Behind this preference for fast gratification lies an investing bias known as hyperbolic discounting. It means that we show a marked preference for current consumption over future rewards. Hyperbolic discounting helps to explain the challenge of getting us to invest for far-off retirements. As rewards are delayed further into the future, we assign them less value.

Studies, for example, show that most people would take $100 today over $200 in two years time, but would not take $100 in six years over $200 in eight years. Rationally, there is no reason for this – we should find these trade-offs identical in relative terms.

The problem is the way that we think about time is not rational. As points in time are pushed into the future, we come to view them as simply faraway points on a fuzzy horizon. This treatment of time seriously complicates how we attach value to future rewards. The value of savings to a man aged 65 are obvious but, without a time machine, showing this to the same man in his twenties is a problem if he assigns little value to a distant reward. The issue then is that valuable years of compound investment growth can be lost to inertia.

Binding Commitments

One of the main methods of addressing this human failing is via making commitments; ideally, binding commitments. In the same way that people find it easier to train for a marathon once they have made a commitment to raise money for the effort, commitments can be useful in investing.

Superannuation is a great example of a binding commitment. It effectively bars people from using their savings before retirement and it benefits from favourable tax treatment to further promote saving over consumption.

There is no such binding commitment for a managed fund or holdings of shares. Given the patience required for investing, this poses a behavioural challenge to investors at a time when holding periods of shares have fallen to historic lows.

There is plenty of evidence to show that investing in a well-chosen portfolio of high-quality shares has been a winning strategy over time. But time is a critical part of the process. It follows then that self-control is a critical part of investing. For some investors, it might be better not to monitor the daily fluctuations in markets if these merely cause them to question the value of holding investments.

Source: Fidelity (October 2012)
 

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So, what are the habits of frugal effective people?  They are not miserly, they do not give up the luxuries that make them happy.  They understand the difference between possessions and net worth, remember that true wealth is measured in assets.  To be a successful, effective and financially secure  person, understanding and perhaps adopting the habits of a frugal person may assist.

Be Proactive –  Take responsibility for your own life.  Understand you are in control of your life and the direction it takes daily.  Make your financial commitment to yourself and let others know your goals.   Listen to yourself and reason with yourself.

Have Realistic Goals – Envisage your end results despite obstacles.  Visualise effectively what you want to achieve and decide how you will get there.   Remember things are created twice, once mentally and then physically.

Prioritise – Keep your goals as your first priority.  Ask yourself what are the things most valuable and worthy to you and prioritise around these.  Learn to say no to be in more control of your budget and in achieving your financial goals.

Be Positive –  Have a win-win mindset.  This will allow you to see mutual benefits from all your interactions.

Communicate – You need to be able to listen to and understand the goals and behaviours of other people in your life as well as having them understand your goals.

Synergise – Surround yourself with people who are where you want to be, share ideas, work co-operatively to be creative and enable more effective results than you could achieve individually.

Keep Fit – physically and emotionally – renew yourself by being healthy, exercising the body and the mind, relaxing and having fun.  It does not mean having to go to expensive spas or restaurants.  Riding your bike, walking, cooking yourself and relaxing in a tub at home can re-energise you.

Newcastle Financial Advisors Leenane Templeton take a holistic view of your life and finances and we are passionate about helping you to grow, protect and maintain your wealth. 

Speak with our financial advisors today.

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The stall-holder hopes you won’t make a sufficient correction so that you pay too much. It’s an everyday example of a common decision-making frailty: our tendency to anchor to numbers in the face of uncertainty.

With investing, numbers to anchor to are ubiquitous: this is why it is one of the most common cognitive traps for investors. Forecasting, in particular, allows the anchoring bias to run free.

Imagine two reports that forecasts gold prices a year from now. Report A suggests a doubling of the price while report B suggests a tripling. Investors who read report B might be reluctant to sell after a doubling of their investment – they are anchored to the idea of a tripling. What if the gold price falls? Investors risk hanging onto a losing investment by clinging to anchors.

Much of the harm of anchoring is exacerbated by other behavioural biases such as hindsight, overconfidence and an attachment to “narrative fallacy” – a story that justifies a forecast. The problem is the story may not play out – and the story itself is typically a device for understanding a chaotic world.

Anchoring in forecasting is a best-guess exercise and investment professionals are aware of the pitfalls.

More dangerous is the subconscious anchoring to irrelevant numbers that derails many investors. Why does the price an investment is bought at act as an anchor on future decisions? Most worrying is the fact that anchoring happens when people know they are using irrelevant information.

Many investors are guilty of latching onto market prices as anchors. This is dangerous as prices may prove to be overvalued or undervalued. They are simply the latest estimation of value and may not reflect the real value of a company.

So how should investors deal with anchoring when the tendency to anchor is overwhelming?
James Montier, one of the leading authors on behavioural investing, has a suggestion. It is that investors should anchor to something with predictive power, namely income streams such as dividends.

While earnings can be manipulated by accounting treatments, dividends cannot. In this way, they provide a barometer of a company’s financial health. Studies suggest that bubbles are more likely to appear in stocks when investors lack dividends as an anchor.

Dividends and dividend yields provide a way for investors to understand price relative to value. Equityincome investing has always been seen as appealing to the patient investor. Now it has behavioural appeal to those who want to overcome common investing vulnerabilities.

In order to ensure you are making a measured and tactical investment choice, always speak with your financial planner when making investment decisions.

Source: Fidelity Worldwide Investments
 

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Exchange traded funds (ETFs) are one of the fastest growing investment instruments in the world because they offer investors a cost effective way to gain exposure to a range of domestic and international asset classes.

This article provides a summary of:

• What an ETF is
• The benefits if investing in ETFs
• How ETFs compare to other investments

Exchange traded funds (ETFs) give investors the combined benefits of managed funds and listed shares in one convenient, liquid and easy to trade investment vehicle.

• ETFs trade on the Australian Securities Exchange (ASX) exactly like shares, giving you the ability to diversify across an asset class in one easy transaction.
• The underlying assets of an ETF are comprised of a diversified portfolio of securities across an asset class which typically track an index.

Why invest in ETFs?

There are 6 good reasons to consider investing in ETFs:

• Instant diversification
ETFs provide you with the ability to diversity across an asset class through the holding of a single security. This broad investment exposure helps you to avoid concentration risk, which can occur if your investment portfolio is not sufficiently diversified across and within asset classes.

• Liquidity
Like shares, ETFs give you the flexibility to buy or sell at any time during market hours – meaning you can respond quickly to take advantage of changes in market conditions. While daily volume is seen as an indicator of liquidity for shares, ETFs benefit from Market Makers providing liquidity.

• Transparency
To ensure transparency, a full list of the underlying holdings of the ETF is provided to the market each day. This list allows you to see the exact nature of the underlying exposure, making it easy to use the ETF to complement other investments in your portfolio.

• Lower cost
ETFs are a cost effective way to gain exposure to a diversified portfolio of securities across an asset class. Since ETFs are typically able to achieve lower operating costs, the management fees can be lower when compared to other forms of managed funds.

• Tax efficiency
ETFs generally have a lower level of portfolio turnover than actively managed funds, usually changing only when there is a rebalance of the index. As a result, ETFs are more tax efficient investments over the long term because they are less likely to generate high levels of realised capital gains. Since primary market investors, such as Market Makers, purchase a large number of ETF units directly from the Issuer and offer the ETFs for sale on the secondary market, the trading of ETFs in the secondary market does not increase portfolio turnover within the ETF and this helps to keep them tax efficient.

• Returns from dividends and capital growth
As the underlying portfolio of assets changes in value, ETF units will change in value. Investors benefit from capital appreciation of the value of the ETF units and may also receive distributions that have been paid by the underlying holdings, such as dividends. Depending on the underlying securities in the ETF, investors will also receive any associated franking credits.

Comparing ETFs to other investments

To meet your investment goals, you may choose a combination of investments in your overall portfolio, including exchange traded funds (ETFs), shares and managed funds. When deciding to invest it is important to understand the features of the various investment types.

How to use ETFs in a portfolio

ETFs can be used in a portfolio to help implement a variety of strategies for different investor types.

Speak with your financial adviser about whether ETFs are right for you.

Source: Russell Investments, March 2012.
 

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Most people wouldn’t dream of driving without car insurance, or living in a house without home and contents insurance, so it is remarkable that the majority of Australians do not think about protecting their families through life insurance, in the event of death, accident or illness ¹.

With the incidence of cancer increasing year on year ² and the occurrence of cardiovascular diseases preventing many families from living a full life because of disability ³, it is becoming increasingly important to consider crisis cover as part of a life insurance portfolio.

Many Australian families struggle, both emotionally and financially, when a family member is diagnosed with a life threatening or debilitating medical condition. By taking out crisis insurance cover you can help to ease the financial burden should you suffer a traumatic event.

You might think ‘it’ll never happen to me’, but you may think again after considering these facts.

Cancer

Cancer is a leading cause of death in Australia with more than 43,000 people expected to have died from cancer in 2010.

The most common cancers in Australia are skin cancer, cancer of the digestive organs, breast cancer, lung cancer and prostate cancer ⁴. 93,200 new cases of cancer will be diagnosed in Australia this year, that’s 255 every day. Only 50% of these cancers are successfully treated ⁵.

Prostate Cancer

• 1 in 6 men will get prostate cancer ^6.
• Almost 3,300 men die each year of prostate cancer and around 20,000 new cases are diagnosed every year ⁷.
• Each day about 32 men learn news that they have prostate cancer – tragically one man every three hours will lose his battle against this insidious disease ⁸.
• Breast Cancer
• 1 in 9 women are at risk of being diagnosed with breast cancer by the age of 85 ^9.
• 32 women were told yesterday they have breast cancer; 32 women will be told today…and tomorrow¹⁰.
• 2,707 women die from the disease in a single year – making it the leading cause of cancer-related death in females¹¹.

Skin Cancer

• Over 480,000 Australians are treated for skin cancer each year – that’s over 1,000 people every day ^12.
• Over 1,700 Australians die from skin cancer each year ^13.
• Australia has the highest rate of skin cancer in the world. Skin cancers account for around 80% of all new cancers diagnosed each year in Australia. Each year Australians are four times more likely to develop a common skin cancer than any other form of cancer ^14.

Cardiovascular disease (CVD)¹⁵

CVD is the term used for heart and blood vessel diseases and stroke.

• CVD kills 1 Australian every 10 minutes and prevents 1.4 million people from living a full life because of disability caused by the disease.
• CVD is one of Australia’s largest health problems.
• CVD affects 2 out of 3 families ^16.

So, what is crisis insurance cover?

Crisis insurance cover, also known as trauma cover, pays a lump sum should you be diagnosed or suffer one of the specified trauma illnesses or events, Some of the ‘illnesses’ are procedures and not illnesses e.g. Coronary By-Pass, Angioplasty, Aorta Surgery, Heart Value Surgery or Major Organ Transplant. Depending on your insurer, this lump sum payment may be up to $2,000,000 on diagnosis.

You can take out crisis cover between the ages of 16 and 64 and it covers you 24 hours a day, 7 days a week anywhere in the world, depending on your insurer.

How can crisis cover benefit you?

You should speak with your financial planner about the amount and type of cover that you need. Everyone’s circumstances and situations are different so discussing your needs with your adviser is a good first step when considering life insurance.

Should you be diagnosed with a life threatening or debilitating health condition, crisis cover may help you:

• to pay for any additional medical bills or necessary treatment
• to replace lost income while ill or recuperating
• to pay for home care or auxiliary services while recuperating
• to replace lost income of a family member who is caring for you
• to pay for rehabilitation
• to pay for a change in lifestyle, for example, access ramps, wheelchairs or manual car controls.

Speak to your financial planner today to find out about the most appropriate cover for you.

Each insurer differs, but most policies can cover you for a variety of crisis events such as:
 

• Angioplasty
• Cancer (female organs)
• Cancer (general)
• Cancer (male organs)
• Coronary by-pass surgery
• Heart attack
• Stroke
• Accidentally acquired HIV
• Aorta surgery
• Aplastic Anaemia
• Benign brain tumour
• Blindness
• Cardiomyopathy
• Kidney failure
• Chronic liver disease
• Chronic lung disease
• Coma
• Dementia & Alzheimer’s disease
• Viral Encephalitis
• Heart valve surgery
• Loss of hearing
• Loss of independent existence
• Loss of limbs
• Loss of speech
• Major head trauma
• Major organ transplant
• Motor neurone disease
• Multiple sclerosis
• Muscular dystrophy
• Parkinson’s disease
• Primary pulmonary hypertension
• Rheumatoid arthritis
• Severe burns

Crisis Insurance Case Study *

Doug has been working as an accountant for the past eight years in Newcastle where he lives with his wife and three kids. Unfortunately for Doug and his family, he was recently diagnosed with bowel cancer. Doug’s diagnosis meant that he was required to undergo extensive chemotherapy, and as a result he was unable to work for six months. As you can understand, Doug and his family were extremely devastated when the doctor diagnosed the condition. As well as dealing with the emotional stress, they also had to consider how they would pay for the mortgage, school fees and other bills without Doug’s income.

Fortunately for Doug and his family, their financial adviser had recommended that both Doug and his wife take out crisis cover on top of their Term Life cover. When Doug received the news from his doctor, he called his adviser immediately who submitted a claim to his insurance company. His claim was assessed and Doug received a lump payment of $250,000. The payment enabled Doug and his wife to pay for his medical fees, mortgage and school fees all of which his income would normally have paid for.

The lump sum payment meant not only that Doug and his family’s bills were taken care of but also meant that Doug could focus all his energies on getting better instead of stressing about financial concerns.

* This is an example only to illustrate the potential benefit of taking out crisis cover, and should not be relied upon as indicative of benefits payable under any crisis cover products.

Crisis Insurance

Endnotes:
1.  http://www.lifewise.org.au/about-the-lifewisecampaign/underinsurance,-a-problem.aspx
2.  http://www.aihw.gov.au/cancer/data/acim_books/AllCancers.xls
3.  http://www.heartfoundation.org.au/HeartInformation/Statistics/Pages/default.aspx
4.  http://www.cancer.org.au/aboutcancer/FactsFigures.htm
5.  The Risk Store
6.  The Risk Store
7.  http://www.prostate.org.au/articleLive/pages/Prostate-Cancer-Statistics.html
8.  http://www.prostate.org.au/articleLive/pages/Prostate-Cancer-Statistics.html
9.  http://www.cancer.org.au/aboutcancer/cancertypes/breastcancer.htm
10.  The Risk Store
11.  http://www.cancer.org.au/aboutcancer/cancertypes/breastcancer.htm
12.  Australian Institute of Health and Welfare (AIHW) & Australasian Association of Cancer Registries (AACR). Cancer in Australia an overview, 2006. Cancer Series Number 37. Canberra: AIHW, 2007.
13.  Australian Bureau of Statistics (ABS). Causes of death 2007. 3303.0. Canberra: Commonwealth of Australia, March 18 2009.
14.  Australian Institute of Health and Welfare (AIHW) & Australasian Association of Cancer Registries (AACR). Cancer in Australia an overview, 2006. Cancer Series Number 37. Canberra: AIHW, 2007.
15.  http://www.heartfoundation.org.au/Heart_Information/Statistics/Pages/default.aspx
16.  The Risk Store

Source: AIA Australia Limited, September 2011
 

Need Crisis Insurance? 

Call Leenane Templeton today and speak with our team about personal insurance

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The importance of “dividend imputation” – for that’s what the system is called – is that it changed the post tax considerations of investing in favour of Australian shares, especially over cash.

Up until 1987, company earnings paid out as dividends were largely taxed twice. The first time was when companies paid tax on their gross profits (for dividends come from net profits). The second time was when the investors who received the dividends paid tax on this income.

Dividend imputation abolished the double tax whammy on dividends by allowing shareholders to claim a tax credit for some, or all, of the tax an Australian company has paid on its earnings. These tax credits are known as franking credits. Companies that pay all their tax in Australia often offer “fully franked” dividends.

So that low income earners could gain the full benefit of the new tax system for dividends, the Howard government made franking credits refundable in 2000. This means that low income earners can receive franking credits back in cash as part of their tax refund.

The tax law surrounding franking credits carries restrictions and exemptions that may change the tax benefits received for different people. But its mainstream application is significant because other asset classes generally don’t offer such tax effective income streams as Australian shares.

An Australian company, for instance, that offers a fully franked dividend of 5% (its expected dividend payment divided by its share price) is offering a more tax effective income stream than a bank term deposit offering a 5% return. In reality on a pre tax basis, this Australian company is offering a 7% yield for investors on the highest marginal tax rate, versus 5% still for the term deposit.

Dividend Yield

As Australian shares have fallen in recent times, the dividend yield on Australian shares has risen to about 5% overall, and many large stocks offer dividend yield far in excess of the average (see endnotes 1). This dividend yield would carry franking credits in excess of 90%, if the franking credits offered by the typical managed Australian share fund on their distributions is any guide. This means that the effective yield of Australian shares overall is closer to 7%. At the same time, term deposit rates are falling.

The drive behind the introduction of dividend imputation was to encourage investing in shares. It’s still working just as policy makers thought it would a quarter of a century or so ago.

To discuss your share portfolio speak with our Newcastle financial advisors

Endnotes
1 Bloomberg. As at 7 September 2011. Based on the S&P/ASX 200 Index.
Source: FIL Investment Management (Australia)
Limited, September 2011

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Now that we have survived a few hot summer days and can expect some heatwaves through the summer it is useful to remember that heatwaves apparently kill more Australians than any other natural disasters. 

A number of Australian cities, in particular Brisbane, Melbourne and Adelaide, have experienced significant deaths due to heatwaves since the late 1800s.  It is likely that this pattern has been repeated in major regional centres, and will continue, especially with population growth and an ageing population.

However, there has never been a national study which uses a common definition of heatwaves and directly compares mortality data, until now.  Working with support from the Commonwealth Government and the Bureau of Meteorology, PricewaterhouseCoopers have released a report entitled "Protecting human health and safety during severe and extreme health events – a national framework".   The research conducted demonstrates that heatwaves have led to considerable excess deaths in Melbourne, Adelaide, Brisbane, Sydney and Perth over the past 50 years. 

The report predicts that by 2050 an extreme heat event in Melbourne alone could typically kill over 1,000 people in a few days if we don't improve the way we forecast, prepare for and manage these events.  They researchers consider it is likely that Brisbane could face a similar death toll with Adelaide, Sydney and Perth increasingly impacted.

Putting these comments into perspective, the report quotes the tragedies of 173 people dying in the Black Saturday fires in Victoria in 2009 and 35 in the Queensland floods in 2010-2011.  However, even more tragically, more than 370 people died from extreme heat in Victoria in the same week as the Black Saturday fires.

Whilst much is being done in making our homes, businesses and community safer, there is much more that can be done to ensure we have the correct infrastructure and a more resilient population base.  The report suggests that having an early warning system, developing an Excessive Heat Factor forecasting framework, which recognises local differences in heat conditions and experience, will enable emergency workers, social health and health workers, families and carers to be in a much better position to respond.

This report suggests that with the right support the Bureau of Meteorology could provide this tool quite rapidly.

Protect your family with adequate insurances – speak with our Newcastle Financial advisors about insurances

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Speak with your Newcastle Financial Advisor today or call 02 4926 2300

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Recouping Investment Losses

Research conducted by Welton Investment Corporation over a fifty-year timeframe from 1960 -2010 found that, whilst many investors assume equity market returns have a normal distribution curve (bell-shaped) over time, the reality was that returns are asymmetrically weighted on the downside rather than the upside. 

Welton's analysis suggests that the average investor encountered severe rolling quarterly losses 5.3 times more frequently than would have been expected.

Speak with your Newcastle Financial advisor for investment advice

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The Financial Planning Association of Australia  (FPA) was pleased to announce today that Andrew Frith of Leenane Templeton Wealth Management, based in Newcastle NSW,  is the inaugural winner of the Newcastle Chapter Associate Financial Planner Best Practice Awards 2011.

Replacing the previous Value of Advice Awards, the FPA’s Best Practice Awards recognise the superior outcomes for clients when professional financial planning expertise is provided in line with the FPA Code of Professional Practice and Code of Ethics.

For the first time, to recognise achievements at the grass-roots level, submissions for the Best Practice Awards have been awarded at Chapter level with Andrew Frith of Leenane Templeton winning the FPA Associate Financial Planner Best Practice Award.

"This award demonstrates our high standards of professionalism and commitment to providing valuable advice and service to our clients, we believe in placing the clients interests first rather than our own" said Andrew Frith of Leenane Templeton Wealth Management Pty Ltd.

Andrew, a Chartered Accountant and specialist in self-managed superannuation, has also been recognised in the past as one of the top 10 financial planners in Australia awarded by AFR Smart Investor.   For further details email wealth@leenanetempleton.com.au

for more details visit our website at http://financialplanner-newcastle.com.au 

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