Not your crisis...

Not your crisis

News from Cyprus has shaken the markets...

Who would have thought an island in the Mediterranean (that most people didn't even know existed) could generate so many headlines...

What's important is to realise that the odds of this most recent 'crisis du jour' having any impact on you are slim to none (unless you’re a depositor in a Cypriot bank).

It's your financial coach's job to hold your hand and reassure you. 

Remember we talked about this in the past. We talked about we would only deal with things that:

1. are relevant to our plan

2. we can control

And another world 'crisis' doesn't fit in any of these categories. 

... So remember, 'that' crisis is very rarely your crisis.

Let the seeds grow...

Let the seeds grow...

I opened the paper today...just kidding; I tapped on my Twitter app this morning and went through the financial news section. Even though I kind of know the sort of ‘breaking news’ stories I'm going to find, I still read them. 

Dow Jones is down 12 points over night, EU political pressures on Greece continue, Facebook shares hit (apparently and surprisingly) new lows. I take another bite off my toast and smile...

It’s time to switch the TV on. 'I can’t wait' for the next expert analysis of these stories in the regular money segments. My two year old son screams in my ear, he wants me to change it back to cartoons. How do I explain to him that I simply need to know what is going on in the financial world out there and what impact it has on my money? 

Sounds familiar? I know I am not the only one going through this daily morning routine. In one way or the other, we are all victims of the daily noise surrounding us from the moment we open our eyes. 

It’s the culture we live in. It’s the news, the marketing, the advertising entering our head space without our permission. They use good old fashioned fear, but more recently also frustration, desire and family values – all emotional drivers that stay stored in our memory bank. And they stay there for a long time. Until the right time comes, and a very important and emotional financial decision needs to be made, they reappear. And they subsequently drive the decision process.

In a nutshell, the most people make their important (often life changing) financial decisions based on what they see, read and hear in the media. Permit me to say, that’s why most people are not financially independent and what’s worse, a lot of people become financially destroyed.

Financial independence comes from a thoroughly planned journey, where decisions are not made based on the latest news. 

It's created by a series of sound financial decisions, which are made proactively. It utilises virtues as patience and discipline. It doesn’t chase the latest, hot trends or funds and it doesn’t chase any price movements either. It's shaped by a long term plan and strong fundamentals but it’s flexible enough to adapt to changes in personal circumstances. It's formed by a plan that never changes its course because of variables it cannot control. It only deals with variables that it has some chance of predicting and controlling.

But importantly, it's designed and regularly assessed by a financial coach. He/she  constantly makes sure you are on the right path to maximise the probability of achieving what is important in your life. However, the timing needs to be right in order to hire a financial coach. It requires an acceptance that escaping the noise means gaining focus. It’s hard to gain focus when life sort of happens every day. Without going into expertise and experience of a financial coach, the practical and emotional value added is priceless. 

Once you allow yourself overcome the fear of this new experience you’ll allow yourself plant a seed that will grow into a strong and healthy tree one day.

by Michal Bodi

 

End of the Year Myth Busting

End of the year myth busting & putting things in perspective...

We are at the finish line of 2011, a year that will be remembered as volatile, emotional and a year of change. So much has happened this year, in Australia and all over the world. So many of those changes happened because someone finally said stop and questioned the ordinary reality they have lived in. Just because things have always been a certain way doesn’t mean it is the right way. It’s good to question or compare things from time to time, it can give you a different perspective on life and it can improve your level of understanding.

Let’s take a closer look at few misconceptions and myths surrounding us every day. They are used in every day conversations so often that they are considered facts. Not many would question them and unconsciously many have their vision clouded by them. The reason why I am writing about them is that if corrected they could possibly change the perception and improve general knowledge of a few financial concepts. Ok, let’s start our myth busting exercise:

Myth no.1 – Superannuation is a risky investment

Superannuation is not an investment; it is a tax structure or a tax environment. It was designed to offer a tax favourable treatment of assets, used to provide you with benefits in retirement. Also it can considerably increase Centrelink eligibility.

The majority of people’s super money is invested in managed funds within their default employer super funds. These are generally exposed to shares and when the share market is volatile (which happened daily in the last few years) their balances would reflect that. But it has nothing to do with superannuation as the tax concept. Most assets widely held outside super such as cash saving accounts, term deposits, investment properties, direct share portfolios, art work, and commercial properties can be structured within the superannuation environment. It comes with certain restrictions, but also considerable tax and Centrelink benefits. So, next time when you hear someone saying: ‘My super lost money’, you can correct them by saying: ‘No, it can’t’. When you think of super, think of tax and Centrelink, instead of performance and investment returns.

Myth no.2 – Shares are risky investments

The only risk that applies here is the emotional risk associated with these assets. Shares generally carry a certain amount of volatility and that is very normal. The share market moves up and down and sideways on daily basis and no one really knows why, nor can they predict what will happen next. But as long as you stick to the fundamentals of buying quality companies, at good value, apply diversification and remove emotions and allow your investment enough time to perform, you are on track to achieve good growth. Unfortunately, average investors fail to stick to these rules and then subsequently blame the investments, of course! Shares generally offer good liquidity, especially if bought via managed funds. This is one of the great advantages compared to other growth asset like direct property. If you are in an emergency and need to cash in a portion of your portfolio, you can, and it is usually done within a matter of days. With property you simply can’t just sell the kitchen should you need cash quickly.  Additionally, shares can pay meaningful dividends which are often at rates higher than term deposit rates.

You are better off seeking a financial planning professional to help you make the investment decisions with you.

Myth no.3 – I don’t need insurance, they never pay claims anyway

You don’t need insurance, you want it. Ok, this is a tricky one. Because there are so many different types of insurances out there, it is often confusing to distinguish what type of cover people mean. There is insurance for everything these days. However, generally speaking, it is sadly personal insurance (Trauma safety net, Income Protection, Life and Total and Permanent Disablement cover) people opt to ignore.

It comes down to this; when deciding what type of insurance to choose from, consider two criteria – likelihood of a potential claim and the extent of the impact the claim would have on your life. Ask yourself these questions, and be honest. When are you likely to be more affected emotionally? – A. Someone steals your car or B. You are diagnosed with cancer of the liver. What will make a bigger impact on you emotionally? – A. Your house gets flooded or B. Your spouse dies and leaves you with two young children. Which is it going to be a bigger problem going forward? – A. Someone breaks into your house and steals your jewellery or B. You have a car accident and end up in hospital with a spinal injury and you are not able to go back to work anytime soon, your income has stopped and your bills continue to appear in your mailbox (not mentioning extra medical bills).

Your lifestyle today as well as the majority of your plans for the future relies on your regular income. Do not get fooled that you can start making plans with your income without securing it first.

An enormous amount of $3.5 billion ($3,567,649,826 to be exact) was paid in Trauma, TPD, Life and Income Protection claims* just in 2010. That means an average of $14.3 million was paid to 245 Australians every working day in 2010. Yes, it pays to have an appropriate cover in place.

·         Statistics are the aggregate from the following companies – AIA, AMP, Asteron/Suncorp, AXA, BT, CommInsure, OnePath, Macquarie, MLC, Tower and Zurich.

Myth no.4 – Industry funds - all benefits to members

This will come as a surprise to a lot of you. But here’s the real deal.

Industry super funds (ISFs) fall under different legislation than retail super funds and master trusts due to their not for profit status. They don’t have to publish gross/net investment returns, but instead they use what is called a ‘crediting rate’. This  provides them with an advantage to utilise it in their huge advertising campaign.

Tax is the biggest cost in super. When an insurance premium or a management fee is paid from your super balance, these are tax deductible expenses to the fund with tax credits normally applied back to your account. But not with the industry funds, you don’t see a tax credit going back to your account. They pool these credits and include them in the crediting rate and therefore overinflate the fund’s total return. It gets better. These funds are then used for what I think is far from benefits to the members. For example, Australian Super has 1.5 million members and an estimated deductible premium of $200,000,000. At 15%, this would mean a rebate of as much as $30,000,000 that the trustee is using for what? Advertising to non-members (possible breach of the sole purpose test?), subsidizing admin fees so that they look cheaper (transparency issues?) are not my idea of benefiting to members. As far as the facts go, they only benefit to themselves.

There is a long list of issues that an average ISF TV commercial viewer doesn’t realise, and is instead misled by the marketing skills of their sales department.

Oh, and by the way, ISFs refuse to be formally rated by the research houses. Probably due to concerns this would uncover cracks in their deceptive conduct by running their campaign of ‘Industry funds are run only to benefit members’.

Compare the pair? No, thank you.

Myth no. 5 - I don’t need financial advice

Financial advice is available for everyone but not taken by everyone. There are two types of people. The first type always complains about the present and only talks about the future and then there is the other type that does something about their life and plans and controls their destiny.

If you got this far through this blog you are probably in the second group. This is a great start. An ongoing relationship with a financial planning professional will enhance the outcomes you are after. A good planner will stop the information noise around you and keep you focused on your goals. They will simplify the legislative and financial complexities and help you to understand the rules. This considerably eliminates a lot of stress and allows you to get a sense of control, helping you stay confident that you are on track to achieve what is important to you.

Financial advice can end up making a dramatic difference to people’s lives. And it often does. So remember, you always have a choice.

After these holidays, upon returning to work and receiving financial advice, would you rather:

A – Ignore the advice, have no budget, make no extra contributions to your super, pay an extra $175,000 in your mortgage interest, try to time the markets, chase investment returns, and simply miss the best days in the markets and consequently have your super last you only few years into your retirement, pay unnecessary tax after you turn 60 and be at the mercy of government support instead of enjoying your retirement?

Or

B – Implement investment recommendations from your financial planner, get on top of your expenses, pay off your mortgage 12 years earlier allowing you to buy an investment property and increase your overall super benefits in retirement, pay no tax and spend the rest of your life taking trips and enjoying the grandkids?

Would you rather:

B – Ignore the advice, watch your life partner die after not having enough liquid funds to treat his/hers stomach cancer condition, miss the precious last months of their life after having to go back to work to pay the ongoing bills and put food on the table for your children, at the same time have no other option but sell the house you lived in with your family for years and where you were looking forward to raising your grandkids, and abandon the plans to fund your kids’ university studies?

Or

A – Implement lifestyle protection strategies with your financial planner, receive a lump sum when your partner is diagnosed with the disease, allowing you to contact the experts and treat the condition immediately, replace his/her income, take your time off work and spend it by their side and speed up their recovery, maintain all your future plans and together attend your kids’ doctorate graduation?

Merry Christmas and Happy New Year 2012, may it be filled only with the good decisions.

Michal Bodi, Financial Coach

Clarity the key to your success

Clarity the key to your success

Perception really is reality. Someone important once said: Give me the power to control the media and I will take over the world. It is fascinating to watch how the media and our politicians mastered their selling process and how successful they are in altering the reality of every day Australians.

Instant access to information of any kind makes it already more difficult and confusing to make any kind of decision. Therefore it is natural that we automatically delay decision making and throw it in the ‘too hard basket’.

Then, due to relentless lobbying via the media or the next door neighbour, we tend to go back and (without much consideration) opt for the imposed option. Without considering the consequences we then quite happily close the subject. There, the case is closed and filed.

If ever questioned about the decision in the future we often get somewhat defensive. It was us who made it in the first place and therefore we protectively don’t want to re-open the subject and potentially change the outcome. The power of our ego usually works its magic from there.

In various degrees I am confronted with this human behaviour on almost daily basis. I don’t blame anyone for behaving in such way. It doesn’t happen consciously. But let’s think about it. Is an access to information and a little knowledge enough to make a good decision? The difference between knowledge and wisdom is realising that a tomato is a fruit but we cannot add it to a fruit salad. Therefore, we need something else, something or rather someone  that will guide us how to use that knowledge.

The point I am making here is that it is up to a financial professional, to clear the fog. To clear client’s mind from the heavy clouds of too much information noise, advertising and confusion. An experienced adviser can provide CLARITY, look at the bare facts and make a rational decision for our client.

In the past we spent a lot of time on basic client education as the effective tool to raise our client’s awareness, it is no longer necessary. There is plenty of information out there and it is not hard to access it. What is important though is to choose the right information and match it with a quality expertise. Only financial wisdom can provide the right direction, take the burden off client’s shoulders and give them a solution that is right and unique to their situation. Once this happens, the reaction we get is usually quite amazing. Once the client realises that we want what they want and that we are going to make it happen for them and that they don’t have to worry about it anymore...it feels great on both sides.

And that is what I believe the financial planning profession should be about. To be there for our clients, to provide them with leadership and clarity they need, so they can rely on us with any important lifestyle decision. It is a noble profession that deserves this recognition.


by Michal Bodi