Where the wild things grow…

I grew up in a small town, somewhere in the mountains of Europe. Life was easy for me; I didn’t have to do much. My parents worked and every time I needed money I just asked, and it was given.

Then there was my Grandpa. I spent more than half of my young years with him. Life was very safe and simple those days. I was only thirteen, but if I didn't come home for dinner my parents just knew I was staying with my Grandpa. No phones, no SMS, they knew I was safe.

My Grandpa has always been my hero, my mentor, my hope. He was also happy to fund my adventures (banned by my parents), whether it was a train ride to a nearby lake or camping trip with friends.   He always left money in the same spot – a decorative coffee cup in the living room bookcase; right next to Grandma’s black and white photo. Even after so many years, he missed her greatly.

Grandpa gave me so much more than just pocket money. As I was growing up, I started to face my first challenges. I received my first setbacks. I was often lost and I never seemed to know the answer to the question ‘what I want to do in life’.  I had no idea, but he always encouraged me.  He was my sounding board for everything. He told me that everything will happen at the right time – when I will be ready. And whatever it was, he would stay by me because he believed in me.

My parents were ‘too close’ to me emotionally to discuss my problems with them.  I always went to him.  He listened, he told me not to worry, he put things in perspective and showed me the bright side. ‘It’s never so bad; it can’t get any worse’… he used to joke. He told me to lift my chin up and to keep going. Then he played some old records and watched me smile again.

Even though he didn't necessarily tell me something I haven't already heard from my parents, he did it in style. He was bigger than life. Nothing was too hard not to have a go at. He’s been my inspiration and an example of how you will never lose in life if you always do your best and always see the good in people.

I couldn't be there when he finally left. He didn't want me to be there. They found him in the morning with a smile on his face.  He’s accomplished everything he wanted in life.

His Great Grandson, my son, will grow up learning the principles of perseverance, a positive attitude and courage. He will also witness his Dad teaching and spreading these qualities through his work, so as many people as possible will give things a go, and achieve their wildest dreams.

It’s the best way to make sure my Grandpa will always be around, and to make sure he’ll keep smiling proudly every time he looks.

I love you ‘stary oco’. And THANK YOU!

by Michal Bodi

If you connected to this story, please let me know what you think by sending me an email or commenting below. I'd really love to hear from you.

Risky vs Safe - The Great Flaw

How often do you hear people saying things like - that's risky or this is safe, in relation to investing?

The very concept of both is very subjective and it depends on people's points of view, their attitudes, their experiences but predominantly their practical understanding of value of money.

When it comes to investing, the words like safe and risky are being used so loosely (by both the advice professionals and the general public) it's created a confusion costing you big time!

That's why I thought it was about time I set the record straight. 

Before we start, it's important to emphasise that I'm talking about investing here, which means a process of an ongoing long-term value enhancement, not parking your money in for your next year's ski trip. That's called saving.

Firstly, let's define what the real value of money is - the actual ability to pay for things we value. It has a name - the purchasing power and it simply represents what we can buy with our money.

Still with me?

Question - What happens to the purchasing power as the cost of living constantly increases?

The value we get for our money decreases.  The value of our money is being constantly eroded by the increasing cost of living (inflation). 

Now, if the above is true, we're kind of stuck with the assumption that the only risk, when it comes to investing, is inability to enhance the purchasing power of our money at a higher rate than the cost of living is going up.

That's a big statement, you might want to read that one again. 

Ok, let me ask you a question. What's the real inflation rate in Australia - you know, the rate at which stuff we pay for on a daily/weekly/monthly basis - milk, petrol, private health insurance, electricity...) goes up?

The real inflation is more like 5-6% pa.

Looks like now we're getting somewhere.  Let me ask you another question. What do you think is the only type of asset with ability to produce ANY returns after inflation and taxes? 

The correct answer is equities / shares / stocks / companies !!! 

Whaaaaat?! Shocked? It's very counter cultural and counter intuitive thing to write! 

That would mean that (after inflation and taxes) it's the shares which are safe in the long run! Hmm, and chances are that (until about five minutes ago) you thought it was the other way around - that it's cash that's safe and the shares are risky! 

What this means, is that if we want to start creating real wealth, in real life (which includes inflation) and keep our money safe ,we need to expose it to shares. 

The higher the exposure to shares, the higher the probability (approaching certainty over time) that we'll successfully manage to keep our money safe.

The higher the allocation to cash, term deposits and bonds, the higher the probability (approaching certainty over time) that we'll in fact fail to keep our money safe and as a result our money will lose value over time.

And you thought it was the other way around, didn't you? The cash is king, keep your money safe, shares are risky, it's the last place I'll put my money in, I don't want to lose it .... blah blah blah... People repeat this to themselves and they don't even realise how irational it sounds.

They keep fighting the dragon of losing the their capital and the real dragon of inflation comes through the back door, totally unannounced to them, unobserved by them and destroys them.

Losing the capital while investing in shares, when you invest over a long term, is virtually impossible. 

And that completes the tragedy of this flawed concept of risk. People are actually fighting a dragon that doesn't even exist. We don't have a 20 or 30 year period in the history of our share market when equities even produced a negative return.

And what's this 'long term' everyone refers to? How long do we invest for? Let me answer you with a question - When will the inflation stop?

One more thing, the equity/share/stock investing comes with the ups and downs - the volatility. But hey, that's the exact reason why you're getting the premium average return of 2-3 times the inflation rate.

Volatility does not equal risk. It's there for that same reason - to leave us with some returns after inflation and taxes.

If you got to this end of the article, you've just learned three very important (although counter cultural) facts:

- inflation is the reason why people invest
- shares can be safe if they're invested for the right reason 
- volatility doesn't mean risk if you process it correctly

Don't let anyone else tell you otherwise. The traditional understanding of risk - the higher the risk, the higher the return - isn't really accurate, I'm sorry.

The more accurate version is this - the higher the required return, the higher volatility.

It's how you deal with volatility, how you process it, how your mind moves when you experience it and how you hire someone to help you deal with it - that's what really matters!

If you want to find out more about real investing - click here for my Hitchhiker's Guide to Investing series.

What's your view? Can't cope with volatility? Want to find out more on the topic of equity investing?

Drop me a line to mbodi@sydneyfinancialplanning.com.au or simply comment on this article.

Also feel free to google my name for more information on investing and money behaviour.

Catchya,

Michal 'Misho' Bodi

Acting vs Reacting

Regular readers of this blog would know that our success is dependable on the right choices. These go hand in hand with recognising what we can control and focusing on just that. 

Since we have zero control over proposed regulatory changes announced in 2014 Federal Budget, let's instead talk about how to be in the best position to cease the opportunities they bring.

In another words, we are far better off actively review our position on a regular basis, acting and planning our lives, compared to taking the re-active approach and get nasty surprises in the future.

Let's have a look at some things that will help you plan and be ready:

1. The government has done its yearly budget, have you?

When was the last time you had a look at how you spend your money and how much tax you pay? Your expenses dictate how much money stays in your pocket at the end of the day. 

Budgetting is where it all starts when it comes to be in control of your money. If you haven't done your personal (or family) budget yet, allow me to inspire you and do one. Of course, as always a good financial planner will be able to assist you to complete it. 

Here's an article I recently posted on @HumbleInvestors website and which has a link to a detailed budget - http://humbleinvestors.com.au/baby-steps-financial-freedom-ultimate-checklist/

A good budget will help you cope with the proposed fuel excise increase, the GP and medication co-payments and family tax benefit changes.

2. Tax management and planning

Increase in the tax levy is never popular, but good tax minimisation strategy and planning can help you manage that. If you earn over $180,000 per year, it's time to seek quality advice. You may be able to take advantage of many tax strategies available to you and decrease your taxable income back to pre-budget levels or even lower.

3. Planning your retirement means less dependence on government

The number of Australians retiring every year continues to increase to record levels and this government (as well as any future governments) has to address that. For them it practically means a growing number of people asking for government benefis. Naturally, the age pension eligibility will continue to be lower and more difficult to obtain. 

A solid, time and dollar specific retirement plan will address your future lifestyle and income requirements. It will make sure you will be able to retire on your terms, independently and stay retired. It will ensure you are on track to save enough money and make your savings last longer than you.

That way, neither the increase in age pension age nor the lower age pension eligibility will drastically impact your future.

4. Start early to invest in your kids' future

Having children gives you a lot to think about and one common goal that a lot of parents have is to give their kids the education they deserve.

Planning the education expenses in advance means starting having this conversation and implementing the investment plans nice and early. It will also put you in the best position to cope with future government deregulation of uni and Tafe fees.

5. Teach your kids about debt

We don't learn anything practical about debt in schools. Yet debt is part of the everyday reality for the most of us. 

Engaging a good financial planner can make a huge difference in your debt funding habits, correct structuring of loans and eventually in the amount of money you spend to fund your debt.

Your children learn from you and copy you (even they would probably never admit it). Learning how to tackle debt will equip you with great lessons to teach your kids. It will also help them focus on important issues when it comes to debt and help them repay any future education (HELP) loans in no time.

'Planning your life financially is not something you have to do on your own.'

There are lots of wise and helpful financial planners out there who will make sure that you'll have a plan and won't have to reactively adjust your lifestyle with every government budget.

After all, it's your family budget that you want to focus on anyway.

Let me know what you think and what steps you are going to do today. I'd be pleased to know I have inspired you to take action.

by Michal Bodi

Well done is always better than well said...Stop procrastinating!

Well done is always better than well said.

Procrastination is no doubt the number one reason why people don’t become successful at achieving what they dream of. 

It is caused by the change that needs to happen. And we, humans, don’t like change that much!

Why?

Well, it’s got a lot to do with our ego and the actual process of admitting that what we’ve been doing is wrong. 

It can be especially difficult when we’re surrounded by people with same views as us. Why should I stand out?

Generations Y and Z ...

When you’re young, it feels nice to have a first job, still live at home and spend the money on travelling and going out, but just think about where you are at the moment. Your whole life is only starting.

What you may not fully realise day by day (because you just don't) is that the time is on your side and you will never (ever) be in this position again. 

Use that competitive advantage! Trust me, you don’t want to end up like the vast majority of adults – looking back in ten or more years’ time, realising what a massive opportunity you had… And you blew it!

What I’m talking about is the power of ‘doing’.

You have two choices

Choice number one – do nothing and spend every cent. This is what most of you will do. Just like everyone else (I thought you wanted to be different?)

Choice number two – start implementing tiny changes into your spending habits. Time is your best mate here. It will do the rest, as long as you stay committed.

Remember, if you change nothing, nothing will change. The change doesn’t need to happen all at once, you can start with baby steps. 

One year later, you will be definitely in a better position compared to if you did nothing.

There are many ways to put money aside but here’s a fun example to start getting ahead – something that I call the reverse version of The 52 week savings challenge:

You start with $52 that you put away in the first week – that is the biggest commitment you need to make, it gets easier from here.

The next week it’s only $51. And as you continue, you decrease the money by a dollar every week, until you will end up with a dollar contribution in the last week, year later.

Over the course of the year, you will save exactly $1,378.

This can be used as a nice little deposit into an investment plan which can one day be converted into an investment property deposit. It will give you that competitive advantage.

It can be the difference between having to work every night to earn extra money for your ski trip compared to having a passive income to fund your travels so you can spend more time with your friends.

All you need to do is start. 

Anything. Just start…

by Michal Bodi

How to invest in property

Question:

I have just started investing in property. I want to grow my property portfolio as fast as possible. How do you recommend I achieve this while minimising risk? I currently own my primary place of residence with about $220,000 remaining on the mortgage (valued at $450,000) and have just used this equity to purchase an investment property valued at approximately $585,000 (will rent for approximately $540 per week). From here I would like to purchase additional 4 - 5 properties over the coming 5 - 10 years.

My answer:

Thank you for asking this question. Achieving solid investment outcomes only happens via disciplined strategies with a long term outlook. The trickiest part of investing is avoiding making bad behavioural decisions based on the emotional. 

Successful investing starts with realistic expectations, respecting the investment fundamentals and hiring a third party professional who will draw your investment plan and will ensure you stick to it.

You want to buy one property every year, or every two years – how? If you plan to put cash into each property (minimum deposit plus costs on each purchase) you’ll need to save hard. What is your cash flow position? If you want to keep using equity (by relying on future growth) your goal is not realistic.

From your question it kind of looks like you’ve made up your mind, so if you do go down that road, here’s a few things I would consider and encourage you to implement in your plan.

Avoid acting emotionally

Partner with a third party professional who can draw a time and dollar specific plan in order to help you making objective decisions about your future. This may sound basic but hiring an experienced professional with the objective point of view is money well spent.

Diversify 

If you’re going all property (which I would not endorse) then think of different types and locations. If you’re narrowing your investment strategy to only one idea, you’re putting all your eggs in one basket - all your planned assets would end up in same property. If  you don’t have exposure to different assets you have no backup plan. Also, consider investing in equities to increase an exposure to different assets in your portfolio.

Avoid euphoria

Don’t buy what’s popular, otherwise you possibly lose the sense of risk (when you’re worried that others are making more money than you, you’re in the euphoria zone). It’s the opposite of panic and capitulation and it’s equally dangerous. False expectations are set, your behaviour is completely emotional and the investment decisions are not being thought through. You also lose the sense of value and you end up buying overpriced assets.

Have plenty of equity

Protect yourself against unforeseen events (interest rates, loss of tenants, etc.) and make sure you put at least 20% of cash into each property. This will likely go against your goal of growing your portfolio ‘as fast as possible’, but it’s crucial you don’t expose yourself to high debt.

Don’t speculate

Take a long term view and look for an increase in value over time, rather than chasing short term price movements. You may still think you’re investing but you haven’t realised you crossed the line. If you’re looking at short term price fluctuations, you will end up burning your fingers. Don’t overthink the process; keep things fairly simple, an excitement belongs to Vegas.

Cover yourself and your plan

Have relevant protection strategies to protect your ability to earn income (may need it if property income doesn’t meet your expenses) and to have available cash to deal with the unexpected without pulling money out of your plan.

Lastly, you’re not mentioning this in your question, but what’s your end strategy? 

Assuming you reach your goal of owning ten properties, what do you plan to do with them? Keep them to fund your retirement? Sell them one by one to free up cash? You need to think about this before you start so you won’t get stuck at the end (you may have unnecessary problems with tax, liquidity – access to your money, reliability of income etc.)

Hope these tips help you clarify your points of focus. I believe you’ll consider them carefully before making any investment decisions. Shop around and invest in quality financial advice. It will be worth your while to look for someone who will focus on the dominant determinant of your financial outcomes – your investment behaviour.

Best wishes,

Michal Bodi

Struggling to get ahead? Start transforming your dreams into goals

Struggling to get ahead? Start transforming your dreams into goals

We all have dreams. And we love to talk about them. We know exactly what they mean to us and how they make us feel. 

Reaching these dreams and making them true means that our lives matter. But most people don’t succeed and don’t realise their dream potential. 

Why?

What successful people do differently is that they also have goals. 

And it’s having goals and a plan to reach them what separates them from the pack and helps them achieve their dreams.

How do we set goals? Here are some practical tips:

1.       Think hard about your dreams and what exactly they make you feel. Think about why you feel that and what it would mean to you to realise these dreams. Write notes.

2.       Write them down (include the notes from the point 1). Unless we write our dreams down, they will forever remain in our head. Prioritise them, start with the ones important enough for you to take action and do something about. It’s the very process of writing your dreams down when you start transforming them into your goals.

3.       Match them with pictures – do this for every dream you have and display them in your home. Somewhere you look every day. This might sound silly but visualising is a very powerful trick especially at times when we feel like giving up. It’s when these pictures will remind you why you are doing what you are doing.

4.       Share them -You need a commitment to make to yourself. I find social media to be a great way to do this. Once you make your dreams public, it cements them in. They are official now.

5.       You have done as much as you can on your own. The next thing to finalise your dreams into goals is to make them specific - time specific and dollar specific. 

    

    This can only be done by a third party – a quality financial planner. They specialise in goal formulation and creating the journey – financial plan - to reach your goals and dreams. They will also remind you of your goals and ensure you stick to your plan.

Visit a few firms, take your time and find the right one - someone who will ask the right questions and you will feel comfortable that they understand what is important to you and why.

You will eventually find that it’s not necessarily reaching your goal itself but the actual process of getting there, the excitement of the progress what made you feel happy. You will now also have a blueprint and know what to do in order to successfully reach your next destination. 

So, go ahead; what’s your next dream?

by Michal Bodi