Concerns about the market... Or here we go again.

Should you be concerned about what's going on in the share market/s lately?

The short answer is no. The longer answer would be:

In times of market volatility (nervousness and high emotion) it’s often good to reflect and put things in context. In Nov 2007, the Australian share market was at its all-time high. In 2009 it fell 54%. Since then, the ASX200 returned to almost 6000, recouping almost 80% of the lost ground. Today the Australian share market currently sits around the 5000 mark. 

Ok, so what does it all mean and what do I have to do?

The answer is not much, except remembering the conversations about investing with your financial planner.

These ups and downs (or the volatility as the experts call it) are absolutely normal. They’re organic and we want them to happen. If we didn’t want this volatility in the first place, we’d simply always keep your money in cash. But that wouldn’t be that great either as after inflation there would be nothing left. Therefore, the volatility is good!  It's there for the same reason as the premium returns we get from investing in great businesses in Australia and overseas (also called shares). We have to accept it and appreciate it.

For those people in accumulation phase, still working and contributing into super/investments (let’s call this group – the buyers) this presents a great value opportunity to accumulate more at attractive prices. Just picture going to a fruit market, having same amount of money in your pocket as yesterday and seeing lower prices. As  a buyer, you're getting more value for your money. Happy days.

For those people who finished investing new money - in retirement phase (let’s call this group – the receivers ) - we need to remember that the income they receive from their portfolio is not paid based on its value (or what the portfolio is worth) but the number of units they hold. And although the volatility impacts on the first, it doesn't have any impact on the latter. 

It also highlights the importance of maintaining cash (one or two years’ worth) in your retirement income portfolios to help weather the volatility and not forcing you to sell.

Finally, the share market, just like us, is emotional. There are no good or bad markets. There’s just the market. And Mr Market has a bad temper sometimes. The best we can do is to leave him alone and not try to control it. Or as your financial coach will always tell you, let’s take a step back and think about why we're investing in the first place. This is the main reason you hired them - to put things in perspective and to stop you from making bad decisions with your money.

Hope this puts things in context for you. Please let me know if you have any questions.

Story about a coat ... And perhaps something else too.

I don't know about where you are, but it's freezing cold here in Sydney right now. My wife is excited because she can take out all her winter fashion  and as every winter, she tries her tricks to influence me to wear my winter coats too. 

I categorically refuse. Not because I hate fashion, but because I'm originally from Europe. I moved to Australia with a view of enjoying mild and warm weather all year round. At least that was the story I kept telling myself. My silly coat story...

So, everytime the winter comes along, I get my annual talk about wearing warm coats. And every year I've managed to brush it off. 

Until today. 

It was a particulary cold morning and I've decided that I give it a go. I listened to my wife. I put my winter coat on and I walked out of the house. Seconds after I've realised something strange. There was no usual cold wind getting under my suit jacket, there was no shaking, no whinging. I was warm. I was comfortable. And I was loving it! 

Then I thought of my wife. Why haven't I listened to her before..!? Was it my stubborness, was it my pride? Whatever it was, it stopped from having what I ultimately wanted, which was feeling warm and happy.

Funny the human behaviour. It plays tricks on us and it clouds our vision sometimes. 

It's only after we manage to get through it, we look back and think ,wow, why didn't I do it earlier.?! It reminds me what people say in my office all the time. Why didn't we come in earlier? Or I wish I came here earlier...

I know everyone goes through these moments. I hope this example sparks something in one of you... I hope it inspires you to stop delaying what deep inside you may know is right but you've been trying to ignore it for ages.

Please use the comments below to share your own coat story. I can't wait to read about it!

@MichalBodi

mbodi@sydneyfinancialplanning.com.au

image courtesy of freedigitalphotos.net and stuart miles.

Spoilt for choice, or choices spoilt?

I was buying an audio book the other day.  

And I was in the mood for a good book – there wasn't something in particular I was looking for.  I just wanted something on leadership.  

After 40 minutes (!!!), I ended up with five books in the shopping trolley and no idea what to do next.  I was completely stuck – it was like my mind was paralysed by the options I had available to me.

There was a book written by an author I've read (and enjoyed) before.

Two books had names that I found really intriguing.

Then there was a book recommended to me by a friend.

And with the last one, it was the summary blurb I what I found interesting and it made me press the ‘buy now’ button.

They were all fascinating in their own right and they all were what I was looking for.  

But there I was, sitting at my desk, completely frozen with no idea which one to choose.  

It was all going so well – I narrowed down the 25 search results to a shortlist of five, but I couldn’t get any further.

Did the muse leave me there at the crucial moment?

I wanted to pick the best one – the best of the best!!!  With work and kids, I don’t get a lot of time to relax and enjoy a really good, stimulating book, and so that time one-on-one with a good book is too precious for me to waste on the wrong book.

Unable to move any further, I ended up getting distracted by my kids, I turned off the laptop and didn't make a purchase...

It took me a good few weeks before I was able to go back and buy something. 

And guess what, I ended up buying one of the ones looked at previously.  I didn't bother with shortlists this time around – I just went in and bought the one that was recommended by someone I trust.

Because of that, I've got a good read waiting for me at the end of the day.  I’m really enjoying the book, and I'm so glad I went back and bought it.

It seems like everywhere you look these days, there’s yet another choice that has to be made.  Big choices, small choices, important choices, insignificant choices - they all seem to weigh us down and put pressure on us to get it right - to make the best choice.

The concept of the best is clouding our vision. 

It doesn't have to be that way. Once we allow ourselves to have the freedom to trust and be guided by an objective point of view, the weight is lifted. 

A choice made will always be better than the one you plan to make (one day).

by Michal Bodi

Have you had a similar experience? I'd love you to share with me.

You don't pay me for my time...

I recently had to go to an eye specialist. 

The guy I went to was recommended to me as the best in his field.

I showed up at the clinic on time, feeling a little nervous and unsure of what was happening next.  

One of his assistants explained the process to me step by step.  I was really grateful for that – I was getting a little freaked out, thinking about someone sticking sharp tools into my eye while I was watching!

I had to wait a little longer and then I was taken through to the surgery. The doctor’s assistants and a nurse started preparing my eye – cleaning the skin around it, putting on the protective material, adjusting the lights and laying out all the tools.  

I was laying there for about 20 minutes before the actual specialist came in.  He sat down next to me, looked into my eye and did a few tiny but precise moves with his tools.  Within a minute he was done and said, ‘There you go, all fixed.’  I thought, ‘wow, that was quick!’

As I was waiting to pay, l there was a guy in front of me who’d had the same procedure.  ‘That’s $745, sir,’ said the secretary.

He shook his head and said, ‘Wow, that a hell of an hourly rate!’  

The specialist overheard him.  He came out of his office and walked over to the guy.  He smiled and calmly said, ‘You don’t pay me for my time.’  Then he turned around and went back to his office.  He didn't need to say anything else.

I was gobsmacked!  This guy was spot on!  I immediately thought of the work I do with my clients.

Even though it takes me a little more than a few minutes to do my job, it’s not about billable hours, or the amount of time I spend in front of my client.  The value is somewhere else - It’s about the outcomes we can achieve together. The outcomes they care about.

I help them build the fundamentals which lead to the life my clients want to live.  

The value of that can rarely be expressed in numbers. 

by Michal Bodi

I thrive on a feedback, please let me know what you think, drop me a line to mbodi@sydneyfinancialplanning.com.au or simply comment on this article. I'd really love to hear from you.

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