It's Your Money: How Banking Went Rogue, Where it is Now and How to Protect and Grow Your Money
I don't know what it is but I never had an interest in reading about Australian financial market (although I reside in Australia). Perhaps because I may have put 'Wall Street' and the whole American market on a pedestal, thanks to movies and media. Consequently, I have only been reading books about international financial markets and just finance in general.
After browsing through library catalogues, I landed on It's Your Money. It was very refreshing to read about Australian financial market personally (e.g. royal commission and Australian super system), and also very relevant (duh, I live here). Moreover, the book was written by a renowned Australian financial journalist, Alan Kohler.
This book came just in time for me. By the time I was reading the chapter on 'Superannuation' I actually had a training at work regarding insurance and superannuation. Thanks to the book I was able to actually comprehend what the financial planners (at my work) were talking about. I believe It's Your Money is a great introductory book to the Australian market and also wealth management/financial planning.
The book is easy to read and easy to follow through, with practical tips and real life examples. But I think this book is an entry-level finance book. It's Your Money helps to build foundation on key investment vehicles required for one's own wealth, such as shares/ETFs/index fund, real estate, superannuation, etc. And it also delves into the history of Australian financial market. But this may be a common sense for people who know a bit more about finance than the ordinary Australians.
But at the end of the day, there is always something to be learned from anything. And I have learned numerous things from this book. Below are quotes I wanted to note down, because the information may have been new to me or I wanted to remember it:
Banking vs Wealth management and Insurance
But he soon caught the bancassurance bug, not to mention the takeover bug, and in 2000 Murray’s Commonwealth Bank took over Peter Smedley’s creation, Colonial, which by then included not just the State Bank of NSW but also a big wealth management and superannuation business called First State.
That sparked a flurry of banks acquiring life insurance and wealth management businesses: NAB acquired MLC, Westpac bought BT Australia, and ANZ went into partnership with the Dutch company ING. Two years earlier, in 2000, Australia’s oldest and largest life insurance company, AMP, demutualised, following Colonial’s example. It also launched its own bank, AMP Bank. Around the same time, AMP’s largest competitor, National Mutual, was taken over by the French life insurer AXA. All of these corporate manoeuvrings had two big effects. They helped enrich the men who ran them, and they blurred the line between banking and investing. In fact, the line was smashed. (p.g. 10)
The Commonwealth Bank has announced that Colonial is to be 'demerged’, having already sold the life insurance division, CommInsure. NAB is demerging MLC. And ANZ has sold the old ING insurance business, now called OnePaath, to IOOF. Only Westpac is sticking with its insurance and wealth management acquisition, BT - for the moment, at least. Barcassurance was a twenty-year experiment that didn’t work.
… Banking is mostly about the management of risk. It has traditionally involved rationing credit, not selling it. Wealth management and insurance are products that have to be sold, and the risks that need to be managed are entirely different. Instead of credit risk, wealth managers and life insurance underwriters have to manage investment risk and ‘longevity risk’ - the danger that someone will outlive their ability to fund a comfortable retirement. (p.g. 11)
How to choose your financial planner
Certified Financial Planner (CFP) is the highest designation a financial planner can hold. CFPs are qualified with a degree, have a set period of minimum professional experience, and adhere to the Financial Planning Association's (FPA) Code of Ethics and Rules of Professional Conduct. (p.g. 83)
Tip: Choose an adviser with experience, but also one who is younger than you - to provide continuity later in life. (p.g. 84)
There is a website called Adviser Ratings (www.adviserratings.com.au) that rates advisers and planners much like TripAdvsior does for accommodation and travel services.
Questions to ask when choosing a financial planner (p.g. 86)
Experience
How long have you been in the advice business?
Who have you mainly worked for?
What are the most common sorts of clients that you advise?
What are your clients mostly trying to achieve?
Qualifications and status
What relevant training and qualifications do you have?
Are you licensed?
Scope of services
Do you take a special interest in a particular type of financial product?
Are there any products that you do not recommend or give advice on? (This is important: you want to know if there are any asset classes not covered by the planner's advice, and you want to know if there are any products that the adviser steers away from, and why. Advisers are defined as much by what they say no to as by when and where they say yes.)
Approach
How would you describe your style of advice?
How do you approach financial planning?
How do you go about understanding a new client?
How do you deal with a client who may have conflicting objectives?
Index fund & fees (p.g. 95)
Business Magnate Warren Buffett explained this better than I can in his 2019 letter to the shareholders of Berkshire Hathaway, talking about his first investment - $114.75 at the age of eleven, in 1942.
If my $114.75 had been invested in a no-fee S&P 500 index fund, and all dividends had been reinvested, my stake would have grown to be worth (pre-taxes) $606,811 on January 31, 2019 (the latest data available before the printing of this letter). That is a gain of 5,288 for 1. Meanwhile, a $1 million investment by a tax-free institution of that time - say, a pension fund or college endowment - would have grown to about $5.3 billion.
Let me add one additional calculation that I believe will shock you: If that hypothetical institution had paid only 1% of assets annually to various 'helpers', such as investment managers and consultants, its gain would have been cut in half, to $2.65 billion. That's what happens over 77 years when the 11.8% annual return actually achieved by the S&P 500 is recalculated at a 10.8% rate.
Risk (p.g. 107)
There are many different types of risk. People speak of market risks, inflation risk, tax deductibility risk, country risk, sector risk, sovereign risk, delivery risk, fulfilment risk and a plethora of other risks. (Perversely - even though a long life is generally regarded as a good thing - the risk of a person outliving their savings is referred to as 'longevity risk')
Inflation (p.g. 119)
For investors, inflation is worse than taxation as an eroder of returns. It can be devastating. Inflation of 3 per cent, for example, means that a 5 per cent return on a term deposit is really only a 2 per cent return.
Compound growth (p.g. 123)
To use our example above, if you put $100 away for fifty years at a compound annual growth rate of 25 per cent, you end up with... $7 million - and that's without doing any saving on top of that first $100! Save $100 a month at 25 per cent compound interest and you'll end up with $1 billion. Note that 25 per cent per annum is easy to come by, but most good fund managers can manage 15 per cent, especially with DCA, and that compound rate of return over 50 years, saving $100 a month, produces a final sum of $13.8 million.
Warren Buffett was worth $85 billion at the age of eighty-seven - he started young (twenty-one) and made 25 per cent a year compound over 66 years. You only need to start with $7000 a twenty-one to make $85 billion in sixty-six years if your compound interest is 25 per cent.
Real estate (p.g. 139)
First, let's remember a few fundamentals. People rent houses, not land, but only land goes up in value. Houses depreciate. To be a successful real estate investor you must understand that the house or apartment is the basis of your income, so maintaining it properly is the key to maximising yield, but capital growth only comes from the land.
Dividend dates (p.g. 160)
When directors announce a dividend, they provide three key dates: the day the shares will trade 'ex-dividend', the 'record date', and the 'date payable'. Shares are quoted on the ASX as ex-dividend four business days before the record date, when the company closes its register to determine which shareholders are eligible to receive the dividend.
Once the shares begin trading ex-dividend, the price generally falls in line with the amount of the dividend - because after that date, buyers are not entitled to the payment.
Share strategies for Buffett-style returns (p.g. 176)
invest for the long term (when that suits your horizon)
reinvest dividends and interest, to take advantage of compounding
care bout the underlying businesses
favour high-performing companies that retain and reinvest profits rather than distribute them as dividends
'Good' and 'bad' shares (p.g. 179)
I wished him well, and told him one of Warren Buffett's favourite sayings: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
In other words, don't get too caught up on price. Sometimes you have to pay what seems like a high price for a great company, but that's better than buying a cheap lemon. It's like buying a car, in a way - you get what you pay for.
Currency risk & Sovereign risk (p.g. 180)
You can't entirely avoid currency risk, because the profits of the companies and the returns of the funds tend to fluctuate according to what the currencies do. But at least they've got experts managing their currency risk and in many cases they hedge the risk, which simply means they use futures markets to offset it by locking in a certain exchange rate.
The other risk to keep an eye on with international investing is sovereign risk. This basically means the risk that the country concerned will change the rules in some way so that the company you've invested in can't make the profits it - and you - thought it was going to make.
For example, in 2018 investors in Turkey suffered huge losses because the newly re-elected President Recep Tayyip Erdogan picked a fight with President Donald Trump of the United States, who promptly imposed sanctions and tariffs against Turkey. The currency fell 30 per cent in a hurry, which meant every investment in Turkey fell by the same amount. European banks that had lent money to Turkey, and Turkish companies, all lost a fortune, so even though there wasn't an issue of sovereign risk with Italy, France and Spain, investors in those banks all suffered sovereign risk.
Margin loans and gearing
Gearing, which means borrowing money to invest, is a legitimate investment strategy, but risky, especially with shares. (p.g. 183)
'Margin loans' are lines of credit without fixed terms and with interest-only repayments. With a margin loan, you can borrow money to invest in shares, managed funds or fixed-interest securities, using the investment you buy as security fo the loan. (p.g 184)
Lenders typically offer up to a maximum of 70 per cent of the value of the underlying shares, referred to as the loan-to-valuation ratio (LVR). The borrower must deposit enough cash or shares to make up the difference, or margin. For example, if you have $30,000 in savings or existing shares and borrow an additional $70,000, giving you a total share market investment of $100,000, you have an LVR of 70 per cent.
Performance fee (p.g. 192)
And then there's the performance fee. That's where the manager takes a large percentage - usually 10 to 20 per cent - of any return over a benchmark, often but not always the ASX share index. So if the performance fee is 20 per cent and the benchmark is the ASX 200 index, and the manager produces a return of 10 per cent when the index went up 5 per cent, then the manager gets an extra 1 per cent on top of the base fee (20 per cent of the difference between 5 and 10).
The cost of liquidity (p.g. 231)
You can see it in the superior performance of super fund Hostplus, which has produced the top ten-year return of 12.5 per cent thanks largely to having a large proportion of its investment sin unlisted, illiquid infrastructure, private equity and venture capital.
Top-performing super funds (p.g. 236)
In the 2019 Chant West Super Fund Awards, Unisuper was the Fund of the Year. Other winners included:
Pension fund of the year: Q Super
Corporate solutions fund of the year: Sunsuper
Best fund, investments: UniSuper
Best fund, member services: Sunsuper
Specialist fund of the year: Hesta
Best fund, insurance: NGS Super
Best fund, integrity: First State and VicSuper
Best fund, innovation: Guild Super
Best fund, longevity product: Colonial First State
Super is not an investment (p.g. 237)
The first thing to keep in mind about super is that it's not an investment, it's a way to invest. More specifically, it's simply a tax-effective structure for investing.
But a better question would be: 'Is it better to own shares or property inside super, or outside?'
So super is just a tax structure, a bucket for your savings that is taxed at a lower rate (15 per cent) than the rest of your income when you put it in, and the income on it is also taxed at the same lower rate once it's in the bucket.
Topping up your super (p.g. 244)
As already noted, the maximum amount you can put into super each year at the concessional tax rate of 15 per cent is $25,000. That's 9.5 per cent of $263,158, so if you're earning less that that, you can contribute more to your fund that your employer is taking in compulsory deductions.
For people who earn less than $28,000 a year, the federal government is currently offering a co-contribution scheme whereby it pays $1.50 for every additional dollar you contribute to your own superannuation (up to a maximum of $1,500).
My top ten tips about superannuation (p.g. 250)
If your employer has put you into a retail fund - that is, one that's owned by a bank or AMP - it's almost certainly a bad option and you should check the net returns.
Long-term returns are what matter,
Focus on fees, whatever fund you're in, because fees compound.
Every twelve months or so, you should check up on how your fund is going. If they're going badly, you should ask them why, and if you're not satisfied with the answer, you should consider switching funds.
Salary sacrifice is a good way to top up your super.
Only consider setting up an SMSF if you have more than $300,000 in super. And even then, think twice.
Some industry funds offer free financial advice. Take advantage of it.
Drones (p.g. 262)
But I think drones are a whole different kettle of fish, because of what happened on 4 August 2018. On that day the president of Venezuela, Nicolas Maduro, was targeted in an assassination attempt using a drone. The attempt failed, but it highlighted the key difference between drones and other big three types of vehicles (planes, trains, automobiles)... drones can carry bombs and cameras, presenting a whole new set of challenges.
Blockchain (p.g. 269)
A bigger one is that the World Bank has mandated Australia's Commonwealth Bank to create a 'blockchain bond' - that is, a debt security that exists entirely on a blockchain.
The fact that the ASX is preparing to move the CHESS settlement system to distributed ledger technology, or blockchain, has not only emphasised the legitimacy of the paradigm shift but also helped take Australia to somewhere near the forefront of it.
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