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Archives for Jake Brown

What To Know When You Start Investing

Generally speaking, there are two ways to make more money in life: by working day in, day out, or by letting your money and assets work for you.  Now I can only speak for myself, but letting my assets work for me sounds much better than grinding away at the office for the rest of my life (not that I don’t love my job!).

It may sound like prudent practice, but leaving your entire life savings under a mattress will not give you any return or increase in capital (in fact, after inflation your buying power has actually decreased).  Even leaving your money in a bank account will only generate a minimal return.  On the other hand, investors can earn additional money through dividends and distributions from their investments or by purchasing assets that increase in value.

The purpose of this article is to introduce you to the world of investing and provide clarity on key concepts that we are often asked about by our clients.

When should I start investing?

If we ignore transaction costs and the cyclicality (ups and downs) of markets, the answer to this question would be an easy one: RIGHT NOW! The power of compounding interest means that you are better off investing as soon as possible so your future returns are off a higher base.  This concept is best conveyed in the chart below.  Chart 1 shows that an individual who invests $100,000 today (Blue) for 20 years at an 8% return will earn $96,000 more than an individual that invests the same amount, earning the same return, only 3 years later (Orange).  In the fourth year, Blue would earn 8% on $126,000 ($10,000) whereas Orange would earn 8% on the initial $100,000 ($8,000).  Therefore, it seems the early bird gets the worm after all!

How much should I start investing with?

Unfortunately, for us investors, we do live in a world with transaction costs such as brokerage so it can be unwise to invest small amounts of money where your returns will be “eaten up” by these costs.  A common brokerage fee structure for a number of retail stockbroking firms (including our own) is:

  • $55.00 for trades up to $10,000
  • 55% for trades over $10,000

As an example, if I buy $15,000 worth of shares and sell them a year later for $16,500, I would earn $1,500 in capital gains minus $173 in brokerage (buying and selling) to have a net capital gain of $1,327.   This example shows that a reasonable capital return of 10% has been reduced to 8.8% after fees.  Now, imagine if I only invested $1,000 and sold my shares for $1,100.  My $100 (10%) capital return would reduce by $110, leaving me with a measly -1% return – which isn’t very sexy at all.

So, what does this all mean? If you are an individual that wishes to purchase some Australian shares, I would recommend building up cash to a level that minimises the ratio between brokerage/investment.  If you are interested in creating a portfolio with a number of assets, I would recommend coming into one of our offices for a consultation (if you are good at something, you don’t do it for free).

How much risk should I take?

This is an extremely important question and one that can be the difference between living comfortably in retirement or couch surfing at your grandkid’s place.  The amount of risk you take on is also dependent on your investment goals.  For example, an 85 year old trying to provide for their retirement would have a much more conservative approach to investing than a 28 year old who is trying to build wealth to purchase their first home.

In addition to understanding your goals, at our firm, and in the advising community as a whole, we require our clients to complete a risk profile questionnaire, which provides a clearer picture of exactly how to risk averse they are.  The results of this questionnaire then distinguishes which risk profile our clients fall into and how their money should be invested.  The financial advisory industry uses five risk profiles:

  1. Conservative
  2. Moderately conservative
  3. Balanced
  4. Growth
  5. High growth

What should I invest in?

The answer to this question is a direct result of what risk profile you are aligned with.  There are five main asset classes that we invest in at our firm.  They are, in ascending order of riskiness:

  • Cash
  • Fixed interest: corporate, government or semi-government debt
  • Property and infrastructure: shares or holdings in property and infrastructure assets
  • Australian shares: shares listed on the ASX
  • International shares: shares listed on foreign stock exchanges

The proportion of your wealth that you should invest in each asset class is dependent on your risk profile.  For example, a balanced portfolio at our firm invests 5% in cash, 35% in fixed interest, 20% property, 30% Australian shares and 10% international shares.  The holdings in cash and fixed interest will ensure that 40% of your portfolio is invested in assets that will preserve your capital while paying some income.  The 20% of property holdings provides investors with the potential for capital gains while maintaining some level of capital preservation and income.  The 40% held in Australian and international shares provides exposure to riskier assets that can provide greater capital gains and income in the form of dividends.

Another benefit of investing in different asset classes is to diversify your portfolio and take advantage of the low, or even negative, correlation between some investments.  Correlation is a mutual relationship between two variables (assets).  By way of example, Chart 2 shows how the defensive fixed interest asset class increased by 2% from October to December 2018 as investors fled the riskier Australian shares asset class that decreased by 8% over the same period.  If you were invested entirely in Australian shares, you would have lost 8% of your capital whereas you have only lost 3% if you were invested 50/50 across the asset classes.

If you have been going to sleep on a mattress full of your life savings every night, or if you are interested in learning more about investing, please feel free to come into one of our offices to have a chat.  Our investment team relishes any opportunity to educate people on the benefits and techniques of investing and there is nothing more satisfying than helping others unlock the power of sitting back, and letting your money work for you.

Please note, this article provides general advice and information only. It has not taken your personal or financial circumstances into consideration. If you would like more tailored investment or financial advice, please contact us today.

Read more articles in our Financial Literacy series. 

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Capital Gains Tax: What You Need To Know

Small businesses are vital to our economy and their sale can help fulfil their owners’ retirement dreams.  Since September 1999, there have been a number of Small Business Capital Gains Tax (CGT) Concessions available to allow business owners to cash in on years of hard work, blood, sweat and tears.  However, it is important that these concessions are correctly navigated; otherwise, there is a good chance that the “Taxman” will walk away with a big chunk of your hard work.

Business and Active Assets

The CGT provisions give a number of concessions to clients who sell a business or active business assets.  An active asset is:

  • an asset the taxpayer owns and uses or holds ready for use in carrying on a business and has been active for the lessor of 7.5 years or 50 percent of its life;
  • an intangible asset inherently connected with the business (e.g. goodwill); or
  • an interest or shares in a resident company or trust where the market value of the underlying active asset is up to 80 percent of total assets for at least half of the ownership period of the interest/shares.

Eligibility

To be eligible for the concessions the following conditions must be met:

  • you are an individual, partnership, company or trust;
  • you are carrying on a business;
  • you are a small business, defined as having an aggregate annual turnover of less than $2 million; and
  • your net assets value plus the net asset value of the client’s associates must be less than $6 million (excluding home, personal use assets, life policies and superannuation.

The Concessions

15-year Exemption

If the business or active asset was owned continuously for 15 years, and you are over age 55 and retiring, you can sell the asset or business without being assessed for capital gains.  In our example above, the Smiths would be able to take home $270,000 each.

50% Active Asset Reduction

There is a 50 percent reduction on the capital gain from the sale of an active asset or business.  This is in addition to the 50 percent CGT discount if the asset has been held for 12 months or more.  If Mr and Mrs Smith implement this strategy they would incur a $43,875 tax bill and take home $496,125.

Retirement Exemption

A client can elect to have a capital gain of up to $500,000 from the sale of an active asset or business treated as a superannuation benefit payment.  If you are under 55, then this amount must be contributed into a superannuation fund and will add to the tax-free component. Once you reach the age of 60, all superannuation benefits are exempt from the tax, provided you meet the conditions of release.  This strategy can be applied after the CGT discount and would allow the Smiths to contribute $135,000 to each of their superannuation accounts.

50 percent Asset Reduction + Retirement Exemption

If you have multiple business assets that you wish to sell to fund your retirement, you may be at risk of exceeding the $500,000 limit.  To circumvent this limitation, it is possible to apply the 50 percent asset reduction as well as the Retirement Exemption.  This strategy allows the Smiths to contribute $67,500 to each of their superannuation accounts, providing breathing room for an additional contribution of $432,500 to each down the track.

Rollover

If you sell an active asset, you can defer all or part of the capital gain for two years.  You can defer this even longer if you utilise the proceeds to acquire a replacement asset, or if you spend money to improve an existing asset.  This concession can also be applied after the 50 percent asset reduction.

 

It is vital that your personal financial position is carefully analysed when considering these concessions, as the above is provided as general advice only and should not be taken to be personal advice. Even if your circumstances are similar one of the above examples, please speak contact us to a business consultant today.

The last thing you want is to see the proceeds of your hard work end up at the ATO when you had access to professionals that could have navigated you through this tricky process.  So if you are a small business owner with an eye on retirement, please come in to see one of our helpful Consultants or Financial Advisers to get a plan specifically tailored to your financial goals and objectives.

 

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Business Consulting: What Is It And Why Do You Need It?

As with every aspect of our business, there is no greater importance than the opportunity to strengthen our relationships with clients by helping them navigate towards their financial goals.  Quite a number of our clients are business owners and it has been an exciting year for our business consulting team, which provides business advisory services for all sorts of challenges faced by owners and managers.   Current projects have drawn us into the agriculture, digital media sharing, solar power, consulting, and construction industries.

Late last year we were approached to establish and raise capital for a start-up engineering firm in Brisbane.  The first few months of the project involved us working with the Managing Director conducting a thorough analysis of expected future costs and revenue.  We analysed the industry’s dependence on broader macroeconomic factors such as commodity prices and Government expenditure. Once we had a clear picture of the expected performance of the firm, we prepared an Information Memorandum ready to present to potential investors.  We are now assisting the client in finding investors.

Some time ago, we were engaged to facilitate the sale of an extremely successful building materials manufacturer.  The business’s directors have spent over a decade growing the business in a rapidly growing market and are ready to reap the rewards of their hard work.  We built a financial model for the business and prepared an accompanying Information Memorandum ready for presentation to potential purchasers.  We also prepared a contingency plan, in case we could not find a buyer willing to commit to suitable terms.  In that case, we will look to recapitalising the business and installing new management.  The processes take time – you have to be tenacious to see it through, and not panic when faced with various setbacks.  Our personal and professional experience is completely aligned with these requirements and we are confident of achieving an excellent outcome for all involved.

A successful grain and oilseed farming enterprise required our assistance after separating from the previous ownership structure.  Our responsibilities broadened as the enterprise began to encounter financing restrictions and flooding of their crops.  Luckily, we had already built a detailed financial model that facilitated the preparation of contingency plans including seeking additional financing.  Our consulting team also investigated and completed an application to receive “cheap” funding from the NSW Rural Assistance Authority Farm Innovation Fund to build a much-needed machinery shed.  Now, eight months into their new cropping season, our clients’ business is completely stand-alone and this year’s crops are looking very promising.

As with our financial planning work, our help for businesses is hands-on.  We do our homework properly, and we get involved.  We are a professional resource, a trusted advisor and a friend to lean on.  We do not give up and our team is always available.

The above are just some examples of what The Investment Collective can do for you and your business. It has not taken into consideration your business or your business’ needs. Contact us today for a consultation where your personal financial circumstances and business goals will be discussed in more detail and advice will be customised to your current situation.

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Why Financial Modelling Is So Important

Finding it hard to manage your business’s finances? Unsure of how to price your products or services? Don’t know how much you can afford to spend on wages and expenses? Want to gain an accurate value of your business? Sounds like you need a financial model.

All business operators are concerned with the profitability of their business, but it is difficult to gain an accurate grasp of its real financial position purely from monitoring bank balances and receipts. So often is the case that business owners in successful times lose incentive to monitor their financial position. This can come back to haunt management once times start to become gloomy as they ponder “How did this happen?” “What were we doing right before?”. As silly as it sounds, sometimes an Excel spreadsheet can answer all of these questions (and more!).

Financial models are a key element in most major business decisions. A financial model is prepared whenever any organisation is considering project finance, bidding for a project, evaluating acquisition targets, carrying out monthly financial planning and budgeting, conducting capital structure studies, or just to monitor the business’s profitability.  Accurate financial models are also a staple requirement if you are trying to source financing from investors or lending entities.

They are useful tools that allow business options and risks to be evaluated in a cost-effective manner against a range of assumptions, identify optimal solutions in evaluating financial returns and understand the impact of resource constraints to make the most effective business decisions. A truly effective financial model is one that dynamically updates as the economic and business climate changes.

Our Consulting team has extensive experience in developing financial models which draw from historical performance and management’s expectations for the future. Once a tailored financial model has been created, sensitivity tests are run to generate accurate forecasts and budgets to allow management to determine how they should operate in the future. From here, we can provide recommendations on other business functions.

Businesses from agriculture, engineering, finance, heavy machinery and retail industries have approached us to construct conservative financial models that enable business owners to “hope for the best, but plan for the worst”. In 2016 we had the pleasure of constructing a dynamic model for a grain and oilseed farm in NSW. The original need for the model was to gain a value of the enterprise for the purpose negotiations and restructuring. However, as new problems were encountered, such as restricted access to financing, falling crop prices and even flooding, management quickly realised the true power of a financial model: it’s a tool that provides insight into how to develop clear contingency plans. Similarly, a sports store facing a severe cash flow crisis was able to trade their way out and re-finance through using our no-nonsense approach and financial modelling.

If you or anyone you know owns a business that needs to review their financials to take their business to the next level or faces increasing uncertainty, then now is the time to deal with it. Contact us today, toll free on 1800 679 000 for our Rockhampton office and 1800 804 431 for our Melbourne office to have a free initial consultation.

The information provided in this article is general advice only. It is prepared without taking into account your objectives, financial situation or needs. Before acting on the advice in this article, please consider the appropriateness of the advice, whether the advice is appropriate to you, your objectives, financial situation and/or needs, before following this advice.

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