Noel News 25 March


And once the storm is over, you won’t remember how you made it through, how you managed to survive … you won’t even be sure whether the storm is really over. But one thing is certain—when you come out of the storm, you won’t be the same person who walked in. That’s what this storm is all about.

I am writing this at home on a Tuesday morning. Who would have thought just two months ago when I was enjoying my 80th birthday that the world would be in such a catastrophic state right now. Geraldine and I are in self-imposed isolation – our children won’t let the grandchildren near us in case they get sick and infect us, and given our ages we are doing everything humanly possible to avoid human contact. We are both in very good health, but we are dealing with the unknown, and it’s better to be safe than sorry.

The major newspapers this morning have discovered the word “depression” – just two weeks ago the debate was whether there would be a recession. Now, as the stark reality becomes clear, it’s obvious that this situation will get much worse. The quote at the top of this page reflects my thinking. Many of our parents lived through the great depression of 1929, and it affected their behaviour for the rest of their lives. The GFC was serious, but nobody’s behaviour changed much.

What we are facing now is far worse than the GFC and I believe it will change many people’s behaviour for the rest of their lives. During the GFC, business kept on going – now it’s been stopped dead.

A few months ago, we were talking about a balanced budget – now we face the perfect storm of businesses everywhere going broke, hundreds of thousands of people out of work, and the government pumping everything it can to try to save the economy. The decline in tax receipts will be massive – as will be the increase in expenditure. It could take our debt to over $1 trillion!

My Own Philosophy

I have long believed that local and international shares are the best long-term investment. Therefore, our superannuation fund is 85% shares, 10% property syndicates, and 5% cash. So obviously, we have been battered badly in these downturns.

But this market really creates a dilemma. Part of me wants to sell everything in the hope I can buy back when the problems are over – the other part of me wants to jump in now and buy buy buy when so many blue chips are cheap. But I reckon neither of these is the right thing for me. I believe firmly that nobody can pick the bottom of the market and the market at some stage will recover strongly. However, it’s essential to keep enough cash in the bank for the next three years’ planned expenses.

By cashing in, I am proclaiming myself to be a market timer – which I know is impossible – but by buying at these cheap prices I am depleting my precious store of cash. So, I just sit tight and watch the market daily.

I see an investment in shares as akin to owning a part of a business, and know that if that business does well, our investments should go along with it. Once you start to think long-term, you don’t get fazed by the day-to-day gyrations of the market.

But long-term investors fall into two categories: those that pick their own stocks, and those that let fund managers make all the decisions for them. I fall into both camps. Let’s be fair dinkum here – picking your own stocks and watching their daily movements is much more fun than handing your money over to a fund manager who will send you a monthly report while you go about your other business.

But when I look at my total portfolio on-screen, where profits are shown in green and losses in red, the managed funds are winning hands down. The decision is up to you, and your own experience picking good stocks should be the main guide here.

Unfortunately, in these present uncertain times, many long-term investors start to behave like traders, and decide to cash in a lot of their investments once they start to fall in value. Their reasoning is that they will come back into the market when the recovery is up and away. There is one major flaw in that thinking: by the time they believe the market has turned, it’s too late. Warren Buffett put it perfectly: “If you wait for the robins to appear, spring will be over.”

The accompanying graph speaks volume for this principle. It traces returns on Australian shares from 1900 to 2018. The positive years are on the right of zero, and the negative years on the left.

Source: London School of Business


Notice there are far more positive years than negative ones, and the best of the positive years are far better than the worst of the negative ones. And, in most cases, a very good year follows a bad one.

Successful investors know this – they don’t try to time the market, and they don’t panic and liquidate their portfolio when the market has a downturn. All that does is turn a paper loss into a real loss. A basic investment principle is that TIME IN the market is far more important than TIMING the market.

The message is clear: to be a successful investor, stay in the market and don’t be fazed by the volatility that invariably occurs. Remember, every decade the share market has on average six positive years, and four negative years. The danger of trying to time the market is that you miss out on the best bits of the positive years.

The Sting in the Tail

The government has launched a wide range of highly publicised strategies to fight the deadly COVID-19 virus. Many of these are right on the money. These include cash payments to businesses and individuals, access to superannuation in need, and reducing by 50% the amount that must be drawn by people with account-based superannuation pensions. All these should provide much-needed stimulation quickly, and leave no nasty after-effects.

However, there are other promises that look good at first glance, but which may not be as attractive as they seem on close examination. And there are some seriously negative entrenched practices that have not been given a thought.

I’ll divide them into two categories: the bad entrenched practices, and the “fly now pay later” ideas.

Bad Entrenched Practices

An obvious one in the first category is the rate of interest banks charge on credit cards. It was also ignored by the Hayne Royal Commission, yet many cards are still charging around 20% – unchanged for years, despite falling interest rates in every other area. As more and more Australians lose their jobs, arrears on credit cards will snowball. What will the banks’ attitude be on the rate of interest to be charged? Remember, if the rate is 21% and no repayments are made, the debt will double in under four years.

Next, the banks’ indefensible practice of charging “default interest.” Banks have been loud in their promises to be lenient with borrowers who get into arrears, but nothing has been said about changing their current practice of charging “default interest” – a higher rate – if a loan gets behind. For example, if you are paying 4% and get behind, your interest rate rises to 6%. Will this be addressed?

Now let’s turn our thoughts to electricity providers. There is intense competition between them, even though they are basically selling the same product, with price the only differential. Of course, they have promised that nobody’s power will be cut off if the owner gets behind in their payments. That’s great, but every power contract I’ve ever seen contains a clause that the discounts, which can be as much as 25%, will only be applicable if the bill is paid on time. Will that penalty be waived?

Fly Now Pay Later

There are many contenders in the “fly now pay later” category of ideas. These include loans to small business, and repayment “holidays”. The government has announced interest-free loans to enable business to stay afloat, but at some stage they will need to be repaid.

Similarly, most state governments have announced “payroll tax holidays”, but this merely means you don’t need to pay your payroll tax today – you can defer it and pay later. Payroll tax is payable monthly on the gross amount of wages paid, whether the business makes a profit or not. A business taking “advantage” of a payroll tax holiday will suddenly find themselves with seven months payroll tax in one hit when the holiday ends. It could break any recovery.

Banks have jumped on the bandwagon by promising a “mortgage payment holiday” – in which borrowers can defer their loan repayments for up to six months. One example quoted shows a couple with a loan of $400,000 over 30 years at 3.75% with monthly repayments of $1,834. Making no repayments for six months will put $11,000 in the borrowers’ pockets and may enable them to get by. If that stops some people from losing their home, it’s great – but the interest is simply being added to the loan balance, and compounded, which means paying interest on interest. After just six months, the loan balance will have increased to $411,000 and added three years to the term of the loan, unless the borrowers increase their monthly repayments.

The COVID-19 virus is shaping up to cause a depression, not a just a recession. My fear is that the after-effects may be even worse than the crisis if we don’t get the policies right.

Age Pension Changes

There have been major changes to the age pension. The automatic half yearly adjustments increased the pension from 20 March, and in response to the market turbulence the government has dropped the deeming rates twice in two weeks. The calculators on my website are right up to date so you can model your own scenarios.

Just keep in mind the deeming rate changes do not take effect until 1 May. The deeming rates only affect income tested pensioners – if you are income tested you must do the Deeming Calculations before you enter the income in the Age Pension Calculators.

  1. Go to Deeming Calculator
  2. Go to Age Pension Calculator


Interest Only Loans

Borrowers with interest only loans may face some serious challenges in 2020 if they don’t take steps to prepare themselves for a compulsory refinancing of their interest-only loans. According to comparison site Finder, 730,000 interest-only loans will expire before December, and their lenders will be contacting them to renew their arrangements.

Almost certainly the borrowers will be given no option but to convert their loans to principal and interest (P&I) – this may well mean a substantial jump in their monthly repayments.

Think about Kerry, who is aged 50, and has an interest-only loan of $400,000 for an investment property. The loan is secured by a mortgage over Kerry’s home, as well as a mortgage over the investment property.

The loan was taken out five years ago with an interest rate of 5% fixed. Monthly payments were $1,667 ($20,004 a year). As the loan was interest-only, and for investment purposes, all payments were tax-deductible. The debt remains at $400,000.

The five-year term ends this year Kerry is facing refinancing. Given the present lending conditions, and the general reluctance of banks to assist borrowers, almost certainly the bank will require the loan be renegotiated on a P&I basis, and probably will restrict the loan to 15 years as Kerry intends to retire at age 65.

The comparison websites display a wide range of interest rates, but for this exercise let’s assume that Kerry refinances on a 15 year P&I term at 4% variable. The monthly payments will be $2,960 – an increase of $1,293 a month (or $297 a week). And here’s the rub: the extra payments will have to come from after tax dollars, because only the interest is tax-deductible.

The interest for the first year of the new loan will be $15,368 – that’s a reduction in Kerry’s interest deduction of $4,636. After five years, the interest will be down to $12,197 and be starting to reduce rapidly. The good news for Kerry is that the loan will be paid off at age 65. The bad news is that the after-tax dollars required to pay the monthly payments will be increasing faster and faster every year.

But, these figures are based on the assumption that Kerry is on good terms with the bank and has a secure income that will support the increased payment.

Think about another couple who tend to let the future take care of itself, and whose credit position has declined because one of them lost their job, just after they had borrowed heavily for a new car. If they leave refinancing to the last minute, they may well find the bank will not extend the loan, and their chances with other banks are remote due to their bad credit score. Their only option may be to dump the property and lose money if it was a bad deal, or pay capital gains tax if it was a good one.

The lesson should be clear: if your interest-only loan is expiring this year, you should be exploring your options right now. I am told that it takes at least eight weeks to get most loans approved and by delaying you lose your chance of shopping around for a better deal. Mortgage brokers tell me that banks vary widely in their criteria for loan assessment, as well as in the rates they will offer. Probably your best option is to contact a mortgage broker and start work now on a loan that will work best for your budget and your financial goals.

Something to Ponder

I love the Daily Stoic. It’s a free email by Ryan Holiday and is the first email I read every morning when I wake up. I will now share with you the one I received today:

All this was all pretty sudden, wasn’t it? The economy was chugging along. Life was going well. We had travel plans. We had work plans. We had things we were doing. We had a sense for what we’d do next.

And then… bam. Now, here we are.

You know what that is? It’s a reminder. It’s a reminder of what Seneca—a man who experienced exile, illness, financial setbacks, and all sorts of other adversity—wrote about more than 2,000 years ago. He told us “never to trust prosperity, and always take full note of fortune’s habit of behaving just as she pleases, treating her as if she were actually going to do everything it is in her power to do.”

His point was that events can change quickly, and that we have to be vigilant, particularly in good times, because vigilance is the first step towards preparation. “Whatever you have been expecting,” he said, “comes as less of a shock.”

The events of the last few weeks have been an expensive and merciless reminder of the truth of that advice. We ignored it at our peril, for too long, as humans often do. Fate is fickle. Reversals happen. Black Swans are real. Nothing is stable, change is the only constant.

No one is so rich, so healthy, so strong or smart that they cannot be brought low. That is obvious to anyone looking around today. Yet we are likely, as things get better (which they inevitably will), to forget this fact if we’re not careful…and that is a waste of the pain we are experiencing right now.

The world is always teaching us. The question is whether we’re open to listening. The question is whether we’re ready to hear.

And Finally

The following questions and answers were collated from British GCSE exams, i.e. 16 year olds!

1. Geography

Q: Name the four seasons.
A: Salt, pepper, mustard and vinegar.

Q: Explain one of the processes by which water can be made safe to drink.
A: Flirtation makes water safe to drink because it removes large pollutants like grit, sand, dead sheep and canoeists.

Q: How is dew formed?
A: The sun shines down on the leaves and makes them perspire.

Q: What is a planet?
A: A body of earth surrounded by sky.

Q: What causes the tides in the oceans?
A: The tides are a fight between the Earth and the Moon. All water tends to flow towards the moon, because there is no water on the moon, and nature abhors a vacuum. I forget where the sun joins in this fight.

2. Sociology

Q: What guarantees may a mortgage company insist on?
A: If you are buying a house, they will insist you are well endowed.

Q: In a democratic society, how important are elections?
A: Very important. Sex can only happen when a male gets an election.

Q: What are steroids?
A: Things for keeping carpets still on the stairs.

3. Biology

Q: What happens to your body as you age?
A: When you get old, so do your bowels and you get intercontinental.

Q: What happens to a boy when he reaches puberty?
A: He says goodbye to his boyhood and looks forward to his adultery.

Q; Name a major disease associated with cigarettes.
A: Premature death.

Q: What is artificial insemination?
A: When the farmer does it to the bull instead of the cow.

Q: How can you delay milk turning sour?
A: Keep it in the cow. [He got an A]

Q: How are the main parts of the body categorised? (e.g. abdomen.)
A: The body is consisted into three parts – the brainium, the borax and the abdominal cavity. The branium contains the brain, the borax contains the heart and lungs, and the abdominal cavity contains the five bowels, A, E, I, O and U.

Q: What is the Fibula?
A: A small lie.

Q: What does varicose mean?
A: Nearby.

Q: What is the most common form of birth control?
A: Most people prevent contraception by wearing a condominium.

Q: Give the meaning of the term Caesarean Section.
A: The caesarean section is a district in Rome.

Q: What is a seizure?
A: A Roman emperor.

Q: What is a terminal illness?
A: When you are sick at the airport

Q: Give an example of a fungus. What is a characteristic feature?
A: Mushrooms. They always grow in damp places and they look like umbrellas.

4. English

Q: Use the word judicious in a sentence to show you understand its meaning.
A: Hands that judicious can be soft as your face. (do dishes)

Q: What does the word benign mean?
A: Benign is what you will be after you be eight.

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.

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Noel Whittaker