Cash investments popular among investors

Self managed super fund (SMSF) investors have led the market in adopting online savings accounts and term deposits with 29% per cent of self managed super assets moving to cash between 2008 and 2009 - during the GFC.

Post GFC, cash is still maintaining its popularity among some investors. A UBank survey of customers in March 2010 revealed that a third of SMSFs have more than 50% of their funds in cash.

Some of the returns available on cash rates have been quite attractive with the Reserve Bank of Australia increasing interest rates.

Planning for retirement

Working out the best way to build your nest egg for retirement is never easy, but many agree that relying on superannuation alone is not enough.

According to the Westpac ASFA Retirement Standard, a retired Australian couple needs to earn more than $51,727 a year to live 'comfortably' or more than $28,080 a year if they want to live 'modestly'.

Investing in property is one way to help fund a comfortable retirement that allows you to pursue the interests, hobbies and activities of your choosing.

Here are 5 strategies for successfully using property investment to build wealth for retirement.

1. Think long term
Retirement strategies are all about investing money wisely over many years, building wealth through compound interest and re-investment. Think long term and have a realistic game plan that has built in buffers to ensure you remain in a comfortable position in future years.

2. Aim for capital gains
It is the capital gains that make property investing so attractive for retirement, so buy your property with capital growth in mind. This means choosing a home with resale potential that is of maximum appeal to tenants. Property experts often recommend new-built family homes because they usually have fewer maintenance costs, are attractive to the ideal tenant, and are tax effective for the investor.

3. Diversify
Property should play a big part in your investment portfolio but avoid putting all your eggs in the one basket. Diversify and spread your risk among a number of different sectors including property, shares or managed funds.

4. Consider taxation laws
Rental income may be taxed at a higher rate than superannuation unless you set up your own super fund and acquire property via your fund. Seek expert advice to best understand taxation laws and make the most of superannuation concessions.

5. Start now
It's never too soon to start planning for your future. While you are still working and have equity in your home, now is the time to use property investment as a way to optimise your financial security for the time when you plan to put your feet up!

For help on planning on retirement having an income stream during retirement, speak to one of the financial planners at Intellichoice on 1300 55 10 45 or email info@intellichoice.com.au.

Term deposits outperform shares

Cash investments have delivered far better returns to investors over the last three years than the sharemarket has. The average annual rate of return over the last three years from a one year term deposit has been 5.6%. The average annual return from ASX200 companies over the last three years has been minus 6.6%. Average dividend income for shares has been between 3.4% and 5.5%, which has been offset by some large capital losses.

Choosing a broker when you want to invest in shares

If you are thinking of trading in the shares market, you will need to use the services of a broker. There are two main types of brokers available to you, full service (advisory) and non-advisory (execution-only) brokers.

A full service broker is able to offer you advice on buying and selling shares and other exchange traded instruments such as options and CFDs, provide market research and structured tailored investments for your long term portfolios. As a full service broker is able to offer many services you would generally expect to pay a higher brokerage fee to buy and sell financial products.

On the other hand a non-advisory broker, commonly an online provider, offers no personal advice or recommendations and only provides a trade execution service. Consequently you would generally expect to pay a lower brokerage fee to buy and sell shares, and they are a popular choice for investors who are confident in making their own trading decisions.

Whether you are an active private trader or a long term investor there are many questions that you may need to ask before deciding which broker will best suit your needs.

What type of services do you require from a broker?
Full service offering research and advice, access to investment opportunities in company floats, and financial planning or an online service accessed via phone or internet, offering low cost trading, and straight through order entry.

How much do brokers charge?
Typically brokers will charge a flat fee for transactions below $10,000 and then a percent value of the trade for higher amounts. Often discounts can be negotiated for high volume clients.

Are regular newsletters or share market information available?
Both full service and non-advisory brokers will often provide daily and weekly newsletters recommending sectors and stocks that are performing. These can be provided either by email or by access via the broker’s website.

Do Brokers conduct workshops?
Brokers will often provide workshops on how to use their execution platform, and trade in different types of financial products.

When you select a broker you should ensure that you receive a Financial Service Guide (FSG), a Product Disclosure Statement (PDS) and a Client Agreement detailing the products and services that are being offered to you, and the applicable terms and conditions of trading, by that broker before you open your trading account.

For more information about investing in shares and other investments, speak to one of the financial planners at Intellichoice today on 1300 55 10 45 or visit www.intellichoice.com.au.

Creating an investment portfolio

Before investing in shares there are many questions you have to ask yourself before you put together an investment portfolio with your financial planner.

• Are your investments going to be long term or short term?
• Are you looking for a return in the form of income and long term capital growth or a short term return in the form of a large capital growth?
• What is your tolerance to risk? Are you prepared to risk some of your investment capital for the opportunity to make higher returns?

If you are looking for income and long term capital growth then you should look at stocks that have a proven long term business model and pay good dividends. These stocks are referred to as Value Stocks and would be considered to have a lower risk profile. Their share prices gain over the long term and pay dividends every 6 months providing you with an income. Many stocks within the Infrastructure sector would be considered Value Stocks.

If you are looking for short term capital growth then you should consider stocks that are just starting their growth phase. These are usually new companies that are just starting production or expansion. These stocks are referred to as Growth Stocks and would be considered to have a higher risk. Many stocks within the Energy, Material and Health sectors would be considered Growth Stocks.

Don't put all your eggs in the one basket - investing evenly across Value and Growth Stocks can create a diversified investment portfolio with a medium risk profile. An educated investor can achieve both short and long term capital growth and create an ongoing income by receiving dividend payments.

The difference between a good and bad investment portfolio is always about education and knowledge. The educated investor will always look to buy stocks at discount prices and introduce simple hedging strategies to maintain the profitability of their investment portfolio during volatile times.

To find out whether investing in shares is right for you, speak to one of the financial planners at Intellichoice today on 1300 55 10 45 or visit www.intellichoice.com.au.

The other side of Lending – Mortgage Schemes

Investing in a mortgage scheme
“I wish to get a better rate of return on my money and don’t really mind having an indirect exposure to property as the underlying asset class.'

That's roughly how a mortgage scheme (also called mortgage funds) works, except it involves three extra features: 

1. More than one person contributes money to the scheme;
2. Investors' money is pooled together or used in a common enterprise for scheme members; and
3. Scheme members give up day to day control over how the scheme operates.

Like any investment, you face risks. Your returns will be affected by the ups and downs of property values and interest rates. You also rely on the skill and honesty of scheme managers and property valuers to find borrowers who can pay on time, with adequate security.

In the past, most mortgage funds have operated successfully. Some, regrettably, got into disastrous financial trouble; either because the managers lacked the skill to manage mortgages, especially when some of the borrowers failed to pay, or they lent too much money on optimistic valuations or risky development properties. A handful of operators defrauded investors.

Watch your margin of safety
Risk in mortgage lending lies in the gap between the value of the property and how much of that value is being lent to the borrower (described as the loan-to-valuation ratio). The closer the amount lent to the value of the property, the higher the risk that you might lose part of your investment. A $60,000 loan for a property valued at $100,000 represents a conservative 60% loan-to-valuation ratio, but a $95,000 loan on the same property represents a much riskier 95% loan-to-valuation ratio.

What type of scheme can you choose?
Mortgage schemes, or mortgage funds can be set up in different ways. You can choose:

• Pooled mortgages, where all investors share in all the mortgages. You therefore take your share in all the income and spread the risks across all the mortgages that the scheme manages. LOW / MEDIUM RISK
• Contributory mortgages, where you choose which mortgage(s) you invest in. Your mortgage(s) may pay a different income from other mortgages in the scheme. Your risk depends on the quality of the borrowers to whom you have chosen to lend. MEDIUM RISK
• Debenture or mortgage companies, where you invest in shares or debentures issued by a company that invests in mortgages. Here, you are really becoming a shareholder in, or lender to, the company, which in turn owns the mortgages. Check whether the mortgages are pooled or linked to specific properties. HIGH RISK.

What type of scheme managers can you choose?
All scheme operators must treat investors honestly. At present you will find these types of scheme managers:

• Managers of registered schemes must operate the scheme through a public company that holds an Australian Financial Services Licence and comes under ASIC regulation. (You can check this licence free of charge through the ASIC website or contact the ASIC Infoline by email infoline@asic.gov.au or ring 1300 300 630.) The scheme must have a constitution, a compliance plan and a product disclosure statement that you can inspect. It must also have proper internal procedures for handling complaints, and be a member of an authorised external dispute resolutions scheme.
• Managers of industry supervised schemes must be supervised either by the Law Society of NSW or the Law Institute of Victoria. First, get a copy of the rules set by each body, then make sure any scheme you are considering is abiding by the rules before you invest.
• Directors of mortgage debenture companies must operate through a public company. They must act honestly and diligently, but require no licences or complaints schemes. The directors are free to choose whatever operating systems they like so long as they obey general company law.
• Managers of unregistered and unlicensed schemes must restrict their scheme to 20 people or less and must not be in the business of promoting schemes. Unregistered schemes are not regulated by anybody. You are on your own. Check everything and everybody involved.

What should you choose?
Mortgage schemes may suit your needs and circumstances. Choose the scheme and the manager that suits your own knowledge and experience. If you possess no expertise in this area, you should seek appropriate financial advice.

For more information about mortgage schemes and whether they suit your needs, speak to one of the financial planners at Intellichoice today on +61 7 3624 1900 or email info@intellichoice.com.au. Alternatively, visit www.intellichoice.com.au.

Investing in mortgage funds: getting more from your money, without the heartache

We have all heard a million times that every investment has risks and there is a risk-return trade-off.
So, is there any simple, easy to understand investment for people wanting stable and reliable returns?

Among the four asset classes - Cash, Fixed Interest, Property, and Shares - cash investments are considered to carry the lowest risk, and will generally pay the lowest return. Shares, on the other end, are regarded as the highest risk investment, but have the potential to provide a much higher return.

So, if investors are looking to get their money working a bit harder for them, and getting more than the interest paid by the bank, but they don’t want to take up as much risk as with buying an investment property, they may place their money in a fixed interest investment. That’s where mortgage funds fit in.

Yes – their asset class has a lower risk profile than property investment!

Mortgage funds are less volatile than some other investments: that means that they are designed to provide reliable income payments, preserving the initial capital invested. Not all fixed interest investments can do the same. In fact, despite the name, fixed interest can fluctuate in value: for example, as interest rates go up, bonds value goes down, and so do returns of fixed interest funds invested in bonds. Mortgage funds behave exactly the opposite way: as interest rates go up, returns also go up. So, rates going up become something to look forward to, for a change!

Let’s not forget the importance of diversification: some people do want to take extra risk and invest in property or shares, but how to insure against times when markets are not doing so well? There is no such insurance policy out there, but keeping part of the portfolio invested in a mortgage fund may provide a solution to that.

For example, the graph below shows the performance of a mortgage fund (The La Trobe Australian Mortgage Fund), against the downturn periods of the Australian stock market, over a 10 year period. The mortgage fund had strong positive returns, at the same periods when the Australian stock market was experiencing negative returns.

An article in the Australian Financial Review (October 2008) headed "Cash, property shine as shares crash and burn", suggested that investments in cash or property over the last 10 years had come close to, or even potentially outperformed, the return from equities over the same period. The volatility in the share market that we have seen in recent times has eroded many of the gains made in equity investments prior to the 'global financial crisis'.

On the other side, it has also been argued that over a very long period of time – 25 or 30 years – investing in shares provides superior returns, even with market downturns like the one we have just experienced.

But what if you just don’t have another 30 years to invest? What if you are close to retirement and may need to delay it if the market goes down? Or what if you are saving, for example, for your children’s education? They can’t just “wait a couple more years” to go to school!

In that case, a more conservative option may be more suitable for you.

So, what about the recent debate about mortgage funds?

The word “mortgage”, in investments, hasn’t had very good publicity recently. But it is important to clarify a couple of things, when talking about them.

First, mortgage funds are not those mortgage-backed securities that you have been hearing about! Mortgage-backed securities are much higher risk investments, which have been linked to the GFC.

Second, not all mortgage funds have frozen redemptions in the past year. The ones that did were offering investors the option of taking money out at anytime. They effectively borrowed short and lent long. When the government issued the bank guarantee, many investors felt safer with the banks, and they all tried to get their money out of mortgage funds at the same time. However, investors’ money is used to offer finance for mortgages, sometimes lasting 30 years. As a consequence, managers had to refuse redemptions requests. The lesson learned here is that mortgage funds should match as best as possible the investment term with the mortgages term. Those that did, are still open and continue to provide stable monthly returns.

Intellichoice has a working relationship with La Trobe to offer our clients the opportunity to invest and growh their wealth in a safe manner. The La Trobe Australian Mortgage Fund Pooled Mortgages Option, for example, has never restricted redemptions, has always had only a one year term option, and is currently returning 7.50%, monthly income. That’s why it has been awarded “Best of the Best” in Money Magazine.

For more details about mortgage funds and whether it is a suitable investment tool for you, speak to one of the financial planners at Intellichoice on 1300 55 10 45 or email info@intellichoice.com.au. Alternatively, visit www.intellichoice.com.au.