Philosophy | Slack Investor

Banks … If you must!

Slack Investor has been banging on about the efficiency of online accounts as a place to park your savings (here and here) but my life is also cluttered with other banking relationships – but each of these accounts are first thoroughly researched.

This sounds a bit Un-Slack but banks don’t want you to really think about your accounts, they want you to accept this banking relationship in a benign way as they clip the ticket on every transaction. But, with a bit of thought, you can save some money … and it is much better in your pocket than theirs.

Firstly, Online accounts, everyone should have one as this is the most efficient and flexible way of saving with no risk. Try InfoChoice for a selection of accounts – although some institutions ask you to set up another transaction account with them. At the moment, it is difficult to go past RaboDirect who have a juicy base rate of 1.9% and they link to your current transaction account. Make sure you look at the base rates as the “honeymoon” rates often expire after a few months.

Transaction accounts, these are the busy accounts that you usually have your pay go into and they have good online access and come with a debit card or perhaps pay wave. These accounts usually pay little or no interest and sometimes have monthly fees (If so, … avoid these like the plague!). Make sure you always use the no fee ATM’s or eftpos for getting cash.

Credit Cards, this is where it gets interesting and where banks get a lot of justified bad press ie., Greedy Banks. The current average credit charge rate is 16.92 percent in an environment where the Reserve Bank has set the cash rate at 1.5 percent – I know that there must be a margin … but this is ridiculous! Then there are the credit card transaction charges at the retail level (The ACCC reports them at 1-1.5 percent for Visa and MasterCard, and between 2-3 percent for an American Express card). But there are ways to avoid the hook.

Golden Slack Investor rules:

Be nice to your mother.
Always … Just Always … pay off your credit card every month to avoid these inflated interest rates.
Ask at the point of purchase what the credit card transaction charges will be – explore alternatives to avoid these charges eg, eftpos

I don’t really blame banks… they are just companies that try to do the best for there shareholders. I received a great bit of advice from a seasoned investor 15 years ago …

Don’t complain about the big banks … just close your accounts and make sure you are a shareholder!

I took this advice and, where practical, moved my custom to the smaller banks and credit unions who were working a bit harder for their customers. Owning the big banks have been a profitable trade up until now, especially when you consider the fat dividends that pop up twice per year – Much better than bank account interest!

Due to their privileged position in the Australian economy, I am sure that big 4 banks will continue to be profitable, but they face a few headwinds now and growth will be difficult – They are out of the Slack Investor portfolio for now.

However, the first bit of advice remains true, engage with your banking – look at comparison sites like InfoChoice or Finder The smaller banks, mutual banks, and credit unions are still offering the best deals – make sure they have free ATM access, and some way of doing the occasional face-to-face transactions.

Just fill out a few forms, get some ID certified with a JP, scan … and join the banking revolution!

Sometimes What You Don’t See is Really Important!

Especially when the thing you don’t see is your money!

I know things are difficult out there … rents are high, things break, bills keep coming in, and everything seems to be going up – except for your wages. But, if you can have the discipline to save even a little bit of your money, your wealth fund will be able to establish some roots … and this start is a huge and necessary step to financial independence.

Through experience, Slack Investor knows that it is easier to save money close to the source – if you can quarantine some of your income at the time of payment, – all the better! Start up an online, no fees, bank account and tell your boss that you want a portion of your pay put into this. If your employer can’t do this, then set up a direct transfer from your wages bank, the day after payday, to your online savings account. It is done … you are on your way.

In the parable from the financial classic The Richest Man In Babylon, the rich man Algamish passes on the secret of his wealth to the financially challenged scribe Arkad –

“I found the road to wealth,” he said, “When I decided that a part of all I earned was mine to keep. And so will you.”

Algamish suggested at least 10% of your wealth was to be put aside – and Arcad, with his mentor’s help, also became a rich man in Babylon. Arcad was not lazy with his money and understood the power of money and time through compounding interest …

“Then learn to make your treasure work for you. Make it your slave. Make its children and its children’s children work for you … Invest they treasure with greatest caution that it may not be lost.”

Back in the real world, and far, far from Babylon … So many Australians have built their wealth through real estate. Increasing land values have helped this (Especially in Melbourne and Sydney) … but a big reason why home ownership is a vital stepping stone to wealth is that the banks will lend you 80% of the asset value (If you satisfy their income tests!) … and you are “forced” to quarantine your monthly loan repayments from your spending. This is “forced” saving and most homeowner’s, up until now, have found a way to make these payments each month. Business Insider quote a Standard and Poor’s report of an Australia wide loan delinquency rate of only 1.29% for January 2017. This figure will most certainly rise as we go into an interest rate increasing regime – but that’s another story!

Salary sacrifice into superannuation is another way of putting a portion of your wages aside and “paying yourself” in a tax-advantaged way. This strategy has great benefits for older folk but, … this has little appeal if you are 40 years from retirement.

But wait … Hidden in SCOMO’s 2017 Australian budget there is a tantalizing offer to the young home saver who wants to quarantine a bit of money for their future wealth … The First Home Super Saver Scheme. The unfortunately named, deflating sounding scheme has the acronym – FHSST … and will be discussed next post.

Good Debt and Bad Debt – SCOMO you Genius!

Slack Investor doesn’t often comment on the political scene but in Australia it is the yearly budget week and it always pays to keep an ear out for what our politicians are up to. The Australian treasurer Scott Morrison (or SCOMO to the politically aware dudes) presented his budget yesterday with the usual media fanfare. A good summary here … there was a lash at the banks with a new levy on liabilities for the big 5 (Popular with everyone except banks!). The banks took a hit in the share price today … but Australian banks are very good at spreading the costs back to the customers and I am sure that their profits will continue. There was lots of other stuff, putting out a few political fires, bash the bludgers, etc. Of worthy note is the funding of the National Disability Insurance Scheme (NDIS) with an expansion of the Medicare levy … a revenue raiser that hopefully will be passed by the senate.

I haven’t been inspired by treasurers for a long time … I would have to go back to Paul Keating (Currency floating, tariff reduction, compulsory super) or Peter Costello (Future Fund) to find more than mere twiddlers (I am talking about you here Wayne Swan and Joe Hockey!). But SCOMO looks to be doing a few visionary things that might help the nation. His real contribution as far as Slack Investor is concerned is his introduction of the terms “Good Debt” and “Bad Debt” to the political landscape.

It can be very wise for governments to borrow, especially while rates are low, to lock in longer term financing and invest in major growth producing infrastructure assets, such as transport or energy infrastructure,” From Scott Morrison ABC Audio

These are concepts that Slack Investor has explored before, in the personal sense. The difference in type of debt is such an important concept and understanding of the difference is fundamental to financial independence. Good debt is debt that you take on to buy assets that hopefully appreciate in value (e.g., Real Estate, Shares, Education) and contribute to your wealth. Bad debt is debt that you take on just to buy, or do, stuff.

While I applaud Scott Morrison for introducing these debt concepts to the masses, when you drill down into some of the infrastructure spending that is being proposed there is some doubt as to whether all of his proposals will benefit the country. Not all infrastructure is good infrastructure.

Although Slack Investor is cynical enough to think that consultants will give you the answer that you pay for, I think that a compulsory cost-benefit analysis should be required before any major government outlay. At least then, the figures would be out there and the debate would begin on the veracity of the analysis.

In researching this post … well, its “kind of” research … Slack Investor found a couple of SCOMO photos that are so good that I want to share them. They are here below for your delight (or fright)!

A bit of last minute adjustment ….SCOMO and the Former Prime Minister and renowned onion eater, Tony Abbott – From WixxyLeaks

Put another bit of coal on the fire! Good Idea Scott??? A brilliant, but disturbing, photomash from GeorgeBludger on twitter

2017 April – End of Month Update

Slack Investor remains IN for US, UK, and Australian index shares.

April 2017 has seen rises, in the US and Australian markets and a dip in the UK Index. So far, the Slack Investment Cycle returns for the US, UK and Australian markets are 141.0%, 7.6% and 12.0%, respectively.

Bull markets are a funny thing – and there is no doubt that all markets that Slack Investor follows are in various stages of a bull run – they are comforting as the Slack Investor can congratulate himself on what a stock market genius he is (Ironic comment!) – And yet, I can’t help but feel a sense of unease that things have been “too good for too long”.

Looking at the index chart pages, I get the feeling that it has been a long time since my stop losses have been adjusted upwards in the UK and ASX markets – and this will have the potential to erode any gains should the markets fall suddenly. However, I am comforted that the Slack Investor monthly-decision based method is tried and true and has brought rewards in the past … so I’m staying the course … the objective Slack method is designed to keep you in the markets as long as possible and only withdraw from the fray during a major downturn.

I am also comforted by the fact that we frail humans have behavioural biases, we lack patience and we want to tinker with things! Although Slack Investor is unable to track down the original source, an often quoted study by Fidelity (e.g., Business Insider) investigating the Fidelity trading accounts between 2003 and 2013, found that its best performing accounts were the inactive ones – Either owned by people who had forgotten that they had an account, or by dead people!

The Slack Investor does not recommend complete inaction though – but trading less has its merits.

While it is fresh in my mind I will drop in another example of the fine New Zealand experience below…

Day 3 Milford Track NZ – Slack Investor’s corpulence is almost eclipsed by the magnificence of Sutherland Falls. Reminder … must exercise more often!

For more information on parameters such as progressive gains, look on the Slack investor ASX Index, US Index and UK Index pages for updated details – and a look at the charts. Next end of month update on the index charts will be early in June.

I WISH I could save on petrol

What is it about people and petrol prices? … OK …not all people!

However, It does qualify as a “Barbecue Stopper” (Thanks Fiona Katauskas … and Tony Abbott?) when the petrol price suddenly rises or falls, its in the news and people talk. It can start up some irrational behaviour. I did know a bloke who would fill up jerrycans of petrol on any fuel price reduction.

Slack Investor has been guilty of it himself … driving across town to save 4c per litre … and perhaps using the amount of fuel that I am supposedly saving! Fuel prices are important to Australians as only a few Australian cities have great public transport networks – and the car is a necessary evil, and petrol is a non-discretionary expense, in a lot of cases.

WISH cards are gift cards that can be purchased at a 5% discount at a variety of places I get mine through RACQ, a local motoring organisation that has member discounts. You apply online and you can get a physical WISH card or an e-gift card number that you can use straight away at any Woolworths aligned store or petrol station.

5% discount doesn’t sound like much – Why would you bother? – I would usually agree, but, if there is no inconvenience to using the card, Why Not!

Let me give you an example. My current cost for petrol is $1.44 per litre, using the e-gift card (which I buy $500 lots and hide in my car! …I admit, there is some risk here … but so far so good!). The 5% discount is a saving of over 7c per litre – which can be added to any other loyalty discount (usually 4c per litre).

Now, Slack Investor does not want to create the impression that he is excessively frugal – I enjoy spending money on things that I like e.g., travel. However, all day to day expenses should be examined in a rational way so that you can then use any savings to do the things you enjoy – or, to increment your way towards financial independence.

Most Australians Struggle in Retirement – What to do? – Part 2

The previous post identified residential property or shares as likely growth investments that all investors should become friendly with.

The economist Shane Oliver has collected some data on the performance of each of these investment vehicles that goes back to 1926. The graph below uses a logarithmic scale which is quite appropriate for such long term reviews where there is a big range of values. The good thing about this scale is that in percentage terms, a vertical movement of, say 10%, moves the same distance whatever the year However, the downside is that it does visually compress the dollar gains for the higher achievers shares and property – the dollar values on the left axis should be considered in detail.

Looking at the above, it is clear that Australian residential property (blue) and shares (orange) both represent good investments. These values indicate Australian averages and in some markets (Inner city Sydney and Melbourne), property has done even better!

What stands out to Slack Investor is the raw dollar values for each investment class that 90 years of investment would reap. $100 in shares or property would be worth at least a million dollars now. The raw figure returns for bonds (light green) and cash (black) of around $50000 and $20000 in 2016 are much less impressive – If you want growth … shares or property are the big games in town!

The graph above shows that over 90 years, Australian shares are a slightly better investment than Australian property – However, over different time frames, property has done better than shares. Russell Investments have put out a report analysing returns for the last 10 years to December 2015. Australian residential property gained on average 8% p.a. compared with 5.5% for Australian shares.

As well as the past returns from each asset class, there are other considerations such as tax, liquidity,, transaction costs and ability to gear – Banks have traditionally allowed higher gearing ratios for property (80-100%) compared with shares (typically 50-70%).

Despite these complexities, if you want to prepare for retirement with more than basic superannuation, you must get involved with investing in either shares or property – they are growth assets that, with careful selection, will always do well in the long term – and do especially well in times of economic growth. Investing in these assets inside or outside of superannuation will help provide for your financial independence.

Most Australians to Struggle in Retirement – What to do? – Part 1

At some stage in your life, if all goes well, you might be on your way to buying a house to live in and starting to think about the next step of your financial future. If you are lucky enough to be an Australian employee, you will already be exposed to the share market through your work-funded compulsory superannuation (thanks Paul Keating!). The compulsory super now stands at 9.5% of your wages. So, you might think that your financial future is all taken care of … But wait, some crackpot naysayer from the ridiculously named Committee for Sustainable Retirement Income says

“Even after contributing to superannuation at 12% for most of their working life, most retirees will still not meet the comfortable retirement benchmarks.”

Cripes! We had better do something about this … and the more time that you have to work on this, the better!

A good place to start is adding tax-advantaged “salary sacrifice” contributions to your super. This is a great idea if you are in the last 10-15 years of your working life, but the downside is that you will be locking up your savings until you reach your, quaintly termed, “Preservation Age” – the age when you you will be able to access your super.

If you were born after 30 June 1964, the preservation age is 60 … and, If I was 20-30, I would think that this is too long away off to worry about – It is a long time to lock up your money! Also, one of the few things that you can guarantee is that future governments will gradually increase the preservation (and pension) age.

So, what can we do to fortify our financial future – The only easily accessible games in town are

Money in the Bank (Online of course!)
Bonds (or Fixed Interest)
Residential Property
Shares

The latter two are generally what I would consider to be growth (above inflation) assets and, although there are risks involved with each, to be serious about growing your money, you must get involved with one or the other, or both!

Through your home or compulsory superannuation you might already be a little invested in each of these asset classes and might be looking for new opportunities.

A flick through the paper will show you some great opportunities – Investment seminars conducted by self-made millionaires who, for a small fee, would be willing to impart the secrets of their financial success. In this case, Slack Investor would take the advice of ASIC on their MoneySmart site and show great caution.

ASIC suggests seeking independent advice before investing in any such scheme. Slack Investor suggests that you first educate yourself in these matters – and then avoid these seminars like the plague. My Dad would suggest you ask the question – “What are they selling?”

After all these suggestions, Slack Investor is pooped, stay tuned for the next instalment on this exciting episode as we explore further the shares vs property dilemma.

2016 December Monthly Update

Slack Investor remains IN for US, UK, and Australian index shares.

December has been a jolly month for the markets that Slack Investor follows. The US, Australian, and UK markets climbed 1.4%, 2.7%, and 3.8%, respectively.

This is also time to rub the belly and review the calendar year 2016. The Slack Self Managed Super Fund, which is my main retirement vehicle, had a mixed year due to some not so wise investments in telcos and medical stocks. However, it still returned 7.5% overall for the 12 months. This was below the benchmark ASX return of around 11% but well above the online cash rate of around 2%.

As Slack Investor has a general policy not to directly invest in mining companies, it can be expected that the Slack Fund would underperform the benchmark in a year that mining companies did exceptionally well (2016, +52%).

Although the festive spirit prevails, it is good to remind myself of the words of Rudyard Kipling from “IF”

… If you can meet with Triumph and Disaster
And treat those two impostors just the same

Slack Investor tries to follow these wise words of British stoicism and treat the transient good and bad news of the stock markets with some detachment … and remain ever vigilant in a mostly slack way!

See the ASX, US and UK-Index pages for updated details.

Financial Winners

There are many ways to measure a happy and successful life – and financial security is just a part of this. Benjamin Franklin best sums it up

“Content makes Poor Men Rich; Discontent makes Rich Men Poor.”

To be grateful and happy with our many blessings is a good place to start – But, to be financially secure is one of the three tenements of a happy life. My Dad did give me the great advice …

“The only time that you use borrowed money is for the purchase of appreciating assets.”

This meant I would avoid the crippling credit card interest by paying off my credit card balance every month (Admittedly, there were a few slip-ups!) and, most importantly, if I wanted a car or holiday, I would have to save up for it first – and pay cash before the glorious enjoyment of my purchase.

However, (hopefully) appreciating assets like property or shares were given the big tick by my Dad – and it was OK to borrow money for them. I suppose my Dad would have made an exception to the rule if you were investing in yourself. Spending borrowed money on things like education or, if you are just starting out, tools, a work ute, or office equipment – can be justified.

This makes Slack Investor a bit of an outlier in the community considering the amount that the average Australian owes on credit cards. ASIC has a Debt Clock and they point out that there is around $32 billion owing on Australian credit cards, that’s an average of around $4,300 per card holder!

There are some basic rules for getting ahead financially and Noel Whittaker points out the differences between winners and losers in the financial game.

“The winners borrow at low rates of interest, subsidised by the Tax Office, to buy growth assets such as property and shares that increase in value over time. The losers borrow at high rates of interest, non tax-deductible, for consumer items such as cars that depreciate in value.”

You can argue about the fairness of negative gearing and capital gains concessions (I think rightly!) and superannuation concessions (Which have been recently reigned in) – but these are the existing rules.

If you start at a young age with just my Dad’s advice … and only borrow to invest in, hopefully, appreciating assets – it will be a good start. My Dad was an understanding bloke and would appreciate that there were some cases where the rules need to be broken – i.e. suppose that you needed a car for your job – but he would insist that If I did borrow for a car that I would shop around an get the best loan deal … and hopefully, I would be able to pay it off early.

Slack Investor can’t guarantee financial security – but If you follow my Dad’s simple advice you will be on the right path to be a financial winner.

Volatility … Its Scarey! … Take a deep Breath!

The range of one year share investment returns over a 10-year period – From Fidelity

In the above data collected by Fidelity, it is sobering to look at the range of returns that a share investor can expect over a one year period. By setting stop losses, you can help protect yourself from the very worst of declines – but even with this protection, there will be some bad investment years. Lets look at the worst investment year for Australian Shares shown above (-40%). Even with stop losses, your portfolio might lose 10-25% due to prices rapidly falling before you can act. This is a major hit on your savings and during the 2008 GFC many experienced losses in their investment and superannuation savings that have turned them off share investment forever. This, in hindsight, has not been the best decision as cash returns have been relatively low and, up till June 2016, median balanced funds have improved 86% since this global financial crisis.

But volatility is not for everyone – You must be able to sleep at night!

This week, Slack Investor just had the shock of one of his stocks dropping in price by 37% on an earnings update. Price swings like this on your hard-earned investment dollars are hard to take and the volatility of the stock market – particularly with individual companies – make share investment a difficult environment for many.

To Slack Investor this is was not great news and though I prefer to make my investment decisions at the end of each month, the price revision has triggered the “not very slack” procedure of a review of this stock. Are the companies earnings still forecast to grow? There is now a daily review of this stock – with a view to sell. The correction may be an over reaction … or just the start of more bad news.

The things that protect me in these moments are diversification and the fact that Slack Investor is a long term investor. There are always at least 20 stocks or managed funds in the Slack Portfolio.

Although at the time of buying, by doing a bit of research on past and future earnings, I am convinced that each individual company will be an enormous contributor to the retirement fund. However, I have been investing long enough to know that things don’t always pan out as forecast … and I have realized that it’s not necessary to get all your investment decisions right … just so long as you get a good portion of them right!

Investing can be tricky at times and during times of market volatility it is useful to take the long view. The 15-year extract above (Shown on a compressed Logarithmic scale)- from Fidelity – indicates what would happen to a $10 000 investment over 30 years in index funds in various markets. For Australian shares the average yearly return is 8.5% over 30 years – but there were some boom times over this time frame. Over a shorter period, Canstar reports a 10-year average return for the Australian Index of 5.5% compared to the, admittedly risk free, cash option of 3.1% over 10 years.

Particularly in these times of low bond and cash yields, if you can accept the volatility of the share market, be willing to live with the occasional investment mistake and have a diverse list of well-managed growing companies in your portfolio – take a deep breath and you will be OK!