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The Fierce Girl's Guide to Finance

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IWD2017: 4 grown-up things every woman should do with her money

Yay, it’s International Women’s Day! What are we going to do to celebrate?

We could start a bloody revolution that changes the course of history for the century. Oh wait, that’s already been done – by the Russians in 1917. Yep, for realz. The revolution kicked off when thousands of women took to the streets protesting against food shortages on IWD 100 years ago.

There was no hashtag for it then, and not even a Snapchat story, so did it even happen?

But anyway don’t let me get started on history stuff because I won’t get to the real point. And that is:  equality means equal pay and equal opportunity, and we don’t have either of those yet.

I don’t really want to delve into the 17% pay gap issue – or more concerningly, the huuuge gap between men’s and women’s super balances (up to half, in some age groups).  But they exist, they suck and they appear to be stubbornly sticking around.

But those stats are averages, and we all know that Fierce Girls don’t care about averages. We defy averages. And so here is the Fierce Girl’s Guide to being a grown-up woman who tells the patriarchy to go back to the 20th century where it belongs.

1. Get serious about tracking your spending. I have been resistant to this whole idea for years. I am not that kind of girl. But then I got to my last payday and had seriously messed up cashflow issues. (Yep, I am far from perfect with money).

Thing is, I didn’t feel like I spent much. Sure I had to pay rego and stuff for my car, and it was holidays etc. But seriously where did my cash go? So I downloaded the MoneySmart TrackMySpend app (totally free, thanks Government!) and started recording.

And then I realised that this exercise is life-changing in the same way as keeping a food diary. When you have to write it down, you don’t want to spend/eat it. It’s a serious accountability tool.

And so, it’s not until you create some proper boundaries and systems that you can truly get on top of things.

2. Get your super sorted. I know, super is dull and stuff, but it really, really makes a difference when you get onto it early. And it’s a quick and easy adult task you can tick off.

If you only do one thing, find your forgotten super and roll it into one account (speak to your fave super fund and they will likely do it for you).

If you do two things, make sure your fund has all your correct details and check how much you have saved. Knowing the amount can really make it feel like real money that you own.

And if you get really effing excited, review your investment option. Are you taking on the right level of risk for your age? If you’re under 45 or so, you might want to boost returns with a more aggressive approach. But I’m not qualified to tell you that – call your fund and ask them.

And finally, at Defcon 5 level of super enthusiasm, put some extra money in! Did you know any amount you put in from your pre-tax salary gets taxed at 15% – instead of your income tax rate of up to 47%?

Anyway, I have a whoooole post about super – one of my fave topics – that I would point you to.

3. Have a separate, possibly secret, stash of money. If you’re a single gal, this is simple – just put a bit away, every pay, into a separate account that has an extra level of irritation to access e.g. a separate online bank or a term deposit. Just as long as you can’t crack into it for a 2am round of shots or for a mid-arvo premenstrual retail therapy session.

This is money to buffer you against the slings and arrows of outrageous fortune.

If you’re coupled up, just make sure it’s separate. You need something that you can call on if the relationship goes south. Whether it’s secret is up to you. Marriage vows, trust, partnership – I get it, they matter. Totes up to you. Just have the cash, one way or another.

Oh, right, here’s a post about this very issue. (Just be careful your ex-husband and his lawyer don’t read it and accuse you of hiding assets in your divorce settlement) (and yes that actually happened).

4. Learn some stuff about money and investing and finance. This stuff might seem a little boring. And it is, I guess, compared to iPanda – an entire website dedicated to baby pandas (which I HIGHLY recommend).

However, can a panda cub give you security, opportunities and choices? No, only cash money can do that. So take an interest. Read some blogs like this or Financy. Listen to podcasts like Freakonomics or Planet Money. Maybe even check out the personal finance or  business sections of the newspapers.

Knowledge is power, and money is power. So put those together and you will be a total bad-arse WonderWoman, wielding a calculator and making it rain.

Also, talk to your girlsquad about this stuff. As much as it’s important to discuss the hotness of young Justin Trudeau, it’s also useful to share your tips, challenges and ideas about money. And to support their money goals. (Oh wait, here’s another blog I prepared earlier!)

So, the message here is simple. Being empowered requires money. And the better you are at managing that money, the more we will be worthy of all the opportunities and privileges our foremothers fought for. So go forth and be fierce!

 

4 reasons you can stop panicking about buying a home

Sometimes it feels like all money conversations come back to this issue. Can I buy my own home? Will I be a failure if I don’t? Can I ever afford one?

And it’s not a daydreamy, hypothetical convo, like ‘What if I called my kid Joaquin? Would people know how to pronounce it? Did the Pheonix family really lay the groundwork here?”.

No, the tone is more like ‘Will I die in a gutter, languish in poverty, or be photographed collecting mail in nothing but a bedsheet, if I don’t get onto the property ladder?’.

There is a sense of panic, as if not hobbling yourself with a million dollars in debt means you will end up on the scrapheap of life.

So let’s all just take a moment and STOP PANICKING. People who panic don’t make good decisions. You know that dress you bought the day before a high-stakes date with Mr Future Husband? Let’s admit: you’ve never worn it again.

Instead, let’s have some realtalk about property, saving and wealth.

Because there are more ways to build wealth than buying a house.  Property is just one ‘asset class’, as the professionals call them. There are many more (read a whole post about it here) and they are all viable ways to build wealth.

However, there are some valid reasons that people go nuts for property in Australia. For example:

  • It can increase in value without you doing anything (aka ‘capital growth’)
  • It is easy to borrow money, because it’s a secured asset. In other words, the bank can repossess it if you go broke, to get its money back. It’s more complicated for banks to do that with something likes shares.
  • You get great tax breaks. If you sell the home you live in and make a profit on it, you don’t have to pay capital gains tax on that profit. If you did the same with any other investment – e.g. shares, bonds or an investment property – you would. And then there is the old negative gearing heist (which I won’t go into here – but basically the government rewards you for losing money – wtf?).
  • You get to live in it and nobody can kick you out. You can also renovate and hang hooks and shit. (Although why anybody in their right mind would renovate is beyond me. Dust, paint splatter and interminable trips to Bunnings. Lord give me strength).

These are all compelling reasons that I acknowledge warmly. I own property and it has been a good investment.

But here are some downsides that don’t get a lot of airplay, especially in the media.

By the way, the mainstream media has a huge vested interest in talking up property. Ever notice those thick, glossy real estate liftouts in the paper? Yep, they are rivers of gold for media companies, so it’s not in the interests of News Ltd, Fairfax or their mates to say ‘hold up, property is totes overrated!’, is it?

But here are some counterpoints to the national narrative.

1. You pay a huge amount of interest over the life of a mortgage

This graph is from an earlier post (which you should also read). I include it here to defy the people who say ‘renting is just giving money away to someone else’. Well, Mr Mansplainer, a mortgage is just giving  interest payments to a bank.

Say you borrow $500,000 over 25 years, you will pay nearly $300,000 in interest (at 4%, which is a historically low rate in this country). That interest amount is represented by the light pink below.

Source: Moneysmart.gov.au

Source: Moneysmart.gov.au

Hopefully the property increases in value so you make some of that money back. But it’s not guaranteed. Which brings me to the next point.

2. House prices don’t always go up

I know, they do in your living memory, and certainly in the last few years. Mr Mansplainer may even tell you ‘house prices double every seven years’.

HOWEVER, this somewhat dubious assertion is based on averages, which don’t tell the whole story. You know, your ex-boyfriend was only an arsehole to you half the time, on average. But that didn’t make it worth staying with him.

Don’t just take my word for it – take the Reserve Bank’s! I know you won’t read their paper on the topic, so let me summarise. House prices rise faster and slower depending on other stuff going on in the economy.

But over the long-term, that shit is all over the place. The graph below gives you an idea of how house prices resemble a 5-year-old kid high on fairybread and Cheezels at a birthday party.

screenshot-2017-02-26-at-11-28-45-am

 

 

 

 

Source: RBA (which is why it’s crappy low-res). NB: This shows prices when inflation is removed. 

So it depends on when you bought, and also where you bought. And so we come to another point.

3. Picking property is a lottery

When we talk about property going up by, say 7% a year, that’s averaged out across the country. It masks the fact that some people bought gems, while others bought dogs.

Maybe they paid too much in the first place. Maybe they bought in an area that hasn’t gone up much, or worse, in an area that has gone down. Places like Mackay or Townsville boomed as a result of mining a few years back. Now, they have bust, with prices actually dropping.

Here’s a real-life example. A couple I know, let’s call them Kylie and Jim, bought a new house in an estate in Townsville in 2004. They paid $254,000.

Five years later, having been sent interstate for work, they sold it for $379,000, netting them a tidy profit of $125,000 (less taxes and costs). Nice deal.

That same house sold this year for $340,000.

Yep,  eight years later, it sold for nearly $40,000 LESS than it did in 2009.

Kylie and Jim were just lucky that they caught the cycle on its way up, and got out before it went down.

If you live somewhere like Sydney right now it’s easy to feel like there is only one direction and pace for prices: up and fast.

But I know another couple with an investment property on Brisbane’s outer edges, whose property value has grown at about the same pace that I lose fat, i.e painstakingly slowly.

I did some sums on it and the capital growth has been about 2.5% a year. That’s not taking into account the extra money they need to find every month for the mortgage, because it’s negatively geared.

The moral of this story is not that Queensland property is a mug’s game. It’s not – plenty of people have done well there, and all over Australia.

The point is that there is a good deal of luck and timing involved in buying property. The same is true of any asset class. But don’t look at the headline figures and decide buying a property is a rolled-gold, surefire way to get rich. As with any investment, there are risks.  And so, to the next point…

4. We may be in a property bubble – and it could burst

Now I am not a crazy doomsayer. I am only saying we might be in a bubble.

But some people are convinced of it. Here’s a chart of house prices since the 19th century from a blog called macrobusiness (they are a little ‘out there’, but I read widely). All the labels on it are theirs, btw.

Source: Macrobusiness
screenshot-2017-02-26-at-1-21-26-pm

 

 

 

A while back, I fan-girled Greg Medcraft, the head of ASIC (our corporate watchdog in Australia). He was on the 389 bus to Bondi, so I went up to him and started chatting about property bubbles. (True story, I swear). He said words to the effect that when people are in a bubble, they’re in denial about it.

“This time it’s different”, they say – like an ex-boyfriend who’s trying to win you back.

For my mate Greg, this market looks, smells and tastes like a bubble. And that was 2015, before we hit the point of a $1 million median house price in Sydney.

Other people disagree, and point to population growth, lack of supply and a bunch of other factors driving prices ever upward. I see their point too.

The fact is, nobody knows for sure.

If house prices stay high, there are benefits, mainly to people who already own them.

If house prices fall, the economy will definitely suffer – but it will also mean aspiring buyers get a better shot at affording something.

Either way, you shouldn’t give up on the idea of buying your own pad eventually. Which brings me to…

One last (very important) thing. 

If you can’t afford a property yet, that doesn’t mean you can piss your money away in protest or despair.

There are plenty of options for building wealth (check out this post). But you have to get serious about saving and investing to do it (check out this post about the four best friends who will make you rich).

Just because you don’t have a white picket fence doesn’t mean you can’t be a serious money saver or investor.

It doesn’t matter how much you have, saving and investing is a mindset and a habit. So work on that and ignore the noise about house prices, smashed avo and property bubbles.

You’ve got this!

If you liked this post, you could totally sign up to receive more! I post every week and you might not always see them on Facebook (because something something algorithm). So pop your email address in that box up top. Thanks! 

photo credit: ruimc77 Burbujas via photopin (license)

Why the baby boomers have all the money, and what we can do about it

I love my parents, and my parents’ friends and all the wonderful baby boomers in my life.

But geez they annoy me as a generation.

Swanning around in million dollar properties they paid 25,000 bucks for. Earning a tax-free income in retirement. Cashing in on their free university qualifications without a HECS debt in sight.

Baby boomers account for 25% of the population but own 52% of the wealth. They built their careers and wealth over an unprecedented period of economic growth.

Did you know we’ve now had more than a hundred quarters of positive growth? This is like having a hundred consecutive days of perfect dieting with no accidental chocolate incidents – i.e. practically unheard-of. (I admit we have lived through this period too – but with a lower base of assets to grow from).

Sure they had the recession in the 90s and the 1987 stockmarket crash. They had to live through skinny jeans before lycra was invented, and they didn’t get to play Where in the World is Carmen Sandiego at school. I’m not saying their lives were perfect.

But they have done ok, and Smashed Avo-gate brought this simmering divide to the surface. It’s partly because the world has changed so quickly, so deeply. Home ownership used to be an expectation for any adult with a job and a bank account. It’s now a mythical place of $100,000 deposits, heartbreaking auctions and million-dollar median prices.

The luckiest among us will get help from our parents. Others have parents who can’t or won’t contribute, creating a further divide.

So, what can we do about it? How can we stop those greedy (but totally loved and appreciated!) baby boomers from stealing our futures?

Don’t get mad, get even. And get advice.
Investment Trends says baby boomers account for four in five dollars under advice (i.e money being looked after by financial advisers). That means they are out there getting financial advice while all of us suckers are messing around reading The Fierce Girl’s Guide to Finance. JK! That’s a great idea!

But it might not be enough. I’m not a profesh, and I can’t tell you what’s best for your circumstances.
Sure, advice isn’t free, but it is an investment. Do it early, do it right and it will pay dividends in future. It’s like the difference between messing around at the gym on your own and losing half a kilo in six months, or getting a PT and dropping 5kg in six weeks.

And just like paying a PT makes you really think twice about eating that piece of cake (because hey, you just dropped 80 bucks on a workout), getting a financial plan can make you much more focused and disciplined. If you want to find a good one, my homegirl Nicole P-M has a good column about this.

If you still don’t want to stump up for the full box and dice, you could look at a digital option – aka Robo-advice. Decimal and Stockspot are some of the bigger players (but I haven’t used them so can’t provide a recommendation).

Take Baby Boomer advice with a very big grain of salt. The stuff our parents did to get ahead was done in a different world. Back in the 80s you could get 15% interest for sticking money in the bank. Inflation could be up to 10% as well, but worst case scenario, that’s still a 5% gain.

The best you can hope for today is a 3% interest rate if you shop around. Inflation has been hovering around 2%. So, that’s a big old 1% gain for stashing your money in a bank. (Don’t understand the inflation thing? Check out this post).


Before 2008, the world hadn’t heard of quantitative easing (i.e. governments printing money) or negative interest rates (an actual thing). Now, bank deposits barely keep up with anaemic inflation rates (and in countries like Switzerland you have to pay the bank to look after your money, thanks to negative interest rates. I shit you not).

Buying property was a stretch, but a sure bet for building wealth. You could probably even do it on one income. Today, a mortgage that’s 6 or 8 times the average income means you both work and possibly pay for childcare too. And the stockmarket generally doesn’t deliver the double-digit returns it did back then.

The finance industry calls this a ‘low growth, low return’ world.
So hey, thanks boomers for setting that up!

I’m sorry that have no good news for you on this front. It’s going to be like this for a while yet.
What it does mean is that taking advice from your folks can be tricky. They’re in a different headspace (in retirement or close to it) and need to focus on protecting their nest egg.


But we don’t.


There’s a concept called ‘pushing up the risk curve’ – it means that you take on more risk in order to chase higher returns. Instead of buying bluechip stocks you buy cheaper, more speculative ones. Instead of investment grade bonds you buy unrated ones. Instead of buying fixed interest bonds, you buy shares with high dividends.


Remember when you first start drinking alcohol and it took you two Bacardi Breezers to get hammered? But as you increase your ‘piss fitness’ you need a whole six pack and some shots to get to ‘hilarious drunk shenanigans’ level.

Similarly, we need to take more risk in this environment to get the same returns as before.


I am NOT saying go to Vegas and put it all on black. I am NOT saying attend a property spruiker seminar that promises you vast riches if you sign up RIGHT NOW, TONIGHT ONLY!

What I am saying is that we may need to look at something more aggressive than a bank account. Buying bank shares because your dad says they’re good? Maybe not. Buying an investment property because your parents made a killing on a Gold Coast apartment circa 1994? Maybe think twice.

The good thing is, we are young. We can tolerate more risk. If we go backwards we have many more years to go forward.

So just make sure you run any well-meaning advice through a filter, the same as you would when your mum gave you fashion advice as a teenager. (On second thoughts, my mum probably had some useful insights then). 

And short of just asking your folks to stump up funds for a house deposit, I don’t have a lot more advice than this: save more, spend less. That’s what a lot of our parents did. My family ate at the Yarrawarrah Windmill Chinese Restaurant once in a while, but that was the eating out budget. They didn’t get a new iPhone every two years. We had the world’s shittiest cars (Subaru Enduro – wtf). They never took to us to Disneyland. And that’s how my parents ended up paying off the house.

So, take the best bits of the boomers, ignore all the cushy tax breaks they’ve made for themselves, and crack on with you own money goals.

 

Tears, fights and vomit: why economics is as fun as your 21st birthday

Think you don’t like economics? Oh stop, I know: you fell asleep just hearing the word. I used to as well. But somehow I actually learned to love it.

It was kinda like that nerdy guy who grows on you – the more you get to know him, the more he seems surprisingly sexy.

Wait, is that just me? Sorry. Anyway, there are a few concepts that shape your life more than you know; understanding them can help you with your own money.

Also, being able to converse about economics is a great party trick. Not as good as doing The Worm, but I can’t do that anyway … so here I am in the corner, drinking martinis and discussing central bank policy.

martini

Here’s how you can be that cool too.

The lowdown on interest rates

Interest rates have a big impact on your life because they’re tied up with property prices, and therefore how much money you have to spend or save once you’ve put a roof over your head. (I have another post about this topic, but it’s already outdated because bloody Taylor Swift can’t keep a boyfriend – read it here).

The thing to remember is that interest rates are both a cause AND an effect. The Reserve Bank of Australia (our central bank) uses them to influence economic growth, but they only do this in response to other trends.

For example, the RBA will raise interest rates to ‘cool’ the economy, when inflation is running high and wages are growing too fast – what’s known as a ‘wages breakout’.

(How awesome does that sound though? Like, somehow our paypackets go nuts and party hard and we all end up as total ballers driving Porsches). Apparently, however, this is NOT A GOOD THING.

When things go too hard, too fast and too enthusiastically, they end in disaster, and you’re lying there like ‘Wait, what? Are you done already?’.

Obviously I am talking about inflation (get your mind out of the gutter). High inflation is bad because it reduces the value of your money, drives prices up and creates general chaos in the economy.

It’s not ideal when it’s too low either, as wages stagnate and the economy slows. Basically, inflation is like a fucking needy pedigree cat who only wants the exact right amount of food in the exact right bowl at the exact right time of day. So the RBA tries to tame it with interest rate policy.

Interest rates and housing affordability – aka ‘why am I destined to rent forever?’

I bet you’ve heard your parents complain about  the 1990s, when interest rates climbed as high as 17.5% (compared to 1.5% today).

I know right! Apparently there was more to worry about in the 90s than whether Pearl Jam’s second album could possibly be as good as Ten (It wasn’t. Like, it was good, but no Ten).

pearl-jam

Anyway, they have probably told you this in the context of ‘But we had it so hard when we bought a house‘ and ‘we had to walk six miles to school, through the snow, in bare feet.’

If they try this on you, feel free to point out that yes, rates were higher, but the amount you had  borrow was miniscule compared to now. A handy chart from the Government shows the price of a house in the 90s was about four times the median income. It’s now six times that.

housingaffordability01

So what has made prices rise so much?

There are lots of factors such as population growth and land supply.

But loose monetary policy is also to blame. And no, I’m not implying anything about the morals of said policy – it is actually talked about in terms of ‘easing’ or ‘tightening’, as though it’s some sort of screwdriver. (Obvs invented by men.)

When shit gets real at your party

When the GFC swept through, economic growth fell off a cliff. Business and consumers stopped spending money because they were totally freaking out.

So how does a central bank convince you to spend again? They cut rates. The lower rates are, the cheaper it is for businesses to borrow money and invest it in things that create jobs.

Since the GFC, the central banks of the world have been using low interest rates to pump more money into the economy and make it grow.

This is like walking into a 21st birthday party and giving everyone tequila laybacks on the dancefloor – it will definitely liven up the party, but you can’t predict exactly how.

Well, we can make general predictions: someone will vomit over the balcony; at least two girls will cry; and there will be a punch-on among the boys. Standard.

Similarly, when interest rates go down, house prices go up  because more people can afford to get a home loan. Other asset prices often go up too – like the stock market – for the same reason.

In the same way that tequila makes everyone feel super hot and ridiculously charming, low interest rates make people feel rich – like they could go to a strip joint and make it rain.

But you know how at a certain point, you can’t drink anymore? You’re too drunk, too sick or too tired, so you lie on the nature strip and have a little ‘rest’. That’s where the world is right now with monetary policy. The central banks have pumped so much tequila into the party that everyone is sick of it and it’s not working anymore.

Not before median house prices in Sydney hit a million bucks though. Thanks RBA!

I have some personal views about the failure of this whole approach, its link to rising income inequality and the resulting rise in destructive populist politics. But I’ll save that for the party talk.

In the meantime, let me leave you with this thought. You can’t control the big picture economics happening around you. But understanding them will give you greater insight into how you might respond to them – or even make money from them.

So, don’t be afraid to read more, listen more and think more about that hot, nerdy guy known as economics.

Photo credit

An Insider’s Guide to Finance: the risk-reward relationship

I’ve taken plenty of risks in my life. Some were productive, like packing up and moving to London. Leaving my marriage was a big risk that was hard to take, but the right thing to do. Wearing neon patterned tights with a crushed velvet skirt to a mufti day in year 7 – that risk did NOT pay off in either social or fashion terms.

When it comes to money, you need to get comfortable with risk. You see, there is a thing called the risk-reward premium, which means the higher the risk, the higher the (potential) reward.

This also means you can put a price on risk – the riskier the deal, the higher the stakes.

It’s why a car loan has a much lower interest rate than a credit card. The car can be repossessed if you can’t pay back the loan, while the credit card is ‘unsecured’ – they can’t come after you for the delicious cocktails you just bought, and the bank manager won’t fit into that Kookai dress. So the risk is higher for bank and more expensive for you.

Risky Business?

Now I am not saying let’s go to Vegas and put it all on black.

But when you invest, you want to balance the risk within your portfolio and within the asset class so that you get a good return while not losing your money.

Ok wait, I just dropped some jargon there. Let’s break it down.

Your portfolio is your entire wardrobe.

Your asset classes are each section: shoes, dresses, underwear, activewear, etc.

We talk about being ‘underweight’ or ‘overweight’ certain types of investments. For example, when the banks aren’t performing well, you might sell off some of those stocks and become underweight in banks. Or if you think resources are about to get hot again, you buy more and go overweight.

This can apply within one asset class – so you can be overweight on running shoes and underweight on high heels, within the broad ‘footwear’ asset class.

Or it can apply to the broader asset classes, so you have heaps of activewear, but not much in the way of work clothes (yep, me). That would be like having a lot of property (your own home) but only a small parcel of shares.

So now we have the lingo, let’s talk about risk. Here’s what you need to know:

1. You need some risk in order to make money, and that’s ok.

2. You can manage that risk by spreading it around – aka diversification

Now let’s talk more about that.

Why risk is ok.

Risk is what makes you money. It’s the old adage of ‘nothing ventured, nothing gained’. So it’s safe to keep your money in a term deposit in bank, but that’s not going to make you money.

In fact you could even lose money in the bank.

Wait, what?

Thing is, there are heaps of different risks when it comes to money, and one of them is inflation risk. You know how a bag of lollies used to cost 20 cents when you were a kid, and it’s $2 now? That’s inflation.

The value of money changes over time (it’s a really complicated backstory as to why), but let’s just say, inflation usually runs around 2-3% per year. (It’s lower than that right now, but has often been 5-6% in the past 30 years).

If your money is in the bank getting 2% interest, and inflation is 2%, you aren’t making money, but you’re breaking even. But if inflation goes up to 2.5%, you’re actually losing money. The dollar you put in buys less than what it bought a year ago.

This makes intuitive sense right? Things cost more all the time.

So that’s called Inflation Risk, and it’s a risk you face even when you think you’re not facing a risk. Crazy huh.

Here are some other fun and friendly risks:

Interest Rate Risk – The risk that interest rates will change and affect your investment. For example, you buy a property at 5% interest from the bank and then interest rates go up. Suddenly, the $2000 a month mortgage that was covered by rent becomes $2200. Not only do you have to find more cash, it changes the yield – i.e. the return you’re getting for the money you spend.

Liquidity Risk – The risk that you might not be able to turn your investment into cash as quickly as you need to. In the example above, you decide to sell the house as you can’t cover the repayments. But a bunch of other people have been hit by rate rises and are selling too. And with home loans more expensive, the number of buyers falls. So you might have the house on the market for several months, even drop the price. The property investment has low ‘liquidity’ and it can cause all sorts of headaches.

Market Risk – You can be the best stock picker in the world – or pay the best stock picker – but if the whole market falls, it’s pretty likely your investments will fall too. Economies – and the markets they’re part of – are always cyclical. They go up and down – that’s as much a part of life as the fact that you’ll get your period on the exact day you don’t want it to come.  The trick is to be prepared for the cycle and have diversified your risks – that way you can manage the dips when they come.

This is just a short list to give you a flavour. There are plenty more, like

  • sequencing risk (the risk that your investments are in the toilet right at the time you need them);
  • credit risk (the risk that the company you lent money to – in the form of bonds – goes under and doesn’t pay you back);
  • operational risk (the risk that you invested in a company run by morons who bugger it up and lose your money); and
  • concentration risk (the risk that you put all your eggs in one investment basket and then drop the whole darn basket).

You can make friends with risk

I’m not trying to scare you though. You don’t avoid investing just because there are some risks. If I listened to my mum about all the risks of going on holidays to the US (being shot, getting raped, the plane crashing, the car crashing…) then I’d never go.

What you do is manage risk, by being clear about your time horizons and your goals. (A financial adviser can totally help you there).

The rule of thumb is that you only invest in shares if you have at least a five-year horizon, because that’s how long you need to smooth out their ups and down (technically called volatility).

An investment property generally needs even longer because of the costs and drama associated with buying and selling.

And with your superannuation, you have 30-40 years to smooth out the returns, so if you’re young (under 45 or so) then you can tolerate even more risk in the hope of getting higher returns.

Spreading the risk is crucial. The ideal (possibly over your lifetime) is to have a bit of everything. Not just a property, not just shares, not just a term deposit, not just bonds. A bit of everything.

But you can start small. For example, think about a managed fund or ETF if you already own your home. Think about buying listed property instruments (REITS) if you already have shares but can’t afford an investment property.

Basically, don’t just buy a bunch of super cute high heels but then never have any good flats you can walk in.

Risk in a nutshell

So here are the takeaways you should know about risk:

Risk is a part of life, and investing. But if you stay away from crazy, get-rich-quick, too-good-to-be-true investments, you can tolerate and manage risk effectively.

There is also risk in doing nothing. Letting your money sit there and track inflation is a risk, because you risk your future returns and wealth.

So don’t be scared of risk – because the other side of it is reward. Imagine if you never took the risk of drinking too much, wearing too little and partying too hard – what fun stories would you have to remember? Investing is just like that, but with less booze.

Photo credit: Aaron Perkins

 

Fierce Girl Finance is totally legit. Here’s the proof.

I was invited onto a podcast called Swings & Roundabouts, which is an investment-themed show created by BRR Media. These guys do a bunch of stuff for the finance industry, and have been around forever, so they are a totally legit crew.

OK, I will admit that my friend and former colleague Jane Lowe is the host, so I may have got a foot in the door there.

But the good news is, if you find all my writing is a bit full-on, you can pop on these shows while you  chop the veggies for dinner. (That’s my prime podcast time).

Here is the first show, where we talk about the big issues like why women get ignored by the finance industry.

And then I was so entertaining, I got invited back today to talk about finding a financial adviser, and why investing is like shopping and facials – you can listen here. 

Please share if you like it, and let me know if there is anything you’d like us to cover in future.

 

 

Buying shares is pretty much like choosing a husband

For realz. But I’ll get to that.

First up though, why are we talking about shares? Because they can be a solid way to build wealth. And they can be another option if you are priced out of the property market.

However, the stockmarket has been given a bit of a bad rap over the years. Partly because of the dudes who run it. People think they’re like this:

Well, I work with a lot of them and can assure you most of them are way more nerdy. They’re much more likely to ‘slave over a spreadsheet’ than ‘snort coke off a hooker’.

And maybe you think people who play the stockmarket are super-rich, like Goldie Hawn in Overboard (oh, what an 80’s classic!):

Well, go down to any company AGM (a shareholder meeting) and check out the crowd. It’s like this:

There are two types of shareholders. The first is mainly white guys in suits (‘institutional investors’). They invest on behalf of super funds and the like, and don’t go to AGMs because they have private meetings with CEOs in boardrooms with tiny bottles of San Pelegrino.

The other shareholders (‘retail investors’) are normal people like us. A fair few are older people who come to AGMs for the free sandwiches – and because they rely on shares for retirement income.

“But enough random photos, tell us more about shares!” I hear you say. Well, as R. Kelly once said, let me break it down for ya.

“Stocks, shares, equities: what are they?” 

These are all the same thing and they mean you have bought a piece of a company. You are a part-owner of it. You share the risk and the reward. If the value of the company increases, the share price goes up. If it makes a profit, it gives some of it to you. If it goes bust, so does your money.

Types of shares:

Bluechip – this is not an actual technical term. It’s just a way that people refer to big, reliable companies like banks or miners. (Note: being big isn’t a guarantee of reliability. It’s like, you can buy a pair of Jimmy Choo’s and be confident in their quality – but that stiletto heel can still get caught in a crack and snap off.)

These shares are the premium end of the market – you’ll pay more for them, because they are less risky. Buying bluechips is like marrying a guy in his 40s who already has a house and a career . He has done the hard yards and proven he is an adult. But you pay a price – emotional baggage and a bitchy ex-wife.

Bluechips also tend to pay more in dividends but have less capital growth – explained below.

Large cap, small cap – This is short for ‘large capitalisation’, and is the sharemarket value of the company. Each share is worth a certain amount, and there are a certain number of shares out there. When you multiply these, it gives you the ‘market cap’. (Company A has 1000 shares each valued at $1, so its market cap is $1000.) There are also ‘small cap’ and ‘micro cap’ stocks, which are often bought based on their growth potential rather than how they are doing now.

A company’s ‘market cap’  hopefully grows over time, as its profit, size and share price increase. It’s possible to buy a ‘small cap’ stock that becomes a ‘large cap’ years later.  This is like marrying a 28-year-old guy working on a start-up – a decade later you might be living in a waterfront mansion, or struggling to pay for childcare because you’ve become the breadwinner. It’s a bet on the future.

Bottom line: A good share portfolio will often have a mix of large and small companies because they each have their pros and cons.

“Ok, got it. But what will shares actually give me?” 

1) Dividends 

Because you are an owner of the company, management might decide to give you a share of the profits. These are dividends. Management decides how much they will pay each year, once they have run all the numbers.

This is what those retirees at the AGM are looking for, as dividends replace their pay cheques. However, the company might not make a profit. Or it needs to invest the profit into paying off debts. So they don’t pay you anything.

That’s because dividends are ‘discretionary’. A company never has to pay them.

You can choose companies that are really bloody likely to pay them, like a big bank. Overall though, income from shares tends to go up and down, so if you rely on them for your lifestyle, you generally need other assets like fixed-income bonds or term deposits as well.

2) Capital Growth

This is where the big gains can be made. If you had bought shares in Apple back in 1980 – when Steve Jobs was just another nerd in a turtleneck – you would have paid fifty cents each. They are now $110 each. Even allowing for inflation (i.e. things used to cost less – remember when a mixed bag of lollies was 20 cents?), that is still a damn good deal.

Of course, for every Apple there’s another five companies that either fell over, stumbled along or just ran a steady marathon. It’s all about picking the right stocks. Is that 28 year old boyfriend going to make good money, be a caring father, not get a beer gut and stay faithful?

Nobody knows. Even Beyonce. She won on the first three but failed on the last one. That’s exactly the same as picking stocks. The good thing is, you can have as many stocks as you like, whereas society says we can only pick one husband at a time. (Whatevs).

Total shareholder return (TSR) is what you get when you add these together. Often you can choose to keep reinvesting the dividends you get paid (if you don’t want the income), so that boosts your shareholding value. Couple that with capital growth, and that’s your return.

The TSR is based on many factors, including the company’s performance and share price. For example, ANZ Bank has delivered 7.5% TSR on average over the last eight years, while Westpac has delivered 11.5%. Luck, skill and research, basically.

“Shares sound great! Sign me up! Take my money!”

Whoa there sister. Let’s just bear in mind a couple of things about shares.

They are volatile (compared to cash, bonds or property). Their price can go up and down in one day (and usually does). A bit of ‘vol’ (as we like to call it, because we sound cool and smart) is okay over the long-run, but it does mean you need to be flexible. If you want to spend the $5000 in your share portfolio, you can easily sell them. But is the price good that day, week or month? This is why shares are better over at least a five-year time horizon.

All shares are not created equal. Some are dogs. For example, if you bought Myer shares in 2009 for about $3.60 they’d be worth about $1.30 now. I suspect these shares were bought by men who hate shopping, because if any of them had set foot in a Myer they would know the service is shit, the stores are tired and the prices are ‘meh’.

But if you had bought JB HiFi at the same time, for $9.50, you’d be smug AF now, because they are currently $27 each. I know right! Although, why people still buy all those CDs and DVDs baffles me completely. (By the way, if you like these figures, the ASX website has heaps of fun graphs and charts)

So, you can choose your own shares or you can let someone else do it. But even the pros get it wrong sometimes. What we hope is that they get it right more often. Which brings me to the third point.

Don’t put all your eggs in one basket. This is good old ‘diversification’. As we have discussed before, that’s just a fancy way of saying don’t stock your wardrobe full of just ballet flats, or just high-heels, or just runners. That’s crazy. Same with investments. If you buy shares, buy a range of them, because they will all perform differently over time, and in different conditions.

But how do I buy a whole bunch of different shares with just $1000?

Glad you asked! You can either buy a managed fund or an exchange-traded-fund (ETF). They pool a lot of people’s money and spread it out over a range of shares. (You can click the links to find out more about them).

I won’t give you advice on which ones to choose but I can tell you that I have the Acorns app. This takes small amounts of money out of my bank account every week and puts it into an ETF. It’s pretty cool because you don’t notice the money going out.

I don’t fancy myself as a stockpicker. Firstly, I just finished that subject in my post-grad course, and it was seriously the hardest fucking thing I ever studied. Secondly, I don’t have time to dig into the company accounts of potential investments.

So I put share investments into my mental list of “things better left to experts” (along with tax returns, powerlifting training programs and making laksa).

If you do want to go it alone, you can easily sign up to a broker and do it yourself. Check them out at Canstar (a comparison site).

“Sheesh, that’s so much information, I am just as confused as ever”. 

Ok I hear ya. There is a lot to know. You can always talk to a financial adviser. Or you can just start small. For example, download Acorns. Pop $500 into a managed fund or ETF. Or have a ‘fantasy portfolio’: pick some stocks and watch them over a period of time to see how you do.

What I would say is this: if you haven’t bought a property, (or even if you have), shares are one more option for you to build wealth and become a certified Fierce Girl.

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Fierce Girl Action Plan: Part II – Super fun!

Things I like talking about: hair and make-up; weightlifting; The Bachelor; superannuation. Weird huh?

I know it sends most people to sleep – but please, stay with me! Let’s do a deal. I will jazz it up and break it down for you.  You will spend five minutes reading it. And then you then can go straight back to your important tasks like scrolling through Insta.

The thing is, you need to love super early in life to get the most from it. The earlier you start, the easier it is. (Magic of compound interest, yo!).

So here are the things I absolutely want you to know.

Choose a super fund. And give them all your money. 

You could just stay with the fund you’re in, or the one your employer chose for you. But there are two reasons you might choose your own:

  1. If you have several funds, you need to pick one to roll all your money into.
  2. You prefer to make your own choice, not what some employer chose (I don’t even trust mine to pick the Friday arvo wine without my input).

So, let’s pretend you’re at a make-up counter. That’s way more fun huh? You’re looking for a foundation and your comparison points are texture, colour match and moisturising potential. Well it’s the same for a fund. You want to look at:

Performance (over at least 5 years, not 1 year, because this shit is invested for at least 30 years). All funds have to publish their performance figures, and you can find comparison tables here.

Fees –  There used to a lot more variation in fees, but since the Government brought in ‘MySuper’ (a low-cost default scheme), the differences have shrunk. I am in a slightly higher-fee fund myself, because I have made a conscious choice to pay for ethical screening (see below) which is more work and therefore has a price premium.

Insurance – As we saw in Part I, your super fund usually comes with insurance. Make sure you aren’t losing the stuff you want or paying a lot more for it.

Your values and beliefs – Here’s something that will blow your mind. You may be invested in tobacco companies RIGHT NOW. No way huh? Yep, a whole bunch of super funds use asset managers who invest in tobacco. And coal mining. And armaments (bombs and guns!). And gambling.

How could this be? Well, you might think there are a bunch of besuited, bespectacled boffins at your super fund who invest your money. Wrong.

Most funds have a small group of boffins, who choose which fund managers will do the investing for them. It’s the same as when you go to a pub with no in-house kitchen (I’m looking at you, Darlo Bar). So you order a burger and it goes out to Grill’d. Or you order a pizza and it goes out to Crust. But then the bar-staff bring it to your table and give you napkins. This is how most super funds work. Fund managers get paid way more than Crust staff though. 

So, super funds have a bunch of fund managers who are specialists in all types of investments, such as Australian shares, or international bonds. They award them a ‘mandate’, meaning ‘Here is $200 million – can you invest it for us please?’. This is not a bad thing. It means you have really focused specialists who are (hopefully) awesome at what they do. (Who wants a burger made by Crust?). It also spreads risk – if one fund manager gets it wrong, another one probably got it right (or less wrong).

So I have nothing at all against this model. I know a bunch of these fund managers and they are nice people and passionate about what they do.

However, it means you don’t always know where your money has gone. It could be in a nasty mining company or in a wonderful renewable energy company – you just can’t tell.

So, if you care about this, you have a couple of options:

  • Choose your current super fund’s ‘green’, ‘ethical’ or ‘ESG’ option – if it has one. What that means varies, as there is no official definition, but you can ask them.
  • Choose a ‘core’ ethical fund – That’s what I have done, rolling all my money into Australian Ethical. I should disclose that they are my client, but I would spruik them anyway, because they do all their own investments (no sending out to Grill’d), use a rigorous ethical screen, and have fantastic performance. (Coal is a bad investment huh? Who knew?). I can also tell you that the people who run the fund really believe in what they do. There aren’t really any other funds that work this way, so I can’t give you an alternative to compare it to.  

Roll your money into one fund (aka ‘consolidation’)

Ok, so you have decided which is your favourite fund. Now it’s time to rescue your money from your other, unloved funds. Australians have a ridiculous amount of this unclaimed super – $16 billion! – and it’s legit like leaving $3000 in your winter coat pocket and forgetting about it. Except you’re paying fees to your wardrobe to look after it.  

Or it’s paying multiple gym memberships. Imagine if you joined a gym every January in a fit of new year fervour, got bored of it by February, but you still paid the fees. Then you start a new gym the next year, and so on. If you’ve had several jobs and acquired several super accounts, this is exactly what you’re doing. PLEASE STOP DONATING TO SUPER FUNDS.  They don’t need your money.

Donate it to your future retired self instead. She wants to spend summer in Europe in 2045, looking like Baddie Winkle. (If you haven’t seen @baddiewinkle on Instagram, you have no idea what your #retirementgoals could look like).

So, have you tried to do this in the past and there was a bunch of awful paperwork and then it was all too hard? Good news! It’s now much easier. The last few years have seen the super industry change their back-end systems (hello, 21st century!). 

Also, your chosen fund wants you to scrape up all that spare money and give it to them. So, many will have free and easy ‘rollover’ or ‘consolidation’ services that do it all for you.

Bottom line: this is a low-effort, high-value task that will have a big  impact on your final retirement savings.

Throw in some extra money.

I know, you want to spend that money on a mortgage, or a night out, or a new pair of shoes that you absolutely need and your feet may fall off if you don’t get them.

HOWEVER. Your Baddie Winkle self wants that money too, and she makes a convincing case for it.

First, she says, you’ll give less to the tax office if you make contributions from your pre-tax pay (called salary sacrifice or concessional contributions. I know, they need a branding intervention).

That means that instead of paying, say, 39 cents in the dollar in tax when you get paid, you pay  just 15 cents. Of course, you can’t access it til retirement, and you may get taxed on some it when you take it out (long story there). But overall, you come out ahead.

Secondly, Baddie says, you will get compound returns. Which basically means putting $100 away today and leaving it for 30 years gives you a far higher return than waiting for another 20 years, investing it in 2036, and then only getting 10 years’ worth of returns.

The key to super is that the longer you have it, and the earlier you start, the easier it is.

Consider taking some or all of your next payrise as a salary sacrifice (just ask your payroll person). It’s money you’ve never had, so you won’t miss it.

Or just  think about how much a month you waste on shit like wine and coffee, and match that amount. It’s like a sin tax.

Choose an investment option. Right now, if you have the default option, you have the same investments as 58-year-old Barry in accounting. Which is crazy, because he is retiring in a couple of years and you have aaaages to go. (Soz). That means you can probably tolerate more risk and get higher returns.

Picking the right investment option for your age is as simple as calling your fund and asking about it. Most of them can give advice on this issue. In general, if you are under 40, look at a growth option. (Although some funds call their default option ‘growth’ – it’s a long story – just frickin call them and ask).

And lastly, check your payslips and super fund statements. This is easy and important. When I joined my last employer, I gave them all the details for my super fund but some bright spark in payroll stuffed it up, and started paying it into their default fund. Because I am a nerd and checked, I spotted it. You need to make sure that you are getting what’s yours.

Also, checking your statement makes you feel like it’s your money and gives you an idea of whether you have enough (you probably don’t).

Ok, so, I probably lied about the five minutes thing. Sorry. I really love super.

But anyway, think about doing just one of these things and tell me what it is. Or ask a question – to me, or your fund! But maybe don’t ask Baddie – she is very busy hanging out with her celeb friends.

Interest rate cuts vs Hiddleswift: which one matters more?

Every month, the financial markets whip themselves into a frenzy about the Reserve Bank of Australia’s (RBA) decision on interest rates.

And you’re over here like ‘how long is that Hiddleswift thing going to last?’.

So, should you care about interest rate cuts? Yes and no. Let me give you a quick run-down about interest rate decisions (aka monetary policy) and you can decide. Or you could just sound smart and knowledgeable.  (Although this is a simple version; the economic theories behind monetary policy are hectic).

  • Have a mortgage? Happy days. You’ll save a few dollars a month (say $50 on an average mortgage), which the government hopes you will spend elsewhere, propping up economic growth. However, the tight-arse banks are only passing on half that cut, so don’t start booking the trip to Vegas yet. Also, you could just keep paying your existing amount, to pay your mortgage off faster and save on interest.
  • Want to buy a property? Not ideal. Low interest rates do make loans cheaper, but they also tend to raise property prices. Everyone is all like ‘yay, cheap loans, let’s buy!’. But when everyone does that at once, supply and demand get out of whack. Next thing you know, someone pays more than a million bucks for a hovel in Surry Hills where a dead body was found. True story.
  • Going overseas? Probably doesn’t matter. In theory, these decisions affect the strength of the Aussie dollar. It fell a tiny bit today, which is normal. But because other countries’ central banks* are all over the place right now, it’s hard to predict what will happen to the currency. It’s really complicated, so let’s just say this: if you’re travelling, just travel and hope for the best.
  • Running or starting a business? Mostly a bad sign. If you want a business loan, it will be marginally cheaper due to lower interest rates. But the big issue here is what low rates tell us about the economy. Put simply, it’s kinda crappy. Inflation is low, meaning we aren’t getting mad payrises or spending up big. The economy is growing, but not fast. Consumer confidence is ok but could be better. So the RBA cuts rates to ‘stimulate’ the economy.

But this doesn’t always work. It’s like when you’re a kid and you get ten bucks from your Nanna. You can go spend that on mixed lollies and bouncy balls (the kid version of hookers and blow), or you can save it in your Dollarmites account. Unfortunately, we have too many Dollarmites and not enough child-gangstas these days. The RBA says spend, don’t save! But we don’t.

So monetary policy isn’t working very well, either here or around the world. You might think all the smart money-type people (e.g. the central bankers) would have come up with a Plan B by now. Afraid not.

Well there are other solutions like changing our tax system, cutting the Budget and other politically unpalatable ideas, but it takes a bold government to change what we call ‘fiscal policy’. So they just leave it to the independent central banks to make the hard calls on interest rates.

So there you have it. I’d say you should care about interest rates in the way you care about the love life of Taylor Swift. Interesting but marginal to your daily life.

* A central bank is an independent body that sets interest rates (among other things). They aren’t like normal banks and politicians mostly can’t tell them what to do. So if you hear about the US Fed, the European ECB, the Bank of England or the Bank of Japan, they are central banks. Don’t go ask them for a car loan.

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