In a previous post I talked about how there are many different investment opportunities out there. I talked about how there are hundreds and thousands of different investment brochures and pamphlets. They are all different colours and shapes and sizes. This of course can be very overwhelming if you are not used to this kind of literature.
What you have to remember is that there is only basically six asset classes in which you can invest your money. I would like to talk about one of those asset classes today, that is the commodities class.
Commodities are your basic food or raw materials. Of the top of my head i can think of cotton, gold, pork bellies (still don't know what that means) and of course oil. If you have seen the movie starring Dan Akroyd and Eddie Murphy called Trading Places you may think frozen concentrated orange juice is a commodity but I'm pretty sure it is not traded anywhere although I stand to be corrected.
Commodities can be divided into seven categories:
1. grains and feeds (barley, bran, corn)
2. foods (butter, cheddar cheese, cocoa, eggs, sugar)
3. fats and oils (coconut oil, lard, palm oil)
4. fibres and textiles (cotton, wool)
5. Metals (aluminum, copper, steal)
6. miscellaneous (rubber)
7. precious metals (gold, silver)
By all means think about having commodities as part of your portfolio but don't make that the focus or put 100% of it in commodities you could be heading for disaster. Commodities are great for 10% of your total portfolio.
Wednesday, 21 December 2011
Thursday, 15 December 2011
What is private equity?
Private equity is a general term for raising private money to invest in business ventures. I always make the example of if your brother or sister decide to open a corner fish and chip shop and you give them some money to start the venture then this could be considered private equity.
So, who invests in private equity? Usually high net worth individuals, pension funds, banks, insurance companies and other institutional investors invest in private equity. The minimum investment in private equity are generally quite high so it is out of reach of the average investor.
What happens after you give your money? The venture capital firm that is looking after the investment will pool all of the capital from the investors. The venture capital firm plays are very active role in the management of the companies they are investing in.
What is the catch? Investing in private equity is among the most riskiest of investments. Once you have made the investment, it is very difficult to cash out and in most cases the investor will not get any income. The good news is as long as the investor can accept the high risk and illiquidity of it all the returns can be spectacular.
How can investors get their money back? There are three potential exit strategies for private equity investments:
1.IPO
2. Merger or acquisition
3. Secondary buyout.
The merger or acquisition is the usual one and on this occasion the investor can get their money plus more.
As I said private equity is very risky and you need large amounts of cash but the rewards can be significant. No risk no reward!
So, who invests in private equity? Usually high net worth individuals, pension funds, banks, insurance companies and other institutional investors invest in private equity. The minimum investment in private equity are generally quite high so it is out of reach of the average investor.
What happens after you give your money? The venture capital firm that is looking after the investment will pool all of the capital from the investors. The venture capital firm plays are very active role in the management of the companies they are investing in.
What is the catch? Investing in private equity is among the most riskiest of investments. Once you have made the investment, it is very difficult to cash out and in most cases the investor will not get any income. The good news is as long as the investor can accept the high risk and illiquidity of it all the returns can be spectacular.
How can investors get their money back? There are three potential exit strategies for private equity investments:
1.IPO
2. Merger or acquisition
3. Secondary buyout.
The merger or acquisition is the usual one and on this occasion the investor can get their money plus more.
As I said private equity is very risky and you need large amounts of cash but the rewards can be significant. No risk no reward!
Monday, 12 December 2011
The rule of 72
How long will it take for your money to double in an investment? What a great question.With everything going on in the market today your financial adviser would be well within his or her rights to say, "who knows?" Of course that is a short term view and as most of us should know the market will go up over time. In the short term things are always going to be choppy like the waters of Cook Strait however in the long term we should see returns. So, how do we calculate how long our money will take to double?
We use the rule of 72. "What?" I hear you say, "What is the rule of 72?" Well the rule of 72 is a very easy way to figure out how long it will take for an investment to double. So if you give your money to the bank and they are paying an annual interest rate of 6% then it will take 12 years for your investment to double. If they give you 9% then you guessed it the investment will take 8 years to double. Simple, eh?
The rule of 72 can also be used for inflation. In New Zealand for the last 150 years the inflation rate has been annually 2.7%. So if we divided 72 by 2.7% then we get 26.6. So our money historically will halve in value in 26.6 years.
The last question is of course, why 72? Well, I have no idea. I"m sure some mathematician spent many hours trying to come up with that one. Good on him I say.
We use the rule of 72. "What?" I hear you say, "What is the rule of 72?" Well the rule of 72 is a very easy way to figure out how long it will take for an investment to double. So if you give your money to the bank and they are paying an annual interest rate of 6% then it will take 12 years for your investment to double. If they give you 9% then you guessed it the investment will take 8 years to double. Simple, eh?
The rule of 72 can also be used for inflation. In New Zealand for the last 150 years the inflation rate has been annually 2.7%. So if we divided 72 by 2.7% then we get 26.6. So our money historically will halve in value in 26.6 years.
The last question is of course, why 72? Well, I have no idea. I"m sure some mathematician spent many hours trying to come up with that one. Good on him I say.
Monday, 5 December 2011
Allen Stanford
As a cricket supporter I would like to change my tune today and talk about someone who has played a major role in cricket in the last few years. Late 2008 in Antigua, England played the West Indies in a T20 match with the winning side collecting a cool $20 million for their troubles. The losing side went home, that's it they went home with nothing. It is now history that the West Indies won comfortably by 10 wickets and pocketed the $20 million.
Allen Stanford was the man behind this game. He had been living in the West Indies for a number of years and had grown attached the sport that is cricket. He had planned to organize five of these games with $20 million on the line for each game. Unfortunately for cricket fans and especially the England and West Indies teams only one of these games were ever played as the following year Sir Allen Stanford was arrested on suspicion of been the front man in a fraud of massive proportions called a Ponzi scheme.
I'm not here to pass judgment on whether or not Stanford is guilty or not, in fact I'm kind of hoping that he isn't as I enjoyed the first game they played and would like to see it continue, as even though the West Indies won convincingly it was still quite exciting, especially with the amount of money at stake and the fact that some of the young players in the Caribbean side were about to become instant millionaires.
So, what is a Ponzi scheme that Stanford has been accused of? Basically a Ponzi scheme is an "investment" in which investors are paid returns from other investor's money or even from their own money. There is actually no profit earned by the people running the show. Naturally for the scheme to be kept going you need an endless supply of investor's money. This can be done when the investor re-invests his or her money because understandably they are happy with the results.
So how do these schemes get found out? Well they get found out one of three ways:
1. The people behind the scheme disappear.
2. The scheme can collapse when the returns are so good that the people behind it have problems paying the returns and everything turns to custard.
3. The whole scheme gets exposed by a whistle blower or external market forces.
What is the moral of the story? If it is too good to be true, it probably is or do your own due diligence before making an investment.
Allen Stanford was the man behind this game. He had been living in the West Indies for a number of years and had grown attached the sport that is cricket. He had planned to organize five of these games with $20 million on the line for each game. Unfortunately for cricket fans and especially the England and West Indies teams only one of these games were ever played as the following year Sir Allen Stanford was arrested on suspicion of been the front man in a fraud of massive proportions called a Ponzi scheme.
I'm not here to pass judgment on whether or not Stanford is guilty or not, in fact I'm kind of hoping that he isn't as I enjoyed the first game they played and would like to see it continue, as even though the West Indies won convincingly it was still quite exciting, especially with the amount of money at stake and the fact that some of the young players in the Caribbean side were about to become instant millionaires.
So, what is a Ponzi scheme that Stanford has been accused of? Basically a Ponzi scheme is an "investment" in which investors are paid returns from other investor's money or even from their own money. There is actually no profit earned by the people running the show. Naturally for the scheme to be kept going you need an endless supply of investor's money. This can be done when the investor re-invests his or her money because understandably they are happy with the results.
So how do these schemes get found out? Well they get found out one of three ways:
1. The people behind the scheme disappear.
2. The scheme can collapse when the returns are so good that the people behind it have problems paying the returns and everything turns to custard.
3. The whole scheme gets exposed by a whistle blower or external market forces.
What is the moral of the story? If it is too good to be true, it probably is or do your own due diligence before making an investment.
Tuesday, 29 November 2011
Woo Hoo! I won some money in the lottery
Congratulations you won some money in the lottery. Unfortunately you can't buy a house in Beverly Hills or take over the world like a James Bond villain but you can make a difference in your current financial situation.
So, what should you do with the dough?
First of all pay off those bad debts. You know the ones, the credit cards that charge you a zillion percent interest or the loans on your flash car.
Secondly replenish that cash reserve that you dipped into to take the holiday to Thailand over the Christmas period. Naughty you.
Thirdly allocate some to your retirement account and your fund that you have set up for your children for educational purposes.
Finally with the remainder pay down your mortgage.
Now isn't that a great plan? Resist the temptation to buy that bigger house down the road or a flash new car or a new jet ski or some extravagant toy that you may only use a handful of times.
Of course you don't have to be 100% disciplined taking that holiday to Rarotonga is fine, just don't do it every month.
So, what should you do with the dough?
First of all pay off those bad debts. You know the ones, the credit cards that charge you a zillion percent interest or the loans on your flash car.
Secondly replenish that cash reserve that you dipped into to take the holiday to Thailand over the Christmas period. Naughty you.
Thirdly allocate some to your retirement account and your fund that you have set up for your children for educational purposes.
Finally with the remainder pay down your mortgage.
Now isn't that a great plan? Resist the temptation to buy that bigger house down the road or a flash new car or a new jet ski or some extravagant toy that you may only use a handful of times.
Of course you don't have to be 100% disciplined taking that holiday to Rarotonga is fine, just don't do it every month.
Monday, 17 October 2011
Investing in the Rugby World Cup
For many of you, the last month or so would have had you glued to the television. With the Rugby World Cup being held in New Zealand, it is great opportunity for New Zealand to showcase itself to the world. Obviously many tourists from all parts of the world are in New Zealand at the moment enjoying the various tourist attractions that are on offer. The tourists are experiencing the New Zealand hospitality and the also the culture of rugby that maybe only Wales can match. Who knows, maybe some tourists are in New Zealand to not only watch the rugby but to explore the various investment opportunities that New Zealand has. This got me thinking, which part of the rugby team would you see yourself investing in. Lets take a look.
You can divide the fifteen people in a rugby team into six groups. The front row. These guys do all the hard work. It isn't pretty and the gains are not substantial but without them the team would be like a ship without a rudder.
The locks are a little bit more visible than the props. They are winning all the ball in the lineout and are running around the field chasing the ball. They consistently put in a great effort week in and week out however they owe a great debt to the props.
The back row are some of the busiest players on the field. They are running around up in the clear and then you will see them down in the ruck. They are the guys who probably do the most running in a game. Of course they have their up moments and down moments but over the course of a match they are sensational.
In rugby the forwards and the backs are sometimes seen as two different entities. They don't seem to link at and especially on cold wet days the forwards won't let the backs see the ball. The backs are also divided up into three areas.
The halves. These guys run the show. Every good rugby team needs a good 9 and 10. They cover a decent chunk of real estate in the games and never seem to tire The famous players down the years, a lot of them come from these numbers.
The centres. In a lot of teams these guys are the real raw component that makes up the team. These guys can also have their ups and downs but any good rugby team would be poorer without the a great centre combination.
The back three. These are the pretty boys of the team. They are traditionally the ones that are the furthest away from all of the action.They are a collection of fast runners and brute strength,
So which one would you invest in? I would go for the a combination of the forwards, depending on what kind of risk I want to bear in running the ball. I would hold the ball in the forward pack and about 20% of the time let it out to the backs.
GO THE ALL BLACKS!!!!!
You can divide the fifteen people in a rugby team into six groups. The front row. These guys do all the hard work. It isn't pretty and the gains are not substantial but without them the team would be like a ship without a rudder.
The locks are a little bit more visible than the props. They are winning all the ball in the lineout and are running around the field chasing the ball. They consistently put in a great effort week in and week out however they owe a great debt to the props.
The back row are some of the busiest players on the field. They are running around up in the clear and then you will see them down in the ruck. They are the guys who probably do the most running in a game. Of course they have their up moments and down moments but over the course of a match they are sensational.
In rugby the forwards and the backs are sometimes seen as two different entities. They don't seem to link at and especially on cold wet days the forwards won't let the backs see the ball. The backs are also divided up into three areas.
The halves. These guys run the show. Every good rugby team needs a good 9 and 10. They cover a decent chunk of real estate in the games and never seem to tire The famous players down the years, a lot of them come from these numbers.
The centres. In a lot of teams these guys are the real raw component that makes up the team. These guys can also have their ups and downs but any good rugby team would be poorer without the a great centre combination.
The back three. These are the pretty boys of the team. They are traditionally the ones that are the furthest away from all of the action.They are a collection of fast runners and brute strength,
So which one would you invest in? I would go for the a combination of the forwards, depending on what kind of risk I want to bear in running the ball. I would hold the ball in the forward pack and about 20% of the time let it out to the backs.
GO THE ALL BLACKS!!!!!
Thursday, 1 September 2011
Learning from the self help master
I was reading a friend's review of a Brian Tracy book the other day. For those of you who do not know Brian Tracy, he is a Canadian self-help author. He has written many books on self development and how to get the best out of yourself. The aforementioned friend gave me a Brian Tracy book a few years ago and I have been hooked on "BT" ever since.
What struck me about this review that my friend did, was the financial independence section.The financial independence chapter as you can imagine is many pages but my friend summed it up in four lines:
1. Earn as much as you can
2. Spend as little as you can
3. Save and invest as much as possible
4. Protect yourself against unexpected reversals.
It is so simple when you look at it like that isn't it. I'm sure you remember the three pillars of financial planning:
1. Cash reserve
2. Income protection
3. Pension
These three pillars are all covered in the above summary of the Brian Tracy book. Where are you on this? Do you have a cash reserve? Do you have protection? Do you have a retirement plan? No? You better get started. Don't hold it off to tomorrow. Get started. You will be happy that you did.
What struck me about this review that my friend did, was the financial independence section.The financial independence chapter as you can imagine is many pages but my friend summed it up in four lines:
1. Earn as much as you can
2. Spend as little as you can
3. Save and invest as much as possible
4. Protect yourself against unexpected reversals.
It is so simple when you look at it like that isn't it. I'm sure you remember the three pillars of financial planning:
1. Cash reserve
2. Income protection
3. Pension
These three pillars are all covered in the above summary of the Brian Tracy book. Where are you on this? Do you have a cash reserve? Do you have protection? Do you have a retirement plan? No? You better get started. Don't hold it off to tomorrow. Get started. You will be happy that you did.
Friday, 8 July 2011
KiwiSaver
For a lot of us who have lived in Japan for a few years KiwiSaver may not be something that you are entirely familiar with. Basically KiwiSaver is a long-term savings scheme designed for retirement. It is not compulsory but from what I can see a lot of people in New Zealand are taking advantage of it. Most employees are automatically entered into the scheme when they start a new job but can opt out.
Workers contribute a small percentage of their gross pay. Most KiwiSaver schemes have a minimum contribution. If you find yourself in Japan after starting a KiwiSaver scheme you can access the funds in the scheme after a twelve absence outside of New Zealand. Of course if you do come Japan we can help you re-allocate that money from the KiwiSaver scheme into a tax-efficient offshore plan. As I have said in previous posts New Zealand tax residents have good tax benefits when it comes to offshore investments. Remember you are taxed on the assumption that your offshore portfolio makes 5% per annum. If your portfolio makes more than that then it is effectively tax free. That's a great deal.
Back to KiwiSaver, there are a whole range of investment funds available inside the KiwiSaver scheme. These range in risk from low, meaning cash to high risk. This would generally mean shares. You need to work out your risk tolerance.
Remember KiwiSaver is like a box. The most important thing is what you put in the box. What is your allocation and how much do you contribute on a regular basis.
If you are a Kiwi and living outside of New Zealand. There are alternatives to KiwiSaver where you can invest in similar things. That's what I'm here for.
Workers contribute a small percentage of their gross pay. Most KiwiSaver schemes have a minimum contribution. If you find yourself in Japan after starting a KiwiSaver scheme you can access the funds in the scheme after a twelve absence outside of New Zealand. Of course if you do come Japan we can help you re-allocate that money from the KiwiSaver scheme into a tax-efficient offshore plan. As I have said in previous posts New Zealand tax residents have good tax benefits when it comes to offshore investments. Remember you are taxed on the assumption that your offshore portfolio makes 5% per annum. If your portfolio makes more than that then it is effectively tax free. That's a great deal.
Back to KiwiSaver, there are a whole range of investment funds available inside the KiwiSaver scheme. These range in risk from low, meaning cash to high risk. This would generally mean shares. You need to work out your risk tolerance.
Remember KiwiSaver is like a box. The most important thing is what you put in the box. What is your allocation and how much do you contribute on a regular basis.
If you are a Kiwi and living outside of New Zealand. There are alternatives to KiwiSaver where you can invest in similar things. That's what I'm here for.
Tuesday, 5 July 2011
Are you an investor or a trader?
What is an investor? An investor is someone who commits capital to gain a financial return.
What is a trader? A trader is someone who buys or sells in the market. They are not particularly concerned how long they hold the stock they are simply looking to make money.
An investor wants to identify stocks that provide maximum capital growth over a long period of time.
A trader wants to make a profit without any preconceived ideas of how much time they are going to hold the stock.
An investor wants something that is predictable and shows growing earnings. They are looking for capable management and something that is reasonable. They hope that the company isn't borrowing too much money and they want the company that they are interested in to have a good cash flow.
A trader on the other hand is not particularly worried with these issues. Traders are concerned with the movement of the price of the share.
So, which one are you? I'm going to hazard a guess and say that although most of you who are reading this like the glamour of the trading section and the excitement it generates. However you may not have the necessary knowledge and skills required to be a success at this. I know I don't. Even though it's boring an yawn inducing most of your guys will be investors in which you are building capital over the long term to pay for such things as retirement, your children's school fees or even something like an overseas holiday.
Be realistic when you think about your money making strategy. Are you an investor or are you a trader?
What is a trader? A trader is someone who buys or sells in the market. They are not particularly concerned how long they hold the stock they are simply looking to make money.
An investor wants to identify stocks that provide maximum capital growth over a long period of time.
A trader wants to make a profit without any preconceived ideas of how much time they are going to hold the stock.
An investor wants something that is predictable and shows growing earnings. They are looking for capable management and something that is reasonable. They hope that the company isn't borrowing too much money and they want the company that they are interested in to have a good cash flow.
A trader on the other hand is not particularly worried with these issues. Traders are concerned with the movement of the price of the share.
An investor sells his stocks or shares when it has delivered the result the investor was looking for or the performance is looking dodgy and the risk of holding it is very high.
A trader will sell when the stock has fallen to a set point.
So, which one are you? I'm going to hazard a guess and say that although most of you who are reading this like the glamour of the trading section and the excitement it generates. However you may not have the necessary knowledge and skills required to be a success at this. I know I don't. Even though it's boring an yawn inducing most of your guys will be investors in which you are building capital over the long term to pay for such things as retirement, your children's school fees or even something like an overseas holiday.
Be realistic when you think about your money making strategy. Are you an investor or are you a trader?
Sunday, 3 July 2011
A request from a financial adviser
I mentioned in my post a couple of days ago that if you are fortunate enough to meet with a financial adviser then be prepared to answer a number of questions. This can be quite difficult for some people. A large number of us for some reason don't like talking about money and financial planning. When I was growing up it was very rare for my family to talk about it. For some families the whole idea of making money and investments is a vulgar concept and talking about it is just not a dinner table topic.
My request to you is when you meet with a financial adviser please be open with him or her. I have been in a few meetings where the client does not want to tell me anything and is only interested in "What have you've got?" This is all very well but they have given me no information at all and I can't do anything. Imagine walking into a doctor's office and the doctor asking what is wrong with you and you saying, "just give me some antibiotics." Financial advisers are there to help you. If you have given them some of your precious time then you must have some interest in what they can do for you and how you can work together, so help yourself. You don't have to tell the financial adviser everything like what you had for breakfast this morning but obviously the more information you can give the better advise you can receive.
Go into the initial meeting with an open attitude and who knows you may be pleasantly surprised. Go into the meeting with a closed, arms crossed attitude and you wasting the adviser's time and even worse you are wasting your own time.
My request to you is when you meet with a financial adviser please be open with him or her. I have been in a few meetings where the client does not want to tell me anything and is only interested in "What have you've got?" This is all very well but they have given me no information at all and I can't do anything. Imagine walking into a doctor's office and the doctor asking what is wrong with you and you saying, "just give me some antibiotics." Financial advisers are there to help you. If you have given them some of your precious time then you must have some interest in what they can do for you and how you can work together, so help yourself. You don't have to tell the financial adviser everything like what you had for breakfast this morning but obviously the more information you can give the better advise you can receive.
Go into the initial meeting with an open attitude and who knows you may be pleasantly surprised. Go into the meeting with a closed, arms crossed attitude and you wasting the adviser's time and even worse you are wasting your own time.
Saturday, 2 July 2011
RISK
Risk, one of those four letter words that the majority want to avoid. Let me tell you a little secret. Even when you get into your car to drive down to the dairy (corner store) you are taking some risk. And so when we talk about investing what your attitude to risk is very important. If you have tendency to avoid risk like the plague then you may not want to invest in emerging markets or private equity. Although it is interesting, in my work talking to people about their current financial situations I have heard many people tell me that they don't like taking any risk but that they have made investments in their best friend's flower shop. That just doesn't make sense.
So, what is risk? Well in investment it is the possibility of losing the capital you have invested.Of course there are many different types of risk:
Market risk - the fact that you are getting into investing in the first place.
Financial risk - the possibility that a company (or lets be honest, a country) may get into financial difficulties.
Liquidity risk - the risk that you can't turn your investments to cash as no one wants to buy it.
Legislative risk - the government might change the rules and leave you high and dry.
Political risk - this relates to if you are investing overseas. They might change the rules which may be detrimental to your interests.
OK, so we have looked at the different kinds of risk. Naturally if you increase the risk in your investments then there is the possibility of higher returns. There is also the possibility of the losses been higher.
Where do you sit? Are you conservative or are you going to go for it? Just make sure you know before you jump in.
So, what is risk? Well in investment it is the possibility of losing the capital you have invested.Of course there are many different types of risk:
Market risk - the fact that you are getting into investing in the first place.
Financial risk - the possibility that a company (or lets be honest, a country) may get into financial difficulties.
Liquidity risk - the risk that you can't turn your investments to cash as no one wants to buy it.
Legislative risk - the government might change the rules and leave you high and dry.
Political risk - this relates to if you are investing overseas. They might change the rules which may be detrimental to your interests.
OK, so we have looked at the different kinds of risk. Naturally if you increase the risk in your investments then there is the possibility of higher returns. There is also the possibility of the losses been higher.
Where do you sit? Are you conservative or are you going to go for it? Just make sure you know before you jump in.
Friday, 1 July 2011
You and your financial adviser
According to Investopedia a financial adviser is "A professional who helps individuals manage their finances by providing advice on money issues such as investments, insurance, mortgages, college savings, estate planning, taxes and retirement, depending on what the client requests."
A financial adviser can help you plan for your financial future. The financial adviser can help you set realistic goals and then show you ways to achieve those goals. The financial adviser can help you save for your children's education as well as help you plan and save for your retirement. The financial adviser also helps you with what type of insurance you need for your current situation.
A financial adviser can help you with all of these things however he or she does need to know some information for you. If you tell your financial adviser that you are not going to tell him or her anything about your current situation then don't be surprised if they just pack up and leave.
When you meet with a financial adviser be prepared to talk about your personal situation. For example, what you do for a living, where you live, how many children you have, also your marital status. Then they may ask what you current income and expenditure is as well as ask various questions about your balance sheet. What investments you have now, what loans you have and how much money you have in a current bank account.
A financial adviser will then take all of that information, they will look at where you are now and where you want to be and then build a plan that hopefully gets you on the road towards your final goal.
Choose your financial adviser wisely and that should guarantee a long and profitable relationship.
A financial adviser can help you plan for your financial future. The financial adviser can help you set realistic goals and then show you ways to achieve those goals. The financial adviser can help you save for your children's education as well as help you plan and save for your retirement. The financial adviser also helps you with what type of insurance you need for your current situation.
A financial adviser can help you with all of these things however he or she does need to know some information for you. If you tell your financial adviser that you are not going to tell him or her anything about your current situation then don't be surprised if they just pack up and leave.
When you meet with a financial adviser be prepared to talk about your personal situation. For example, what you do for a living, where you live, how many children you have, also your marital status. Then they may ask what you current income and expenditure is as well as ask various questions about your balance sheet. What investments you have now, what loans you have and how much money you have in a current bank account.
A financial adviser will then take all of that information, they will look at where you are now and where you want to be and then build a plan that hopefully gets you on the road towards your final goal.
Choose your financial adviser wisely and that should guarantee a long and profitable relationship.
Wednesday, 18 May 2011
Your cash surplus and balance sheet
When you are doing an "audit" of your current financial situation two things are important:
1. What surplus income do you have at the end of the month?
2. What assets do you have? In other words what is in your balance sheet?
You surplus income is the money you have left over when you have paid all your bills and had a good time. So for example at the end of the month you have $1000 left in your bank account. What can you do with this? You could save it in the bank. If you are living in Japan this will get you next to no interest. 0.1% or something like that. My advice would be to invest some of it. Not all of it but maybe a maximum of 50% of it. This of course in some kind of investment that suits your risk profile and your time line.
When you are going through your balance sheet there are three sections you should include:
1. Fixed Assets
2. Medium Term Assets
3. Current Assets
Your fixed assets are for example your house, any investment property you may have, another example would be do you have any private equity investments? These assets are generally classified by the fact that they can take a significant period of time to turn into cash.
Your medium term assets are anything that is building for your future. For example retirement plans, saving plans, stocks (shares), long term cash deposits etc.
Your current assets are your cash in the bank or under the pillow whichever the case may be.
When you add up these numbers you will get an understanding of your net worth.
Next time we will look at these numbers and see how they fit into your financial plan.
1. What surplus income do you have at the end of the month?
2. What assets do you have? In other words what is in your balance sheet?
You surplus income is the money you have left over when you have paid all your bills and had a good time. So for example at the end of the month you have $1000 left in your bank account. What can you do with this? You could save it in the bank. If you are living in Japan this will get you next to no interest. 0.1% or something like that. My advice would be to invest some of it. Not all of it but maybe a maximum of 50% of it. This of course in some kind of investment that suits your risk profile and your time line.
When you are going through your balance sheet there are three sections you should include:
1. Fixed Assets
2. Medium Term Assets
3. Current Assets
Your fixed assets are for example your house, any investment property you may have, another example would be do you have any private equity investments? These assets are generally classified by the fact that they can take a significant period of time to turn into cash.
Your medium term assets are anything that is building for your future. For example retirement plans, saving plans, stocks (shares), long term cash deposits etc.
Your current assets are your cash in the bank or under the pillow whichever the case may be.
When you add up these numbers you will get an understanding of your net worth.
Next time we will look at these numbers and see how they fit into your financial plan.
Tuesday, 10 May 2011
Investing 101 (Part 4)
We now have a good understanding on the different asset classes. As a reminder they are:
1. Cash
2. Bonds
3. Equities
4. Property
5. Commodities
6. Collectibles
As a financial adviser unfortunately I can not tell you which asset class to put all your money in. Obviously the best way to make money would be to put it all in the one asset class that goes up the most. Unless you have a crystal ball it would be almost impossible to predict what asset class that is. (If you do have a crystal ball, may I borrow it for a couple of days please?)
So what I can tell you that in the short term I do not know what asset class will go up the most. But what I can say is that over the medium to long term equities should always outperform bonds and bonds should always outperform cash. If this doesn't happen then the whole capitalist system is on the way out.
My job as a financial adviser is to find out about your current situation and then to blend your assets to meet your short, medium and long term financial goals.
1. Cash
2. Bonds
3. Equities
4. Property
5. Commodities
6. Collectibles
As a financial adviser unfortunately I can not tell you which asset class to put all your money in. Obviously the best way to make money would be to put it all in the one asset class that goes up the most. Unless you have a crystal ball it would be almost impossible to predict what asset class that is. (If you do have a crystal ball, may I borrow it for a couple of days please?)
So what I can tell you that in the short term I do not know what asset class will go up the most. But what I can say is that over the medium to long term equities should always outperform bonds and bonds should always outperform cash. If this doesn't happen then the whole capitalist system is on the way out.
My job as a financial adviser is to find out about your current situation and then to blend your assets to meet your short, medium and long term financial goals.
Saturday, 30 April 2011
Investing 101 (Part 3)
So we know about cash, bonds and equities. Let's have a look at the following three asset classes.
4. Property or as some people like to call it, real estate, is the asset class of the tycoon. When I write that my mind immediately goes to Donald Trump who would have to be one more famous property guys in the world if not the most famous. When you look at very rich people's portfolios you would see that a great deal of it is in property. Remember when you invest in property you don't necessarily have to invest in the actual property. You can get exposure to property in funds and the like. So if you don't like fixing toilets at 3am on a cold wintry Tuesday morning then that might be the way to go for you.
5. Commodities are your raw materials. These are things like oil, wheat, even currency is a commodity. Basically anything that can be bought and sold on an exchange. Commodities can be very volatile and are considered a nil sum game. This is where if you are making money through commodities then someone else is losing it.
6. Collectibles are just that, things that you collect that if sold could make you a great deal of money. Examples are paintings are considered collectibles. Your huge wine cellar could be considered as a collectible. What about your collection of vintage cars? Of course. So, if you have a Rembrandt hanging on your wall then you could finance your (very good) retirement on that but you would need a lot of knowledge for that.
Finally I must talk about Alternative Investment Strategies. These are things such as hedge funds. Some people consider it a asset class in itself but in theory it is another way of managing your money.
We have gone through the different asset classes. Next time let's see how it all fits together.
4. Property or as some people like to call it, real estate, is the asset class of the tycoon. When I write that my mind immediately goes to Donald Trump who would have to be one more famous property guys in the world if not the most famous. When you look at very rich people's portfolios you would see that a great deal of it is in property. Remember when you invest in property you don't necessarily have to invest in the actual property. You can get exposure to property in funds and the like. So if you don't like fixing toilets at 3am on a cold wintry Tuesday morning then that might be the way to go for you.
5. Commodities are your raw materials. These are things like oil, wheat, even currency is a commodity. Basically anything that can be bought and sold on an exchange. Commodities can be very volatile and are considered a nil sum game. This is where if you are making money through commodities then someone else is losing it.
6. Collectibles are just that, things that you collect that if sold could make you a great deal of money. Examples are paintings are considered collectibles. Your huge wine cellar could be considered as a collectible. What about your collection of vintage cars? Of course. So, if you have a Rembrandt hanging on your wall then you could finance your (very good) retirement on that but you would need a lot of knowledge for that.
Finally I must talk about Alternative Investment Strategies. These are things such as hedge funds. Some people consider it a asset class in itself but in theory it is another way of managing your money.
We have gone through the different asset classes. Next time let's see how it all fits together.
Sunday, 24 April 2011
Investing 101 (Part 2)
Last time we were introduced to the six asset classes. So let's have a look at each of them.
1. Cash - Cash is a means of exchange and a store of value. You put your money in the bank for example and they pay you interest at a rate that is just above inflation. In Japan that is very little with interest rates advertised at some places as being 0.1%. Not really the deal of the century.
2. Bonds are when you lend your money to the government or some company. They pay you interest and at the end of the term they return your money. Bonds generally pay interest higher than the bank because naturally if they didn't then any would-be investor would choose the bank as the bank has a reputation of being a little bit more safe and secure.
3. Equities - Equities or stock or shares depending on what part of the world you are in are an example of investing where you become owner or part owner of a corporation. You participate in the profit and loss of that company.
These three asset classes are linked. They are linked by three things, first of all they are linked by inflation which is the rise of the cost of goods and services over time. They are linked by time and they are linked by your base currency. Your base currency is the currency of the likely end use of your money. For example if you are saving for your retirement in Hawaii then your base currency would be American dollars. If you were saving for your children's education in Sydney then the Australian dollar would be your base currency.
Next time we will go through the final three asset classes and we will see how they all work in the financial planning process.
1. Cash - Cash is a means of exchange and a store of value. You put your money in the bank for example and they pay you interest at a rate that is just above inflation. In Japan that is very little with interest rates advertised at some places as being 0.1%. Not really the deal of the century.
2. Bonds are when you lend your money to the government or some company. They pay you interest and at the end of the term they return your money. Bonds generally pay interest higher than the bank because naturally if they didn't then any would-be investor would choose the bank as the bank has a reputation of being a little bit more safe and secure.
3. Equities - Equities or stock or shares depending on what part of the world you are in are an example of investing where you become owner or part owner of a corporation. You participate in the profit and loss of that company.
These three asset classes are linked. They are linked by three things, first of all they are linked by inflation which is the rise of the cost of goods and services over time. They are linked by time and they are linked by your base currency. Your base currency is the currency of the likely end use of your money. For example if you are saving for your retirement in Hawaii then your base currency would be American dollars. If you were saving for your children's education in Sydney then the Australian dollar would be your base currency.
Next time we will go through the final three asset classes and we will see how they all work in the financial planning process.
Monday, 18 April 2011
Investing 101 (Part 1)
Buy low and sell high. Beat inflation in your base currency. These are the basic things to be focused on when you start investing. You buy when the market is low and sell when it is high. That is easier said than done. Many people say they will wait until the market gets better before they will start to do anything. Fair enough but you could miss your chance to make that real killing so to speak. How many people would have had the guts to invest money in February/March 2009? I would say not many.
Anyway I'm getting ahead of myself. There any many different investment products out there and the choice can be overwhelming which is why some people hire financial planners to help them. They don't have the time or expertise to do it themselves.
Don't be intimidated by the many hundreds of investment brochures out there. If you open them all and go through them you will find that they invest in six different asset classes. These asset classes are:
1. Cash
2. Bonds
3. Equities (stocks or shares)
4. Property (Real estate)
5. Commodities
6. Collectibles.
Next time we will look at each of these separately.
Anyway I'm getting ahead of myself. There any many different investment products out there and the choice can be overwhelming which is why some people hire financial planners to help them. They don't have the time or expertise to do it themselves.
Don't be intimidated by the many hundreds of investment brochures out there. If you open them all and go through them you will find that they invest in six different asset classes. These asset classes are:
1. Cash
2. Bonds
3. Equities (stocks or shares)
4. Property (Real estate)
5. Commodities
6. Collectibles.
Next time we will look at each of these separately.
Saturday, 9 April 2011
Kia Kaha 頑張れ
It has been a very unforgettable six weeks since my last post. When I use the word unforgettable I don't use it in a good sense. Firstly Christchurch in the South Island of New Zealand was rocked by it's second major earthquake in six months. Almost 200 people from all over the world lost their lives in this tragedy. With New Zealand being such a small country most Kiwis knew someone who was directly affected by the earthquake. The New Zealand community here in Japan was shocked by this but little were they to know that that wasn't the end of the story.
Mid afternoon on Friday the 11th of March 2011 will not be forgotten by the people who experienced the biggest earthquake in Japanese recorded history. The earthquake centred off the north eastern coast of Honshu created a massive tsunami which devastated the Tohoku area. At the time of writing more than 10,000 people have been confirmed dead and more than 20,000 are still missing. I can not begin to comprehend the suffering and shock that the residents of this area are experiencing at the moment. I only hope that the people of Tohoku can get their lives back to normal sooner rather than later. Watching the pictures on television reminded me of the force of Mother Nature and how insignificant we really are. Also the things we worry about on a daily basis are minuscule compared to challenges the people of Tohoku are going to face in the coming months.
Kia kaha Christchurch.
頑張れ東北。
Mid afternoon on Friday the 11th of March 2011 will not be forgotten by the people who experienced the biggest earthquake in Japanese recorded history. The earthquake centred off the north eastern coast of Honshu created a massive tsunami which devastated the Tohoku area. At the time of writing more than 10,000 people have been confirmed dead and more than 20,000 are still missing. I can not begin to comprehend the suffering and shock that the residents of this area are experiencing at the moment. I only hope that the people of Tohoku can get their lives back to normal sooner rather than later. Watching the pictures on television reminded me of the force of Mother Nature and how insignificant we really are. Also the things we worry about on a daily basis are minuscule compared to challenges the people of Tohoku are going to face in the coming months.
Kia kaha Christchurch.
頑張れ東北。
Thursday, 17 February 2011
Tuesday, 15 February 2011
Financial Planning Basics
When you are thinking about basic financial planning there are three things that you should be aware of. Firstly your cash reserve. Do you have enough money that if you lost your stream of income tomorrow or next week then you have enough to survive and pay your expenses for three, six, twelve months? This money should be in an easily accessible bank account. Don't invest it, don't put it in a term deposit for twelve months, make sure that it can be easily turned to cash.
The second thing you should be aware of is income protection. What happens to you and your family if tomorrow you have some kind of accident and you can't work? If you have some kind of income protection insurance and you have a cash reserve then you shouldn't have any problems. Your cash reserve looks after you for the waiting period in your income protection policy and then the income protection policy looks after both you and your family while you can't work.
The final basic financial planning step is to have some kind of pension. Money from your disposable income that you are putting away for when you want to slow down and stop work. A good rule of thumb is never invest more than 50% of your disposable income as you might run into a problem at some stage and if all of your disposable income is going into some sort of pension then you might run into more problems.
If you meet with a financial planner then at the very least he or she should go through these areas with you.
The second thing you should be aware of is income protection. What happens to you and your family if tomorrow you have some kind of accident and you can't work? If you have some kind of income protection insurance and you have a cash reserve then you shouldn't have any problems. Your cash reserve looks after you for the waiting period in your income protection policy and then the income protection policy looks after both you and your family while you can't work.
The final basic financial planning step is to have some kind of pension. Money from your disposable income that you are putting away for when you want to slow down and stop work. A good rule of thumb is never invest more than 50% of your disposable income as you might run into a problem at some stage and if all of your disposable income is going into some sort of pension then you might run into more problems.
If you meet with a financial planner then at the very least he or she should go through these areas with you.
Tuesday, 8 February 2011
Offshore taxation for New Zealand residents
I am asked a number of times about taxation of offshore investments when you go back to New Zealand and become a tax resident. There are many conditions about what constitutes a tax resident or a non-tax resident. This is out of the sphere of this article but lets just say for argument sake you return to New Zealand and become a tax resident and for argument sake you have a large proportion of your portfolio in offshore investments which you have acquired during your time overseas.
So how is this portfolio taxed? I called the IRD and asked and this is what they said:
Well, first of all New Zealand residents are taxed on their worldwide income so don't think that you can hide it away. They'll find it. You are liable to pay tax on your offshore portfolio if it is over $50000. There are exceptions to this with the major one being if the investments are Australian based.
Secondly, the IRD use a system called the Fair Dividend Rate. It assumes that you have received 5% interest on your investments. For example, if your portfolio is worth $100,000 they the IRD will assume that you have received $5000 and then you are taxed accordingly. If your offshore investments gains more than 5% for example 10%, then you are only taxed on 5%. If it is less than this it will be taxed at a lower rate. I asked the IRD on the phone if my portfolio makes 50% then am I only liable for 5%, which the nice man on the phone answered in the affirmative.
All in all this is good news for New Zealand investors. Also the fact that the New Zealand government lowered the income rates on October 1st, 2010 and offshore investing for Kiwis is looking more and more attractive.
So how is this portfolio taxed? I called the IRD and asked and this is what they said:
Well, first of all New Zealand residents are taxed on their worldwide income so don't think that you can hide it away. They'll find it. You are liable to pay tax on your offshore portfolio if it is over $50000. There are exceptions to this with the major one being if the investments are Australian based.
Secondly, the IRD use a system called the Fair Dividend Rate. It assumes that you have received 5% interest on your investments. For example, if your portfolio is worth $100,000 they the IRD will assume that you have received $5000 and then you are taxed accordingly. If your offshore investments gains more than 5% for example 10%, then you are only taxed on 5%. If it is less than this it will be taxed at a lower rate. I asked the IRD on the phone if my portfolio makes 50% then am I only liable for 5%, which the nice man on the phone answered in the affirmative.
All in all this is good news for New Zealand investors. Also the fact that the New Zealand government lowered the income rates on October 1st, 2010 and offshore investing for Kiwis is looking more and more attractive.
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