Noel News 16 Feb 23

Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.
PAUL SAMUELSON

 


Welcome to our February newsletter

Markets have been exciting since December with good results coming from everywhere.  It makes me reflect on the emails I kept getting last year telling me they would like to convert their super to cash just to be safe, and then switch back when the upturn is finally established.

But markets have gone gangbusters in the last few weeks, and of course those who hesitated have missed that upside and still don’t know whether it’s a temporary blip or not. As I have said hundreds of times, forecasting the market is a mug’s game – the trick is to stay in there and enjoy the rises and tolerate the falls.

Here are the latest superannuation statistics. Notice a rise of 3% of the month of January alone:

I’ve mentioned in several previous newsletters quotes from Money Guru Keith Fitzgerald, who has a unique gift of putting things in simple language.

The quote that follows is from his latest newsletter. It’s brilliant. It follows a bad night in the US markets:

“The doomsayers are out in full force this morning on fears of a recession. Frankly, the headlines make my head spin. We’ve seen this playbook so many times that it’d be laughable if it weren’t so predictable. Wall Street’s sole purpose is to separate you from your money. The big trading houses want you unsettled, uncertain, and emotionally charged because they know it’ll make their job easier. Keep your head screwed on straight.

More than 70 S&P 500 companies have reported Q4 earnings, and 65% of them have posted stronger-than-expected results. Stay calm.”

Cartoon by Bob Rich for Hedgeye

That was written two weeks ago and since then we have seen a huge rally on Wall Street, followed by a bit of a slump last Friday. It’s all been caused by the market’s reaction to what the American Federal reserve is doing about interest rates.

 


Inflation forecasts

In its latest Statement on Monetary Policy, the Reserve Bank of Australia said it now expects trimmed mean inflation to slow slightly to 6.2% in June before settling at 4.3% at the end of the year, compared to its earlier forecast of 3.8%. Headline inflation is expected to reach 6.7% in June, before settling at 4.8% at the end of 2023. The RBA does not, however, expect headline inflation to return to the top of its 2-3% target band until June 2025, led partially by strong growth in wages.

Blind Freddy can see this is code to expect more increases in rates, whether they work or not.

Photo by Levi Jones on Unsplash

The bank also forecast that the wage price index would reach 4.25% in late 2023 before declining to 3.75% in mid-2025. If wages do not rise as quickly as inflation, households will continue to be worse off as the year progresses.

 


Reprehensible behaviour

The latest rise drew the predictable headlines, but once again, a major factor has been glossed over in all the reporting. That is the way the big institutions have a feeding frenzy the moment people become vulnerable or get into trouble.

Photo by Jeroen Bosch on Unsplash

Think about a typical family who are doing their utmost to keep their finances in order. They are battling to cope with quickly rising prices on most things they need, along with multiple increases to their home loan repayments. Even with the best of intentions, they may easily fall behind in either or both their home loan repayments and credit card repayments.

Even though banks spend a fortune on advertisements trumpeting that they wish to assist customers in financial trouble, the reality is entirely different.

Most banks have a policy of moving your home loan to a ‘default interest rate’ once you are in arrears with your payments. This means they raise the interest on the home loan purely because you are having trouble making the payments now. But if you can’t make the payments at normal interest rates, how could you possibly make them when the interest rate has been raised? It’s not rocket science – this is kicking you when you are down.

Then there are credit cards. If you don’t pay the outstanding balance in full before the due date, your interest rate skyrockets to around 22% – backdated to when you bought the goods. That’s right: as soon as you can’t pay in full, the interest-free period is taken from you! It gets worse, if you are relying on credit cards to get by, you are on a dangerous path. Your credit rating will be shot and it will become virtually impossible to switch your credit card to a cheaper provider. You will be stuck with an increasing debt at 22% and little chance of getting out of it.

Photo by Alice Pasqual on Unsplash

This has been going on for years, and I’ve yet to meet any politicians who are willing to take on this predatory practice. Surely it’s a matter of basic fairness.

It’s not easy for people who are trying to protect their financial position. Think about a couple who shopped around for the lowest possible rate of interest on their home loan a year ago, before prices started to fall. If their deposit was less than 20%, they would have needed mortgage insurance – an expensive little product with the sole purpose of protecting the lender, in the event of default by the borrower. That’s correct: the borrower insures the lender, for the privilege of borrowing money! A fundamental problem is that mortgage insurance is offered by only a few specialist companies and is not transferable.

A borrower who has a loan with Bank A, and decides to change banks, will discover that a new mortgage – with the same borrower, same mortgage insurer, over the same security – will require them to pay a second premium, to insure their new lender, Bank B. And the cost of that second premium would normally be enough to make the shift uneconomic; they are locked in.

But there’s more. This year, many homeowners will see their fixed loan rates expire and be faced with paying a much higher rate. Their deposit may have been sufficient to avoid mortgage insurance when they bought the house, but if the home’s value has fallen due to interest rate rises forcing prices down, they may find that their deposit is now under the 20%. They are now locked into the existing lender.

Mortgage brokers tell me their existing bank will probably renew the loan as long as the borrowers are prepared to cop whatever interest rate the bank offers them. However, if they wish to change banks to get a cheaper rate, there will be the expense of a valuation, and then mortgage insurance, if the loan is approved. Once again, their only viable option would be to stay with their existing bank and cop whatever terms that bank decides to put on them.

The combination of rising prices due to inflation and rising interest rates – which may well be a futile mechanism to reduce inflation – mean that many families will be under extreme pressure. It’s hard to think of any action more reprehensible than punishing them with default loan rates and high credit card rates.

 


Superannuation changes

A benefit of high inflation is that superannuation thresholds are increased more quickly than normal due to indexation. Recent inflation figures of 7.8% mean that the Transfer Balance Cap, the amount you can transfer into pension phase, and potentially the amount that you can contribute to superannuation, are expected to increase on July 1.

Photo by Kristaps Ungurs on Unsplash

Many people find the Transfer Balance Cap confusing, so let’s have some history. If you cast your mind back to 2016, there was growing unease about the amount that could be held in super in the tax-free pension mode. One proposal was to limit the earnings to $75,000 a year and tax earnings over that at 15%, but the one that prevailed was to limit the amount you could add to superannuation in pension mode.

The Turnbull government achieved this by introducing the concept of a Transfer Balance Cap (TBC) from 1 July 2017 which put a limit on the amount that could be transferred to pension mode in superannuation. Those with large balances could transfer $1.6 million to pension mode, leaving the rest in accumulation.

It was a complex procedure, and many people still think that $1.6 million is the most you can have in pension mode. That’s wrong – having made the transfer, the amount you have in pension mode can grow to any level whatsoever. Once you use up your TBC, you cannot transfer any more funds in superannuation to pension mode.

This leaves three classes of super fund members – those who have taken advantage of the TBC in full, those who have transferred some money to pension mode but have not reached their limit, and those who are yet to move any funds to pension mode. The $1.6 million was increased to $1.7 million a few years ago, and would appear to be increasing to $1.9 million on 1 July. Obviously, if you are yet to make any transfers to pension mode and you have substantial assets in superannuation, it would be prudent to wait until after June 30 when you can take advantage of the higher cap.

The new regulations also stated that once your superannuation balance reached $1.6 million you could make no further non-concessional contributions, although concessional contributions were fine. That number now currently sits at $1.7 million but is also expected to increase to $1.9 million on 1 July.

There is also an expectation in the industry that the limit for non-concessional contributions may rise from $110,000 to $120,000 on 1 July. This means the amount that could be contributed using the bring-forward rules would increase to $360,000. This provides more opportunities for people who have money available, possibly from sale of assets, and wish to boost their superannuation.

These changes are not yet cast in stone, but the general feeling in the industry is that they will happen. Just don’t forget there’s a federal budget on Tuesday 9 of May – as always, there could be surprises.

 


From the mailbox

I was decluttering my parents’ home when I found Making Money Made Simple, which I purchased in 1988. So I have two of your books, one purchased at the beginning of my working life and the other purchased shortly before I retired.

I showed my eldest daughter who now works in finance and she said whilst laughing, ‘You’ve done well!’

I think she’s right, so I’m taking this opportunity to thank you.

 


The tale of a property

Back in 1990 I wanted to diversify my portfolio, so I spent $75,000 buying a small office unit. Now, 33 years later, I have experienced all the ‘joys’ of owning a non-residential property. This included spending $1600 repairing the air-conditioner last month, and coping with little rent during Covid because the tenants could not afford to pay. There are also the normal outgoings such as rates, body corporate fees and land tax. Just this week I was offered $200,000 for the unit – I couldn’t grab it quickly enough.

Just as a matter of interest I punched the figures into my Stock Market Calculator to see what I would have had now if I had put those $75,000 into an index fund that matched the All Ordinaries Accumulation Index. Can you believe that $75,000 would now be worth $1.3 million and be returning me $55,000 franked per year?

Image by Freepik

This confirms my belief that generally shares are a much better investment than real estate. If you pick an index fund there are no further decisions to make; the ongoing costs are trivial and you never have any bills for outgoings. Furthermore, if you need to withdraw some money in a hurry, it’s just a matter of ringing your broker and selling them immediately. If you buy real estate, you can’t sell the back office.

One final thing – when I was talking to the purchaser, I found the rental file on that property and discovered that the rent had not been increased for 13 years. This is because I’m a lazy landlord and would rather spend my time writing books and articles. The key to non-residential real estate is to add value and manage intensively. I didn’t do either of those things.

 


Question and Answer

I have chosen this question, because a major issue for the family was whether a family member should buy the family home from the estate of the deceased parents. In my view, that’s not really a good idea – people are normally better off to take the cash. Then they have the choice of hundreds of properties to buy.

 

Question

My wife’s father died last July. He was living in his own home that was bought in 1997 for $106,000. It is now worth around $575,000. We’re looking at selling the home or renting it out. We have paid our own family home off. We’ve been told that if we sell the home after July 2024, there will be CGT to pay. Can you please provide us with an estimate of roughly how much that CGT would be? At present my wife works part-time and earns around $45,000 a year. I work full time and earn around $111,000. As his will is currently in the probate stage, would it be better for my wife to keep it in her name once she inherits the home for tax purposes?

 

Answer

If the house has not been sold within two years from date of death you will be liable for CGT for any increase in value from date of death until the present day. Based on the performance of the home to date, and the present state of the property market, this may not be much. It’s impossible to estimate the CGT, as we don’t know what gain if any there will be.

I think the bigger picture here is whether your wife keeps the house. She could sell it when the estate is being finalised and get around $575,000 free of tax. She would then have the choice of deciding how best to invest – if she keeps the house, she is making the choice that there is no better investment for her than that house.

 


Stopping ageing

For over 30 years I have been studying ways to achieve a longer healthier life, and many of my findings are discussed in my book Retirement Made Simple. It’s a rapidly growing space, and I was intrigued this week to hear about Benjamin Button, aged 45, who spends £1.6 million a year on a team of more than 30 doctors and medical experts as he tries to engineer his body into that of an 18-year-old.

His bizarre daily routine includes waking up at 5am, taking around two dozen supplements a day, and eating a strict vegan diet of blended foods including vegetables, berries and nuts. The process is meticulously documented. He has taken 33,537 images of his bowels and monitors everything from his bone weight to his number of night-time erections.

It sounds a terrible way to live but there’s more to a long life than just exercise and diet. Even though these two factors play a major role in life expectancy, there are also factors like having a good relationship and a great social network. I read that a happily married smoker has a longer life expectancy than a single non-smoker – that’s the preventative effect of a good relationship.

And as I discovered last November, when I fell and fractured my ankle, unexpected events can happen and destroy even the best laid plans.

In my view, a better goal would be to have a happy fulfilling life and take all the necessary steps to try to live a healthy life as long as possible. Don’t get obsessed about living to 150.

 


 And finally

Image by Freepik

Never thought orthopaedic shoes would really work for me.
But I stand corrected.

Once upon a time there was a king who was only 12 inches tall. He was a terrible king but he made a great ruler.

A Mexican magician says he will disappear on the count of 3.
He says: ‘Uno, dos …’ Poof. He disappeared without a tres.

I wrote a book on how to fall down the stairs.
It’s a step-by-step guide.

My son was chewing on electric cords, so I had to ground him.
It’s OK, though. He’s doing better and conducting himself properly.

My friend claims that he ‘accidentally’ glued himself to his autobiography, but I don’t believe him. But that’s his story and he’s sticking to it.

An armed man ran into a real estate agency and shouted:
‘Nobody move.’

I asked the surgeon if I could administer my own anaesthetic.
He said, ‘Sure. Go Ahead! Knock yourself out!’

I got into a fight today with 1,3,5,7 and 9. The odds were really against me.
.
Number 6 and number 10 are the ‘nervous numbers’ because 7…
8… 9

In Britain it’s called a lift but Americans call it an elevator.
I guess we were just raised differently.

97% of people are stupid. Glad I’m in the other 5%.

The Lord said to John, ‘Come forth and ye shall receive eternal life.’ But John came fifth and got a toaster instead.

 


I hope you have enjoyed the latest edition of Noel News.

Thanks for all your kind comments. Please continue to send feedback through; it’s always appreciated and helps us to improve the newsletter.

And don’t forget you’ll get much more regular communications from me if you follow me on twitter – @NoelWhittaker.

Noel Whittaker