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Investopoly

By: Stuart Wemyss
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  • Summary

  • Each episode lasts around 15 minutes (as short and succinct as possible) and contains tips, strategies, research, methodology, case studies and ideas to help you build wealth safely and successfully. Stuart Wemyss is a qualified independent financial advisor, accountant, tax agent and licenses mortgage broker allowing him to provide holistic advice. He has authored four books with his latest being Investopoly & Rules of the Lending Game. Stuart writes a weekly blog which is reproduced on this podcast
    Stuart Wemyss
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Episodes
  • Should you do anything about rising interest rates?

    Should you do anything about rising interest rates?
    Jun 14 2022
    Some investors have been spooked by the RBA hiking interest rates by 0.75% over the past two months, particularly since it has spent the past two years telling us that rates would not rise until 2024. Higher interest rates at the same time as rising prices (inflation) are a two-fold blow for household budgets. Where are interest rates heading? The banks predict that the cash rate will rise by a further 1.40% to 1.50% by March 2023. Money markets have priced in a cash rate that is more than 2.60% higher by March 2023, but most commentators feel this is too hawkish, and unlikely to happen. The theory is that, due to higher inflation, the cash rate should return to the neutral rate as soon as possible to avoid monetary policy adding to inflationary pressures. The neutral rate is when the cash rate is neither economically expansionary nor contractionary. Most commentators believe the neutral rate is between 2% and 3%. Ironically, inflation may force rates to fall again Australian inflation is currently 5.1% p.a. and will certainly read higher in the June quarter. Inflation in other developed economies is approaching 10%. But anyone that's visited a supermarket or petrol station lately knows that inflation is a lot higher than what the CPI measure reflects. This higher inflation has already dampened consumer and business confidence, which will cool economic growth (GDP). The neutral cash rate might very well be between 2% and 3% when prices of goods and services are at normal levels. However, given the backdrop of much higher prices, it is very likely that the natural rate is closer to 1% to 1.5%. Therefore, if the RBA raises rates too far at the same time prices are very high, it will result in a decline of economic growth (GDP). In fact, last week CBA forecasted that will happen and the RBA will cut rates by 0.50% in the second half of 2023. Don't overreact to recent rate rises I was watching TV with amusement last week. Reporters were interviewing people about the RBA's recent 0.50% rate hike. People were talking like interest rates were 10%! Of course, I shouldn't be surprised at the alarmist nature of TV! The reality is that interest rates are still very low by historical standards. By the end of this month (i.e., after the most recent rate hike filters through to mortgage rates), standard variable home loan (P&I) rates will be around 4.75% p.a. and investment (IO) rates approximately 6.10% p.a. Of course, new borrowers are offered hefty discounts of 2% p.a. or more off the standard variable rate. Therefore, most discounted home loan rates will be in the high 2%'s to low 3%'s. The average standard variable rate over the past 20 years was 6.36% p.a. according to RBA data. And 20 years ago, the average interest rate discount was only 0.70% p.a., so the actual average discounted rate would be closer to 5.50% p.a. Therefore, even if the RBA hikes rates by 1.40-1.50% as the banks expected, standard variable interest rates will still be about 1% below the long-term average. Avoid fixed rates for now The fixed rates that the banks offer customers are dependent upon the banks cost of funds e.g., how much it costs them to borrow for 3 years. Given that the interest rate curve is unrealistically steep, which makes borrowing more expensive for the banks', fixed rates are financially unattractive. For example, 3-year fixed rates are high 4%'s and 5-year fixed rates are typically above 5% p.a. Two things may occur over the next year that will put...
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    15 mins
  • 6 case studies: The importance of holistic advice

    6 case studies: The importance of holistic advice
    Jun 7 2022
    Our goal is to inspire our people to adopt a holistic approach when making financial decisions. That's because financial decisions often include several interrelated considerations and consequences, including financial planning, cash flow, taxation, borrowing and so on. Also, taking a holistic approach ensures no opportunities or risks slip between the gaps. Often, the best way to make a point is to tell relatable, real-life stories. Therefore, to demonstrate how valuable a holistic approach is, I have shared six client stories below. What is a holistic approach? Traditionally, financial services have been very siloed. If you have a tax question, you ask your accountant. If you have a mortgage structuring question, you ask your mortgage broker. If you have a question about super, you ask your financial advisor. You get the point. However, the problem with this approach is that financial matters tend to be interrelated. What seems like a basic mortgage question could have tax and/or financial planning consequences, which a mortgage broker cannot be expected to have the necessary experience and knowledge to address. A holistic approach recognises that many financial decisions require a multidisciplinary approach. At ProSolution Private Clients, we ensure that our team provides a collaborative response to help clients make fully informed financial decisions. Case studies Below is a selection of six case studies explaining how our clients have benefited from our holistic approach. Whilst these case studies are based on actual events, we have avoided including names or financial information to preserve confidentiality. (1) Business plan integrated with personal financial plan Our client recently established his own professional services business. He was achieving some excellent financial results (in a relatively short period of time) and was able to share a business plan with us. We used this business plan to formulate advice regarding a few important matters. Firstly, we ensured that he had flexible business income structures to help minimise tax. Secondly, we developed a long-term financial strategy which addresses how he was going to achieve business and personal goals. Upgrading the family home was a priority. And finally, and perhaps most importantly, we developed a financing (borrowing) strategy to ensure these plans could be implemented with the banks help. This approach ensured all interrelated matters (i.e., tax, borrowing and building wealth) were optimised. (2) Tax planning whilst maximising borrowing capacity In some situations, safely maximising a clients' borrowing capacity can be the most important goal, as without the ability to borrow, their financial plans cannot be implemented. Unfortunately, many accountants do not appreciate how important this can be. In addition, because they don't understand how banks assess loans (which isn't always logical or predictable), they often structure a clients taxation arrangements in a way that inadvertently limits their borrowing capacity. This prevents them from investing and consequently jeopardises their long-term goals. We had a client that was self-employed, and his plan included several property acquisitions, including a family home upgrade. Our accountants and mortgage brokers worked closely together to develop a solution that minimised tax and maximised the client's borrowing capacity. Doing so required the mortgage broker to select the right lender/s which then allowed the accountant to accommodate its credit policies. Magic happens when your mortgage broker works closely with your accountant. (3)...
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    22 mins
  • "Timing" the market can be more important than "time in" the market

    "Timing" the market can be more important than "time in" the market
    May 31 2022
    Most people are familiar with the saying that "time in the market is more important than timing the market". It is very true that holding a quality investment for many decades will mask imperfect timing. However, for some asset classes/investments, timing can be very important. Most markets move in cycles Most people understand that markets move in cycles. To generalise, an asset class can be over-valued (particularly during a boom cycle), under-valued (after a bust cycle) or fairly valued. If you had have invested in the US tech index (NASDAQ) in November 2021 you would have lost about 30% to date. This is a lesson in poor timing. $100 invested would now be worth $70. An investor needs a 43% return just to get back to $100 again (breakeven). It's worth noting that every fundamental indicator highlighted that the NASDAQ has been overvalued for some time. Of course, a bull market can last a lot longer than anyone can anticipate which invites people to ignore these fundamental indicators. Mean reversion: what goes up, must come down If we acknowledge that most markets move in cycles, then it is obvious that we should invest in undervalued or fairly valued asset classes and sell asset classes that are overvalued. Taking this approach leverages the power of mean reversion as I explain in this blog. Investment-grade property has much flatter cycles It is important to define what I mean by "investment-grade property". Investment-grade property is an asset that has produced a solid historical capital growth rate, underpinned by a strong land value component and scarcity. As such, investment-grade property benefits from perpetually strong demand at a level that exceeds supply. These assets are generally located in well-established, sort after, blue-chip suburbs. Property is a lot less volatile than shares - about half the rate. I suspect there's two reasons for this. Firstly, property is a necessity. We all need a roof over our heads. It is not a discretionary asset, like shares are. Secondly, due to high transactional costs (agent fees, stamp duty, etc.), property isn't traded (bought and sold) in the same way shares are. For example, the volatility of the median houses price in Melbourne since 1980 is 9.1%. The average capital growth rate over that period was 8.3% p.a. Therefore, two-thirds of the time investors should expect the annual growth rate will range between 0.8% and 17.4%[1]. That compares favourably to share markets which tend to have volatility rates of 18-20%. Therefore, two-thirds of the time share market returns will range between -11% and +28% - a much wider range. Timing the property market is less important This chart sets out long-term growth patterns for property in each capital city. It is noteworthy that property tends to eb between two cycles being growth and flat. Of course, it would be great if you could accurately pick when each cycle will begin and end, but you can't. It is very difficult (read impossible). Markets cycles can last longer than you may expect. For example, Melbourne's apartment market is a good example of this - it's been flat since 2010. Perhaps on...
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    15 mins
Economics Personal Finance
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