Self Managed Superannuation Funds (SMSF) have become very popular in recent years and it has become the fastest growing sector of the superannuation marketplace. It’s a popular notion isn’t it – running your own superannuation fund. But it is not all beer and skittles.

Increasing numbers of SMSF trustees are running foul of the regulator, the Australian Taxation Office (ATO), for not complying with the regulations. Just because it is your money does not mean that you can do what you like. There are rules.

These rules cover the types of investments you have in the fund, how the investments are managed and reporting obligations. For example, generally, you cannot buy an investment that you will use for your own benefit (a property or artwork) nor can you take a loan from the fund or lend money to someone close to you even though they may pay interest.

SMSF can be a great opportunity for someone to build their wealth in a tax effective manner, but they can also be a burden for those who do not understand their obligations and responsibilities.

The ATO has some very useful publications on their website http://www.ato.gov.au/smsf/pathway.asp?pc=001/135/003&mfp=001/135&mnu=41614#001_135_003 that will assist you if you are thinking that this might be an option for you.

POSTED: 21-Nov-2008

Posted in SMSF | 1 Comment »

The global credit crisis caused the failure of a number of banks worldwide and this led the Rudd government to guarantee bank depositors’ money.  This had the unintended consequence of causing a shift of funds to the banks and an avalanche of withdrawals from non bank institutions running mortgage and property trusts. These trusts, as the name implies invest in mortgages and property which by their nature are not liquid – borrowers have to repay the mortgages and properties need to be sold and proceeds turned into cash.

As a result, whilst the majority continue to make income payments, these trusts were frozen for redemptions. This caused considerable hardship, particularly to self funded retirees who depended on access to pay their bills.

The Treasurer Wayne Swan responded by telling those affected to contact Centrelink – a comment that was met with derision. But Centrelink may be able to assist.

Centrelink has already re-valued investments to take into account the reduction in the value of assets. This may lead to an increase in pension where a person is assessed under the assets test. But further help is also available.

People with little or no entitlement to a pension, because of their assets, who as a result of have funds frozen are in severe financial hardship, can be assisted by the social security hardship provisions. If the qualifying conditions are met, a person can gain additional pension income.  Additionally, those who are not eligible for a pension because of either the assets or income tests (but not both), can access the capital tied up in the frozen funds via the Pension Loan Scheme. This scheme allows a person to obtain a pension loan at a low rate on interest which is secured against their assets.  

 

If you are affected by having funds frozen, and are in receipt of a pension or believe that you might be entitled to one, you should contact your nearest Centrelink office for assistance.

 

POSTED: 07-Nov-2008

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Warren Buffett is the chief executive of Berkshire Hathaway, a diversified holding company. He is known as the world’s greatest investor.

The following article was published in the New York Times on October 17, 2008. Buffett didn’t get where he is by being timid but neither does he take unacceptable risks. His simple rule as he states below is: Be fearful when others are greedy, and be greedy when others are fearful.

Buffett takes a long term view of the stock market. He knows it will recover and wants to be there when it happens.  This is well worth a read.

 

So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.”

 

 

POSTED: 06-Nov-2008

Posted in Market Commentary | 2 Comments »

As we all know, we live in the information age which has had as great an impact on our lives as the industrial revolution had on our antecedents. There is so much information out there, much of it contradictory, that it is at times difficult to sort through it all.  This is no less so in the area of investing.

Much of what we read in this area is either guesswork or opinion masquerading as fact. Much is ill informed, sensational in nature and in some cases designed to lead a person to a favoured conclusion.  So what should you take notice of?

There is no doubt that markets go in cycles, those who say ‘it’s different this time’ are wrong. Sure the circumstances may be different as might the causes but in the long term, the outcome is always the same.  The hardest part is stripping away the emotion and looking at the cold hard facts. It is an unfortunate fact that the doomsayers amongst us get the most press. Nothing sells newspapers like bad news!

Let’s look at the share market as an example. The Australian share market has fallen about 33% over the last year, but it is up 174% over the last 10 years. In the last 50 years of the Australian share market, there have been 13 years when a negative market has occurred, but there has not been one 10 year period which has been negative. It is laughable to suggest as some have that the sharemarket is doomed, that it will never come back and investors will lose all their money.

Consider for a moment what they are saying. Who really believes that the Commonwealth Bank will lose all its depositors or that the bulk of its loans will default? Do you really think that people will stop buying their groceries at Woolworths from which the bulk of Woolworths’ income is earned? Do you think it likely that demand for BHP resources will stop? Do you think people will stop using Telstra to make calls, or shopping at Westfield, buying Rio Tinto’s resources or manufacturers will stop using Toll Holdings to transport goods to market?

There is no doubt that even the best of companies will lose revenue as the economy contracts and this will affect prices. The banks may have increased defaulters and demand for our resources may reduce, which will lead to reduced share prices. Sure some companies are going to fail and others will take a long time to recover. But all this will pass.

Sharemarkets run on fear and greed. At the moment fear is gripping the market and this is forcing the market down further than is warranted on the information available. Inevitably this will wash through the system and rational thought will come to the fore.

Try therefore to look at the information available without the hype and emotion and look at the evidence. It is not different this time. In investing it is not about what happens today but what happens over the long term.  Investing is not about getting rich quick. It is those that buy good companies now when prices are low who will benefit in the long term.

POSTED: 06-Nov-2008

 

Posted in Market Commentary | 5 Comments »