Financial Planning

INVESTMENT

Investing is a life long journey not just a set and forget strategy. You must remember that one of the most important lessons in wealth creation is that the goal of creating wealth is just as important as avoiding costly mistakes. These mistakes could set your wealth plan back for years or even worse permanently. Our goal at Moat Capital is to not only help you create wealth but to also help you avoid those costly mistakes through our commitment to clients’ investment education.

One of the most important parts of wealth creation is the design and management of the investment portfolio. Designing an investment portfolio is all about matching a strategy to your goals and objectives which also considers your tolerance to investment risk and expected timeframe. From here we then methodically design an asset allocation with the aim of reducing your portfolio risk but not your return profile. This is achieved by strategically allocating to certain asset classes (cash/fixed Interest/Property/Shares/Other), sectors (large cap/small cap/International/emerging markets) and investment styles (passive/active/value/growth) which are expected to outperform over the investment timeframe based on our research and analysis.

For the right client and in conjunction with our Asset Management strategies (refer to Asset Management tab) we can also further diversify a portfolio through investment strategy and analysis techniques.  This is even more important leading up to and in retirement when an investor is exposed to ‘Sequencing Risk’. Sequencing risk is the risk of adverse portfolio returns at a time when you are drawing on your funds – sort of like a compounding down effect. By adopting this approach, we can further reduce the volatility to avoid the worst effects of ‘Sequencing Risk’. This is because certain asset classes, sectors, styles, strategies and analysis techniques perform differently at various times in the market cycle.

Finally, we look to use either direct shares, exchange traded funds (ETF’s), managed funds or a combination thereof to complete the portfolio design process and match the portfolio to the most cost effective platform administrator to best implement the portfolio and strategy.

 

Gearing

Gearing involves the borrowing of money to invest. Typically, when gearing into shares or the share market you will implement what is known as a ‘Margin Loan’. Gearing can accelerate your wealth however, it can also increase the risk as losses are magnified. Risks can be mitigated with appropriate Loan to Value Ratios (LVR’s) and better timing into the market.

Other forms of gearing may be to utilise the equity in your home and/or investment property or geared products such as internally geared funds, 100% leveraged equity products that also provide 100% protection and self-funded instalment warrants. Self-funded instalment warrants are leveraged investments (ASX listed securities) which effectively pay themselves off over a set period using the income generated through tax advantaged dividends. By taking advantage of large sell offs and the subsequent high income they can pay themselves off very quickly providing you with higher wealth in the long term to provide a higher income in retirement. As with all forms of borrowing there are advantages and risks and it is best to speak with an expert in this area to give you all the facts. Strict criteria apply before any client is recommended a gearing strategy.

At Moat Capital, we implement a ‘Wealth Accelerator Program’ which involves a targeted gearing strategy. Please refer to this section for further information.

 

Dollar Cost Averaging

This is a very popular and effective strategy to invest in the share market. By implementing a regular savings plan you are effectively averaging out your purchase price. This is because you are buying at different stages of the market cycle. It is most effective in a downward trending market because you are getting to buy units and/or securities at a cheaper price so when those assets recover they will provide the greatest return. It is also a great way to smooth out the volatility in the share market and a way you can invest without having to contribute large sums of money upfront, as you would with an investment property for example. Investing large sums upfront places, you at greater risk in the event you are investing at a bad time (peak of the market – prior to a collapse or prolonged flat period).

WEALTH ACCELERATOR PROGRAM (WAP)

This program is for the intelligent investor only. It can be implemented as a stand-alone strategy or as part of your overall wealth creation plan. It can be investment and/or superannuation money. It combines your existing wealth creation plan with a targeted gearing strategy during the more optimal times in the market cycle. To be admitted into this program a client needs to fully understand the below behavioural chart:

By understanding the behavioural chart our intelligent investors will know that the best time to be risky is when others are fearful. This is the time when the greatest opportunity exists to take advantage of low prices. This is when we implement the targeted gearing strategy and what adds the greatest amount of value to your wealth creation plan over the long term. It is essentially going against the herd mentality and for most investors this is very difficult to do, hence why this program is for the select few investors whom we regard as our intelligent investors.

The below chart illustrates the dangers of going with the herd. As you can see the Average Investors return is significantly less over the 20-year period compared to the market return. Market return is what an investor would’ve received by investing $100,000. The Average Investor return is so poor because the average investor is letting their emotions ruin their judgement by selling when market cycles are low and buying once they have recovered. They are going with the herd!

By being a Moat Capital investor we aim to ensure you at least get the market return and with the Wealth Accelerator Program we aim to add to the market return by investing in a more intelligent manner and being aggressive at the more opportune times in the market cycle.

 

 

When implementing the targeted gearing strategy, we can use either internally geared funds, self-funded instalment warrants, margin lending and/or other geared products that may also offer protection and 100% leverage. The strategy will depend on your personal circumstances and the stage of the market cycle including what asset class and/or sector we are looking to target. It will also depend on whether your investment is inside or outside the superannuation environment and if in the superannuation environment whether a retail fund or self-managed.

As well as understanding the above behavioural chart, strict criteria applies before a client can implement this program. For further information please call one of our team members.

DEBT OPTIMISATION

Like the Wealth Accelerator Program (WAP) a Debt Optimisation strategy can be used as a stand-alone strategy or combined with the WAP. Debt Optimisation on its own is a very effective strategy for creating wealth over the long term. It allows you to invest at the same time as paying down your home loan ensuring, the effects of compounding are put to work as soon as possible, optimising your long-term results. So, instead of waiting the 20 years or so to pay off your home loan and then invest for your retirement this strategy allows you to invest right from the start.

The process is reasonably simple, as you pay down your principle each year you draw an equivalent loan amount as an investment loan and invest into a regular savings plan, also referred to as dollar cost averaging (see the benefits of this in the Investment section). Another benefit to this strategy is it ensures you don’t have to take unnecessary risk closer to retirement as your wealth plan is already well advanced.

For an average couple this strategy can add literally hundreds of thousands to their end financial goal and even more if combined with the WAP.

Please refer to the case study ‘Optimising Debt to Build your Family’s Wealth’.

Strict criteria also applies to this strategy.

SUPERANNUATION

Superannuation is a tax effective savings vehicle which can be your sole strategy to help fund retirement or it can form part of your overall wealth creation and retirement planning strategy.

Superannuation is a great investment vehicle largely because of the tax savings and we encourage our clients to utilise this as much as possible and to take charge of their investment strategy within their superannuation. Make your superannuation count, after all it is your money!

With superannuation employers are mandated to make concessional contributions on your behalf and you can also add to superannuation by making non-concessional contributions or depending on your employment arrangement salary sacrifice contributions.

Some tax effective strategies utilising superannuation include salary sacrificing and transition to retirement. A salary sacrifice arrangement is contributing pre-tax income into superannuation which reduces your taxable income and saves you tax at your marginal tax rate and the contributions into superannuation are taxed at just 15%. Assuming your marginal tax rate is over 15% then every dollar you contribute you are saving tax and helping create wealth in a tax effective environment. A transition to retirement strategy is designed to either help you work less in the lead up to retirement without reducing your income or it can be used to help boost your retirement savings in a tax effective environment without reducing your after-tax income.

Because of the favourable tax treatment within the superannuation environment the government places restrictions on how much you can contribute and when you can take it out.

 

Self-Managed Superannuation

For the right client, we are also able to set up a self-managed superannuation fund (SMSF). A SMSF allows you greater flexibility and control over your investment strategy. You are the trustee and responsible for the ongoing compliance and administration of your SMSF which for some can create a burden and additional stress. It is best to speak with an expert in SMSF before commencing one and as mentioned it is only for the right type of client. This is generally someone who has a good level of financial literacy and some spare time to allow for the administration of the fund. Depending on the investment strategy this can be mitigated to some extent. For further details, please don’t hesitate to contact us. Strict criteria apply.

RETIREMENT PLANNING

What does retirement mean to you? Retirement is a very individual term and people differ on their interpretation or meaning. For example, retirement to some may mean they don’t want to work at all and just want to travel, go fishing and play golf for the remainder of their retirement. For others who wish to continue working either on a part time or full time basis it may simply mean the freedom to not have to work.  Ideally at this stage of your life you should have a fair idea of what retirement means to you and the level of funds required to provide your desired lifestyle in retirement.

Reduce Stress and Enjoy Retirement

We are retiring sooner and living longer than ever before and a male aged 60 can now be expected to be retired for 21 years and a female for 25 years*. Based on these statistics and without the security of employment your funds must provide you with your desired lifestyle for a long time. Do you know how much you will need to fund your retirement?

It is essential to speak to a professional about the level of funds you will need in retirement and even more important to have a portfolio designed to stand the test of time.  Portfolio design and management is even more crucial at retirement. The last thing you need in retirement is to be worrying about your wealth being eroded by volatile market conditions and the fear of your retirement money running out early and having to go back to work or rely on the government age pension. A properly designed portfolio will ideally reduce your risk and maximise your return in relation to your risk tolerance and goals and objectives. Please refer to the investment section for further details on portfolio construction.

* Based on 2000/2002 life tables.

Superannuation will ideally play a significant role in providing your retirement income since it is very tax effective and has favourable government legislation. The structure of your retirement funding needs to be closely considered prior to retirement and is very much based on an individual’s situation, goals and objectives. Therefore, it is best to seek professional advice.

Prior to and even during retirement is the period where you are at most risk to investment markets and you need to structure your investments in a manner to enable you to get the most income from your investments in the most tax effective manner whilst being exposed to the least risk possible. For example, an investment property that may have $400,000 worth of equity may only be providing you with $15,000 worth of income after tax and expenses (not much of a lifestyle). Assuming this investment property is your sole source of retirement funding you may be better to look at investing into different property sectors such as commercial property via listed property trusts or shares that provide a high level of income. This way you could receive income of $24,000 p.a. (based on 6% gross dividends) and not have to worry about managing your property or whether the tenant is going to pay on time or the concern that you may have to fund some costly repairs/maintenance etc.

Other things to consider when thinking of retiring are transition to retirement strategies (see ‘Superannuation’), age pension entitlements, the use of annuities or account based pensions (funded by your superannuation) and making sure your estate planning is up to date.

PERSONAL INSURANCE

Most of us understand that we need to insure our car and/or home and contents, however do we really take the time to think whether the car and/or home would be there if something were to happen to us personally? Personal insurance is all about insuring the most valuable asset of all – You.

Life is a journey and one worth planning for however, there are some things in life which are unplanned. This is where managing life’s risks are important. You need to identify what risks would prevent you from achieving your life goals and then you need to decide whether these risks can be avoided, reduced, retained or offset. If you cannot avoid the risk and the risk is to costly too be retained (large debt and/or children) then you need to offset it. This is where you may need to look at personal insurance.

A good question to start with is who is affected by my financial well-being and whose financial well-being affects me? The answer to this question could involve more people than you think. For example, what if an adult son/daughter, sibling was to be seriously injured and in need of full time care. Who would be looking after their children or wellbeing and how would this affect yours?

Personal insurances help provide peace of mind for you and those that depend on you.

When considering obtaining personal insurance it is important that you speak with someone who has a large range of insurers on their product list. Some insurers provide a more cost-effective policy for the same type of insurance and various insurers have different underwriting requirements. Underwriting is the insurers’ assessment of the risk of providing insurance. For example, one insurer might refuse an individual cover if they have a genetic predisposition to a certain illness. By contrast, another insurer might decide to provide cover, regardless of genetic issues. In this scenario, it is essential to have choice to be able to obtain insurance.

 

Life insurance

The cheapest and most basic of insurance. This provides a lump sum payment to your spouse/dependants and/or estate to pay out debts and help your loved ones continue with a similar lifestyle if you were to suffer premature death and in some cases, be diagnosed with a terminal illness with less than 12 to 24 months to live.

 

Total and Permanent Disablement (TPD)

Provide you with a lump sum payment to help you deal with your permanent disablement and the inability to work again either in your current occupation or one you are suited by training and/or education. Typically, you will have to be unable to work for at least 3 to 6 months before a TPD benefit will be paid.

 

Trauma

Pays a lump sum payment to help you recover from one of the defined traumatic events listed within the policy such as cancer, heart attack, stroke etc. There are generally between 30 to 40 different trauma events that are covered depending on the insurer and the policy.

 

Income Protection

Designed to replace a certain level of your personal income if you were to suffer an accident or sickness and were unable to work longer than the prescribed waiting period. A monthly payment of up to 75% and sometimes higher (depending if the insurer includes Superannuation benefits) would be paid after the prescribed waiting period and will be paid if you are unable to work up to the end of the benefit period. This type of policy is generally tax deductible. Some insurers will even provide Income Protection for a non-working spouse as an optional inclusion.

 

Business Expenses Insurance

This cover is designed to help a business owner cover certain fixed costs whilst unable to work.

 

Superannuation and Insurance:

Where appropriate superannuation can also be utilised to fund certain types of insurance (life, total and permanent disablement and income protection). This can help free up personal cash flow to focus on other areas such as paying off your home loan sooner or creating wealth to help achieve financial independence. Premiums can also be cheaper under this structure although there are trade-offs, with including insurances in Superannuation which may be related to your personal situation so professional advice is necessary.

TAX PLANNING

This type of planning involves close consultation with your tax adviser and could include such strategies as:

  • Investment Bonds. An investment strategy within a bond structure which is a tax paid instrument at 30%. Anyone with a higher marginal tax rate then 30% will benefit from this strategy. No tax if held for 10 years or more and no tax return required either.
  • Protected Investment Loans. This is where you pay an interest only loan amount to gain exposure to the share market. You can walk away from the strategy even if the share market falls with only risking the interest only loan payment made for the year.
  • Pre-payment of investment loan interest.
  • Income Protection and/or Business Expenses insurance which are tax deductible.
  • Salary sacrificing or personal deductible super contributions strategies (see Superannuation section).

Does your share portfolio have a strategy for the downturns?