,000 |
40% |
$80,001 - $180,000 |
40% |
| $150,001 + |
45% |
$150,001 + |
45% |
$180,001 + |
45% |
Low income tax offset increase
The low income tax offset is also set to increase from 1 July 2007, meaning low income earners will receive up to $11,000 p.a. tax free, and partial offsets will be available to those earning up to $48,750 p.a.
This will also provide a boost to those looking to retire on income stream investments between the ages of 55 and 59.
Wealth Creation Impacts:
-
The ability to flexibly distribute investment income, say through a private trust structure, will become even more effective.
-
For some, the use of company structures (flat 30% tax rate) for tax minimisation will becomes even less effective, even questionable (although asset protection, limited liability, and IP protection benefits remain).
-
The use of an allocated pension as part of a transition to retirement strategy will be more effective due to the lower average marginal tax bands. |
Super Co-Contribution Bonus
The Government will double the co-contribution entitlement for those persons who made personal after-tax (undeducted) contributions to their super fund in 2005/06, and meet the relevant eligibility criteria. This initiative is relevant to 2005/06 contributions only.
Child Care Tax Rebate (CCTR) Payment
From 1 July 2007, the Government will bring forward the payment of the CCTR - rather than paying it in the subsequent financial year. It will pay it directly to eligible recipients through the Family Assistance Office (FAO) at the end of each financial year.
Because CCTR will become a payment rather than an offset, the entitlement no longer depends on the claimant having sufficient tax liabilities to offset.
Increased Child Care Benefit (CCB)
CCB is a subsidy for those paying for child care. From 1 July 2007, it will be increased by 10%. Combined with the effect of indexation of the benefit, the maximum increase is $20.50 per child per week.
Superannuation Changes
For most of us, more than half of our accumulated wealth will be tied up in our super funds across our lifetime. At the minimum, a mandatory 9% of your lifetime income will be transferred into super. It is therefore important to understand the key changes and wealth creation options that arise from the recent super changes.
The key changes applying from 1 July 2007 are as follows:
-
An annual $50,000 cap applied to the amount of 'deductible' contributions (e.g. 9% employer contributions & salary sacrificed contributions) that can be made by an individual into super. This cap is lifted to $100,000 p.a. To 2012 for those currently over age 50.
-
A $450,000 tri-annual cap applied to undeducted contributions (personal after tax contributions) for each individual into super. There is a once-off opportunity to contribute up to $1 million dollars in undeducted contributions until 30 June 2007.
-
Lump sum, or pension streams can be drawn from super tax-free after attaining age 60.
-
Reasonable Benefits Limits (RBLs) that restrict the amount of concessionally taxed super benefits will be abolished.
-
Full tax deductibility on super contributions made by the self-employed (up to the new limits) and access to the super co-contribution system.
-
The ability to make contributions is extended to age 75 provided the work test is satisfied.
-
No compulsory cashing - money can be left in super no matter what your age or whether you are working.
-
Pre-1983 contributions to be 'crystallised' as at 30 June 2007, and form part of the 'tax-free' component that can withdrawn from super between the ages of 55 to 59 (Note: all components will be able to be drawn tax-free after age 60).
-
More flexible rules regarding the withdrawal of funds via an allocated pension.
Wealth Creation Impacts:
For those under age 50:
-
Planning to significantly boost super contributions from age 50 can no longer be relied upon. This may mean that we advise on the implementation of a ‘salary sacrifice to super’ strategy earlier in life than we may have in the past.
-
Building your non-super investment portfolio in a vehicle that can be 'transitioned' to your super fund in the later years (e.g. private unit trust structure) is now even more vital.
For the Self Employed:
-
Full deductibility of super contributions (up to capped limits) provides further incentive to invest via super.
-
For those who receive at least 10% of their income from employment or business sources, attaining the government co-contribution should be considered. The maximum co-contribution of $1.50 for each dollar of personal contribution (up to a $1,000 maximum) is attainable for those with assessable incomes under $28,000. The level of co-contribution then scales down until the maximum income threshold of $58,000.
-
It should be noted that proceeds from the disposal of assets that qualify for the small business capital gains tax (CGT) exemption (i.e. the 15-year exemption and the $500,000 retirement exemption), up to a lifetime limit of $1 million, are exempt from the undeducted contributions cap.
For those over age 50:
-
Consider taking advantage of the higher $100,000 deductible contribution cap until 2012 by increasing or initiating a salary sacrifice to super arrangement.
-
For those who need the cashflow, the above salary sacrifice program could be combined with a pension drawdown from super. In some cases the pension income stream will attract less tax than the equivalent salary income.
General:
-
Super splitting will still be a very effective strategy. Placing super in the name of the spouse who will reach age 60 first will ensure earlier access to tax-free money. Remember also that ETP tax will still apply for those planning to retire and access their super prior to age 60. Super splitting may provide an opportunity to maximise the use of the Post-83 tax free threshold of both parties.
-
For those with Self Managed Super Funds, increased amounts of Life and Total & Permanent Disablement (TPD) cover taken within superannuation should now be considered due to the abolition of Reasonable Benefit Limits (RBLs). |
That about wraps up the major highlights. There were many more changes announced in the budget that we have not discussed in detail here. Most relate to very specific circumstances and will be discussed with individual clients during our ongoing wealth coaching sessions. ^ Top
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