Make the most of good fortune

Lissa Christopher

May 4, 2011

If your numbers come up - fingers crossed - the first thing you should do is...nothing.

An unexpected windfall can transform your life providing you invest the money well. Lissa Christopher gets expert advice on what you should do with it.

If a significant financial windfall ever comes your way - perhaps through an inheritance, a work-related bonus or even a lottery win - the first thing a good adviser should tell you is to do nothing.

Put the money in a high-interest savings account, a term deposit or your mortgage off-set account for a month and just think, says a co-director of WLM Financial Services, Laura Menschik.

''Sit on it, dream about it and focus on what you can do, what you should do and what you want to do,'' she says. ''And possibly seek advice, especially if it's a substantial amount of money.''

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A chartered accountant and financial planner with Quantum Financial Services, Tim Mackay, agrees it's important to cool off and manage your emotions in the face of a windfall.

Research has shown, he says, that a change in wealth is stressful and while people tend to protect money they've earned, they can be spendthrift with money for nothing - particularly with an inheritance.

''Don't let anyone rush you into making decisions,'' he says. ''Take your time and allow any urges to splurge on a bigger car or house to pass.''

Money has approached four financial advisers, including Menschik and Mackay, to ask what they'd suggest for people in the 25-to-45 age bracket, the 45-to-65 bracket and those older than 65 in the event of a windfall of between $50,000 and $100,000.

While most have provided advice specific to people's life stages, the director of Brocktons Independent Advisory, Daniel Brammall, stresses there is no one right way for any demographic. ''There's only a right or wrong way for you,'' he says.

''Making smart decisions with your money is done by thinking about your life situation and what you want to achieve in the future. Having a financial road map like this provides a framework to guide your money decisions, lifting you above the noise of the markets and the media.''

Mackay, too, says, ''There is no one-size-fits-all advice [but] your key goal should be to use the money to build yourself a more secure financial future, not to change your material surroundings as quickly as you can.'' While Money expected the advisers to launch quickly into talk about debt-reduction and investment portfolios, one of the first things most mentioned, targeted to all age groups, was the importance of spending the money - just not all of it.

''Take less than 5 per cent and treat yourself and your family,'' Mackay says.

''Reward yourself but be sensible with it because [money like that] may never come again,'' Menschik says. She suggests being as frugal as going out for a splash-up dinner with the interest you earn on the principal during your month of cogitation.

The manager of advice development at ipac, John Dani, says it's all about balancing buying items, buying experiences and putting the money towards improving your future.

''Buying experiences is probably better than buying things,'' he says. ''You can create enduring memories and bring families closer together. It doesn't have to be extravagant.

''There's nothing wrong with improving your lifestyle now by buying things or experiences but people fall short with also applying a windfall towards their future.''

Keeping in mind that what you should do largely depends on your personal circumstances, here are some guidelines and ideas for each age group.

AGE 25 TO 45

Most people in this age bracket are likely to have some level of non-deductible debt, Menschik says, and paying it down with a financial windfall, starting with the one attracting the highest interest rate - probably the credit card - should be considered first.

Next, the mortgage. ''Paying down the mortgage generally makes more sense than investing,'' Mackay says. ''If you have a 7.8 per cent mortgage rate and earn $40,000 to $80,000 in income, then you would need to earn more than 11.4 per cent on investments, before tax, for investing to make more sense than mortgage reduction,'' he says.

''And you would need to earn 12.7 per cent if you earn $80,000 to $180,000. One of the best moves you can make is to own your home outright as soon as possible.''

If you are in good financial shape, you could also consider starting an investment portfolio (be sure to invest in the name of the spouse who pays the least tax). You could also undertake further education, put the money aside for your children's education or donate to a charity.

But don't stop reading yet - some of the advice for the older folk may also apply to you.

AGE 45 TO 65

Superannuation may be the best place for a windfall in this bracket.

''If you're approaching retirement, you might want to look at topping up your super by making a non-concessional contribution [which means] you don't get a tax deduction but it's not taxed when it goes into the fund,'' Menschik says.

''If you're self-employed, you could use it towards your concessional super contributions.'' A ''dent in the mortgage'' is still a good idea at this time and so is starting up a wealth-accumulation portfolio, she says.

Dani says those at the younger end of the spectrum face what's called greater ''legislative risk'' with super.

Money in super is, essentially, inaccessible until you reach preservation age and changes to super legislation may occur in the years to come, including the preservation age being raised.

While you should not ignore super - Dani says ''it remains the most tax-effective form of retirement savings'' - if you're in your early to mid 40s, ''you may want to invest some of the windfall for the longer term in a non-super environment … for the peace of mind and accessibility.''

AGE 65+

People in this age group are often looking for ways to generate sufficient income to maintain their lifestyle, Dani says. They also need to know how any increase in income would affect any Centrelink benefits they're receiving.

''They may wish to consider adding money to super to create an allocated pension, term deposits or the use of specific investment products designed to generate reliable income,'' Dani says.

In this age bracket, it may pay to be conservative with your choices.

If you seek advice on investment options and products, Brammall recommends finding an independent, flat-fee-for-service financial adviser.

''If you see a non-independent adviser, what you're really getting is a sales pitch masquerading as advice,'' he says. He also recommends being wary of complexity and being beholden to an adviser. ''Don't become a slave to your finances,'' he says. This applies to all age groups.

Menschik says she has seen people in this group, mostly women, who receive a lump sum when their spouse dies and hand it out to their adult children. ''Don't give it away because you are going to need it later on,'' she warns.

Inheritance makes the impossible possible

Six years ago, when Anna Beardmore's much-loved grandfather died, he left her $65,000. She was driving a small, old car at the time and decided to buy a new, bigger one with some of the money.

''I'd always wanted one of these [Subaru] Foresters,'' says the 44-year-old mother of two. ''I used to go away a lot, camping and things like that, and it was just a lot more practical. I knew I'd use it a lot.''

Beardmore (pictured) paid $20,000 towards the car, put the rest in a high-interest savings account and took out a personal loan to pay off the remainder owing on the car.

''I just couldn't bear spending it all at once on the car,'' she says.

Beardmore has since used bits of the remaining principal to pay for ''many things'', including two periods of unpaid maternity leave, some of the peripheral costs of setting up a mortgage and buying a house and a trip overseas.

She still drives her ''sensible, practical'' Subaru but now it's more of a family wagon than a camping vehicle.

And she still has some of her inheritance left. Two-thirds sits against the redraw facility on her mortgage and the rest remains in that high-interest savings account.

''Every time I need to use [the money], I thank my grandfather, wherever he is, because there is so much I've been able to do that I couldn't have done without it,'' Beardmore says.

10 golden rules for prosperity

• Do nothing. Park your money, calm down, think

• Remember, there's not one right thing to do. It's about your circumstances and values.

• Reward yourself with a sensible portion of the money. Anything from a splash-out dinner to an overseas trip.

• Pay off debts. Reduce non-deductible borrowings, such as credit cards, personal loans and home loans.

• Consider superannuation. Would you benefit from topping up your retirement nest egg?

• Consider an investment portfolio. However, seek out sound, impartial advice if you decide to take this path.

• Mind the consequences. Remember, a windfall may affect Centrelink benefits.

• Consider charity. It's good to give back and it feels good.

• Think about education. Further education could provide worthwhile emotional and financial returns. Or put the money away for your children's education.

• Seek advice. Sound, independent financial advice is what you want. Don't be seduced by complicated or trendy products. Establish a financial map that's right for you and your goals.

 http://www.smh.com.au/money/investing/make-the-most-of-good-fortune-20110503-1e5gs.html#ixzz1MT8uQKEH

Taking a bet on analysts' stock tips

John Collett

April 30, 2011

Track records ... investor newsletters are a difficult game. Photo: Nicolas Walker

Many self-directed investors rely on the stock tips and advice offered by investor newsletters. But there is no real way to gauge which one has the best strike rate, writes John Collett.

Investor appetite for share tips is growing strongly, spurred by the flight to DIY super. Many self-directed investors rely on the stock tips and advice offered by investor newsletters.

But how good are their recommendations?

While the performance of fund managers is easily established by looking at independently audited performance data, the same is not true for these analysts.

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Only a few have their performance audited. And to complicate things further, all use different methods to measure their success rates. Of the leading players, only Fat Prophets has its numbers independently audited by an accountant.

''Nothing hums like a paper portfolio,'' says Ben Griffiths, co-founder of Eley Griffiths Group, a small-companies manager. ''When the dollar is alive, it's not as easy.''

Demand is growing for these services, particularly from the swelling ranks of DIY super fund trustees looking for advice on how to make money in the sharemarket.

Whereas 10 years ago the newsletters offered a printed publication with recommendations of stocks once or twice a week, these days, the subscribers can access the advice any time as they are updated almost daily.

Investors pay up to $900 a year for their flagship, web-based reports; more when the newsletter is bundled with specialist reports such as mining and small companies.

Fat Prophets has 20,000 subscribers. More than 13,000 of those are based in Australia, with the rest in Britain, where it has a London office, and a small number in the US. In 2005, Fat Prophets had about 7000 subscribers in Australia.

Angus Geddes, who co-founded Fat Prophets in 2000, says a big part of the growth in his business has been the rise of DIY super funds.

''We also attract a lot of people who are disgruntled with the big broking houses,'' he says.

In recent years, Fat Prophets has added a share brokering service and a funds management arm to its stock-tipping services.

Huntley's Your Money Weekly, started by Ian Huntley in 1973, has a loyal following, many of whom are DIY fund trustees and small-business owners. Morningstar bought Huntley's business in 2006.

The head of retail at Morningstar, Paul Easton, says: ''Subscribers are high-net-worth individuals who like to take control of their finances.''

Strike rate

When it comes to the tipsters' track records, it is difficult to make meaningful comparisons - some account for a portion of the costs of investing and others do not.

The Rivkin Report says its recommendations have produced an average annual return of 13.2 per cent against a total return (including dividends) from Australian shares of 9 per cent between mid-1998 and the end of 2010. While the cost of brokerage is deducted from the ''estimated'' return, the performance is not independently audited.

Intelligent Investor's stated return between May 2001 and December 31 last year - a total of 521 recommendations - is 8.9 per cent, compared with the market's return of 8.4 per cent.

Huntley's main model portfolio for the 20 years to the end of last year produced an average annual return of 11.9 per cent, compared with the market return of 11.2 per cent.

Fat Prophets says its recommendations have produced an average annual return of 24.6 per cent, compared with the All Ordinaries Accumulation Index of 8.2 per cent between October 2000 and the end of last year. The numbers for last year have not yet been audited - but they will be.

''It [auditing] is expensive to do but you have to do it, particularly if you use it in advertising,'' Geddes says.

Fat Prophets was pulled up by the regulator in 2002 after using potentially misleading performance figures in its advertising and was required to engage an independent expert to devise a methodology for measuring performance.

Whether the numbers are audited or not, the performance of the tipsters on all their recommendations may not mean that much, since investors could not possibly trade on every one of the tipsters' choices.

Model portfolios

To help subscribers replicate their recommendations in their own portfolios, the tipsters have ''model'' portfolios.

The model portfolio contains a limited number of the newsletter's best stock ideas and is constructed to be balanced between the various industry sectors of the sharemarket.

Each stock holding will be ''weighted''. Stocks they favour most will make up more of the portfolio. The performance of the model portfolio is published to the tipsters' subscribers.

The performance of the Rivkin model portfolio, for example, accounts for the cost of brokerage, interest on the cash balance and franking credits.

''Model portfolios provide a transparent method of reporting our performance and provide valuable advice as to capital allocation,'' says the chief executive of the Rivkin Report, Kristian Dibble.

Tipsters say their services are as much about giving their subscribers advice on what to do when shares they own are the subject of a takeover offer or a buyback from the company as they are about giving tips on stocks.

Dibble says the Rivkin Report's advice to buy BHP Billiton shares in the expectation of a buyback would have made about 26 per cent on the trade. ''It's an example of an event-driven trade,'' Dibble says.

Despite not having a single standard on measuring their performance, Griffiths says the tipsters generally do a good job.

They provide investor education and go into the smaller stocks that normally don't get much attention. However, their market timing on when you should be buying stocks is often less than ideal, he says.

''But the private investor could do far worse than have a copy of the tip sheet like Huntley's at the ready,'' Griffiths says.

Best calls

Fat Prophets' Angus Geddes says their best call was on gold in 2001, when it was at $US258 an ounce. It is now about $US1500. Their view on gold led to a number of gold stock recommendations.

One was Red Back Mining, which Fat Profits recommended in 2003 at between 30¢ to 40¢ a share. The Perth-based miner floated in late 1996 as a junior explorer. The share price of the company rose and the company was taken over last year by a Canadian-listed miner.

Other good calls include Oil Search and uranium miner Extract Resources.

One of Huntley's best calls was its "speculative buy" recommendation on Australian-listed copper miner Equinox Minerals in 2005 at about $1 a share. Huntley analysts recognised the risks facing the company in developing its copper interests in Zambia but liked the fundamentals.

Since Huntley's initial call, the company has been the subject of merger proposals, which helped lift its share price. Equinox is currently under a takeover offer, with its shares trading at more than $8.

Intelligent Investor's two best calls were Cochlear, which makes hearing implants, and ARB Corporation, which makes four-wheel-drive accessories.

The tipster first recommended Cochlear at $6.30 in 1998. Intelligent Investor stuck to its positive view on Cochlear even when its share price dipped in 2004, recommending the dip as a buying opportunity. Cochlear shares are now trading at more than $80.

Intelligent Investor first put a long-term buy recommendation on ARB Corporation in 2004 at about $3.50. It again recommended subscribers buy in 2006. The shares are now trading at more than $8.

Both companies have paid good dividends over that time.

 http://www.smh.com.au/money/investing/taking-a-bet-on-analysts-stock-tips-20110429-1e13s.html#ixzz1MT82Vxq4

Bonds teach stocks a thing or two

David Potts

April 24, 2011

Tortoise and hare...there's a lot to be said for the slow but steady approach offered by bonds when it comes to investing.

Once the poor relation of the investment world, 'steady-as-she goes' bonds continue to lay down a solid track record.

Time heals all wounds but it still hasn't fixed the sharemarket.

In any of the past five years you would have done better with an online bank deposit than in the average share.

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Go back 10 years, so you get the benefit of the biggest bull run ever in the sharemarket, and the picture should be different.

Only it isn't. It's neck and neck between shares and, of all things, government bonds.

In fact, at the low point of the financial crisis, bonds had done better than shares for the previous 20 years.

Roger Bridges, who as head of fixed income at Tyndall Investment Management runs a bond fund, says: ''I was telling everyone here that maybe our fund is the growth asset now.''

Fiddling with the starting or finish year, you can manipulate the returns to put the sharemarket in a better light but the point is, bonds aren't just a poor relation.

They're where you go when everything else goes wrong. Or rather, they're protection before everything goes wrong.

Financial planners see bonds, which are less volatile and make investing less of a punt, as insurance against the sharemarket.

Whatever happens, a gilt-edge bond will always pay and you're guaranteed to get your money back.

Providing a decent return is also true of fixed-income securities generally - that is, anything that pays a set interest rate and gives you your money back at the end.

Oh, so they're glorified term deposits then?

Not quite. The difference is you can get in or out of bonds whenever you want.

But there's a more subtle and, when the crunch comes, critical difference with government and bank-issued bonds and chasing the best cash return. They aren't punting on either the China boom going forever or the US economy hitting its stride in the near future. That's what an investment in the sharemarket boils down to but it's also true of cash.

One is chasing growth in its own right and the other high interest rates, which are a side effect of it.

To put it another way, super funds or any other portfolio that is made up of shares and cash is a one-way bet on economic growth. As the GFC showed, that can't always be counted on.

''They're betting everything on the favourite and not covering themselves,'' Bridges says.

Still, there's a reason that most avoid bonds. Put it this way - the fact that they've been doing better than shares says a lot more about the sharemarket.

Yields on government bonds range from about 5.10 per cent for three years to 5.5 per cent for 10 years. But the banks have finally realised there's a yield gap here and are offering something better.

The Commonwealth Bank was the first to issue a retail bond last year. It pays a fixed 1.05 per cent above the variable 90-day bank-bill rate, which works out at just under 6 per cent.

Since the top term-deposit rate is 7.15 per cent for five years offered by Rabobank, that doesn't look crash hot.

The market agrees, having marked the $100 five-year bonds (ASX code CBAHA) down to about $99, which bumps the yield up to just over 6 per cent if you buy at that price.

The Bendigo and Adelaide Bank has topped that, offering an extra 1.4 per cent above the bank-bill rate, a yield of about 6.3 per cent for a three-year bond.

Unlike the CBA's, though, it's trading in the market (code BENHA) at a premium so the yield is slightly lower for newcomers. Um, trading may be too strong a word.

The bond goes for weeks without a single trade but at least the buy quote is above the $100 issue price. Since both have a floating rather than a fixed rate, they protect you against a Reserve Bank rise.

The higher rates go, the more they pay. That should also protect from rising inflation, which food and petrol prices suggest is starting to stir.

Incidentally, the government also has an inflation-protecting bond. The Treasury-indexed bond adjusts the face value every quarter by the rise in the consumer price index.

Only institutions can bid but you can pick one up in the market through a fixed-interest dealer or broker.

The only trouble is that while it protects you against inflation, it doesn't do much else. The interest rate is paltry - on the latest series issued last week it was just 2.5 per cent.

Frankly, if you're worried about inflation then you'd be better off in something offering high interest.

After all the CBA or Bendigo bonds are tied to the 90-day bank-bill yield, itself based on the official cash rate. If inflation goes up, so will the cash rate as the Reserve combats it.

The banks have other fixed-income securities linked to the bill rate as well, which are riskier but in return pay more. Income securities are one. These were a fad for a while in the early noughties but all came to grief.

Yet that's what makes the few survivors attractive - their prices have been marked down so far from their $100 face value that the yield is pushed up.

Or to put it another way, a dollar paid in interest on a $90 investment is a better return than on $100.

A curiosity is they're supposed to last forever, like the mad bunny in the battery ad on television. There's no maturity date on which you're promised your money back. So the only way out is by selling them on the market (they're listed on the ASX).

The four left were issued by Bendigo and Adelaide Bank, Macquarie, NAB and Suncorp. ''We like the NAB income securities, which, priced about $82, give a running yield of 7.5 per cent,'' says a director of FIIG Securities, Brad Newcombe.

''If interest rates go up, you get leverage to the bank-bill rate that will also go up.''

And because of the Basel III changes to bank liquidity rules, he predicts they'll be restructured ''and that would be the kicker for an increase in the price''.

For an even higher yield, ANZ, CBA and Westpac have converting preference shares, one of a group of securities known as hybrids because they're not quite bonds but they aren't shares either.

Truth be told, though, they're closer to shares. After all, the reason their post-tax yield is higher is that the ''interest'' they pay is fully franked and so comes with a 30 per cent tax credit.

And if that doesn't reveal their true nature, try this. At maturity they typically convert into shares of the mother stock with the bonus of a small discount.

The most popular bank hybrids are the CBA's series of Perls. Each differs slightly from the other and you can still buy the last three in the market, all below their $200 issue price.

The bank redeemed Perls II two years ago for cash on the so-called rollover (as distinct from maturity) date.

Because series III and IV are trading below their $200 face value, you'd be looking at a capital gain of about $15 and $5 respectively when the bank redeems it.

That's an income of about 6 per cent fully franked plus an eventual capital gain of a further 7.5 per cent for the IIIs and another 2.5 per cent for the IVs.

Perls V are trading at a premium and little wonder, since the margin above the bank-bill rate is a hefty 3.4 per cent and so the yield is 8.3 per cent fully franked if you subscribed originally, or just under 5 per cent if you were to buy them now, which probably wouldn't be a good idea.

But wait, there's more. When the bank hybrids convert into shares there's a bonus discount of 1 per cent or 2 per cent.

ANZ has two series of converting preference shares (ANZPA and ANZPB), with margins of 3.1 per cent and 2.5 per cent respectively. Both trade at a premium that brings their annual yield to about 8 per cent fully franked, taking into account the bonus at conversion time.

Remember: the yield on bank hybrids can change every quarter - though it's unlikely to drop in the foreseeable future - when they also pay dividends.

An exception is Macquarie's MQCPA, which has two years left to run paying a fixed 11.1 per cent and isn't franked.

Still, that works out at an annual 10.3 per cent for two years based on its last traded price, which is a lot better than you'll get from a term deposit.

Because they trade on the ASX their price can drop, too, a fate that has befallen all those issued earlier than last year.

It just takes one bank to break ranks with a new issue offering a better return to mark down the prices of everything that's come before it.

Taking a safe punt

The heat seems to be coming out of the term-deposit war between the banks.

If you're hoarding cash because you don't trust the sharemarket, don't have enough for a property and think bonds are lame, there is an alternative. Rather than go the whole hog into the sharemarket, you can dip your toe in and still be assured of a decent return.

So-called step-up securities trading on the ASX are returning close to double digits. These convert to shares in the mother stock on a certain date, or are extended with a higher interest rate.

Australand Assets (AAZPB) pays 4.8 per cent above the 90-day bank-bill rate, which has been hovering around 4.9 per cent, or 10 per cent since you can pick them up for $95 despite their face value of $100.

Or there's Multiplex Sites (MXUPA) with interest at 3.9 per cent above the bill rate but because they're trading well below their face value "there's a 20 per cent upside'', so long as they're redeemed, says a director of FIIG Securities, Brad Newcombe.

Another well-regarded step-up security is Goodman PLUS, which has also been heavily marked down by the market, so boosting its yield. Its step-up date is March 2013, when it will be either swapped for its $100 face value or the interest rate will be increased. In the meantime, there's an 8.5 per cent yield based on its last price of $80.

"When investing in fixed income, a combination of government bonds, semi-government bonds, high-quality corporate bonds and some listed subordinated hybrids is prudent,'' says the head of investment strategy and consulting at UBS Wealth Management, George Boubouras. ''Even an aggressive investor should not hold more than 25 per cent of their fixed-income weighting in listed, subordinated hybrids."

He recommends conservative investors, such as those whose super is paying a pension, should have 40 per cent of their investments in domestic fixed income.

For moderate investors it would be 15 per cent and for aggressive ones 10 per cent. Mortgage funds were once a popular outlet for finding a good fixed income. Not any more. The chief executive of Hewison Private Wealth, financial planner John Hewison, won't touch them.

"Remember Estate Mortgage?'' he says. ''People see them as being like a bank account but they're long-term securities and have a propensity to be frozen. We like to have absolute control over a property and secured by a first mortgage."

 http://www.smh.com.au/money/investing/bonds-teach-stocks-a-thing-or-two-20110423-1ds10.html#ixzz1MT6RDmte

Tortoise versus Hare