Christmas to all my clients and readers of this Newsletter.
Here’s wishing you a enjoyable and happy festive season and a
successful 2005. I’m looking
forward to mine , and I’m sure you’re also looking forward to yours.
to the fact that I will be away on holiday
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McLEAN AND CO.
McLEAN AND CO DECEMBER
2004 NEWSLETTER PAGE 2
GOLDEN RULES OF INVESTMENT
core principles of investing usually dictates the success or failure of
any wealth building strategy. The following are key
investing principles and the building blocks upon which successful
plans are formulated:
interest works like this. When you invest money you earn
interest on your capital. The next year you earn interest on
both your original capital and the interest from the first year.
In the third year you earn interest on your capital and the first two
year's interest. It’s very much like a snowball effect.
As your capital accumulates interest, and interest and interest, it
becomes bigger and bigger.
your selected shares, or units in a managed fund, is best accomplished
at a slow and steady rate over time, regardless of whether you think the
market is about to rise or fall. This approach, known as
Dollar Cost Averaging, is a common way to remove the risk associated
with making a large investment at any point of time, particularly when
markets have been rising and may be ready for a correction.
This strategy not only helps to remove the emotional aspect of
investing- it enforces discipline. When market prices are falling,
you get the benefit of automatically buying more units in a fund with
each subsequent investment. When prices are rising, you are buying
fewer units. The beauty of all this is the outcome- because you
are buying more units when prices are lower and fewer units when prices
are higher, the average cost of your units will be below the average
cost of all units., assuming the market rises over time.
Attempt to Time the Market
timing" is buying and selling your investments based on a belief
that you can pick the markets are heading in the short term.
Share market growth has often come in dramatic spurts that can easily be
missed if you're sitting on the sidelines waiting for an anticipated
correction or bear market to occur. As the 1990s have
shown us, the experts are often more wrong than right when they try to
predict an upcoming market downturn. Unless you have a crystal
ball, your chances of picking market movements in the short term are
minimal. Trying to predict where the share market is heading
can be a dangerous game that can lead to missed opportunities if you
guess wrong. Over the 569 months to June 2004, the
in the Market for the Long Haul
Time has two beneficial properties- reinforcing the power of compound
interest and reducing the risk of negative outcome. It is
important to understand that share markets are naturally volatile
creatures. And in most cases managed funds will set a timeframe by which
you can expect the fund to meet its target return- usually 5 years or
longer. Beware that not every year will result in a positive
return on your investment.
Risk with Diversification
Diversification is one of the most fundamental rules of investing, so
much so that professional portfolio managers live by it.
Diversification- spreading your money among many different investments,
takes a middle road through the highs and lows of market performance,
allowing your investment the opportunity to grow regularly with fewer
fluctuations along the way. Diversification is the most
effective means of managing risk. You'll be less affected by
losses in any one investment and losses may even be offset by gains in
other investments. When diversifying remember to:
McLEAN AND CO DECEMBER
2004 NEWSLETTER PAGE 3
Reduce security or sector- specific
risk- purchase a broad range of investments across various
companies and industries rather than a limited selection of individual
securities. This way, no single investment will dominate the
performance of your portfolio
Spread your money across the different
asset classes (shares, property, fixed income and cash)- each
asset class has its own risk and return attributes. Because
the risks of one asset may complement the risks of another (asset
classes often move in different directions and react differently to
information), it may be possible to achieve higher investment earnings
and reduce your portfolio's volatility.
the Risk/ Return Trade Off
Asset allocation is the key to meeting your objectives- it is
often quoted that asset allocation explains 80-90% of a portfolio's
absolute return. Investing almost always requires you to trade off
your desire for higher returns with your desire to control risk.
Too little return and you will not reach your financial goals. Too
much risk and you will not sleep at night. Invariably investments
advertised as providing high returns have greater risk associated with
them than investments advertising mid stream or lower returns. The
solution to this problem is getting the asset mix right- cash, bonds,
shares, property etc. and how much of each. If you get your
mix right, your portfolio is more likely to deliver what you expect.
Once you have decided upon a mix it is important to stick to it, unless
your circumstances change.
Not Look at Past Performance to Pick Managers
Past performance is a very poor guide to future performance.
Investment manager selection should not be totally based on track
records. Of the 3 managers who finished in the top 25%
returns on New Zealand domestic share funds in 2001 only 1 finished in
the top 25% in 2003 also.
your Asset Mix to stay True to your Tolerance to Risk
As time goes by and markets experience ups and downs, your
portfolio will experience gains in some asset classes and losses in
others, causing your strategic asset allocation and actual portfolio to
become unsynchronised. This raises the need to make
adjustments to counteract the fact that different asset classes have
performed differently, and as a result now comprise different percentage
of your portfolio. This can be dome by:
Adopting the Robin Hood rebalancing
strategy- take from the rich (high performing assets) and give to the
poor (poor performing assets)
Buying new units in the under
performing asset classes
Let it ride, and let the market's
natural cycle rebalance for you.
Inflation- the increase in the price of goods and services, can wreck
havoc on a long term investor's money. Unless your returns
keep balance with inflation, the value of your money erodes. Your
investments should be evaluated not only for their returns before
inflation (nominal returns) but also for their returns after inflation.
A dollar invested in NZ Bonds between 1937 and 2003 earned a 6.7%
average annual return. Yet, according to the New Zealand Consumer
Price Index, inflation during the same period averaged 5.7%. The
real rate of return for Bonds? 1%. A dollar
invested in New Zealand Shares over this period generated a 10.0%
average annual return. The real return- 4.3%. That's
over 4 times better than Bonds.
in the Experts
It can be a good idea to discuss your investment strategies with financial industry professionals- they may be able to assist in creating an investment strategy based on your particular circumstances and assist you in taking on appropriate investments.
McLEAN AND CO DECEMBER 2004
NEWSLETTER PAGE 4
20 WAYS TO SAVE ON YOUR HOME
Everyone wants to pay of his or her mortgage quickly, with the minimum of
cash outlay. Here are
a number of pointers to let you do just that-
check them all or those of interest to you personally:
your term. Your monthly
payments will be slightly more but you will save a lot of interest in
the long run
more than you are required to
additional payments occasionally
4. Pay at
a higher repayment rate
fortnightly or even weekly instead of monthly
to a lender with a lower rate
around , particularly to some of the new non-bank lenders
a loan product that suits your personal circumstances.
your loan between fixed and floating to hedge your bets
various lenders and stay in contact once you have you mortgage
Some lenders offer a lower introductory interest rate or a
gift if you take out a mortgage with them.
You should investigate these to ensure there are no hidden costs
all your debts. e.g.
consolidate debts with high interest rates into a debt with a lower
bridging finance. You
pay more for bridging finance and there are usually more costs involved
14. Make sure your loan can
be transferred- can you transfer the mortgage if you move house during
15. Pay all the fees up
front if you can. If
your cashflow permits it pay these costs upfront rather than adding them
to the mortgage. This
means you are borrowing less and you will pay your mortgage off quicker
16. Develop a relationship
with a particular individual in the brokerage company you are dealing
17. Use your broker- ensure
they shop around for the best deal for you, explain the advantages and
disadvantages of each deal, and then you decide.
18. Selling and then
buying- watch those agent’s fees- research different agents- can you
sell your house yourself and avoid fees?
19. Buying a home or rental
investment property- never
pay the asking price. Do not let emotion rule your decision
20. Trusts and other
financial structures- you should look at structures which may give you
tax savings or suit your long term asset planning.
McLEAN AND CO DECEMBER
2004 NEWSLETTER PAGE 5
GIFTS AND THE ENTERTAINMENT TAX REGIME
any gift to a client or supplier which is in the nature of
“entertainment”, such as food and wine, will be subject to the
entertainment regime and the deduction will be limited to 50%.
which are not “entertainment” e.g. book vouchers, are 100%
CLAIMING GST WHEN YOU PURCHASE AN ASSET ON
can claim GST on the full cost of an asset you purchase on hire purchase
in the first month of the repayments. The reason for this is that subsequent payments will include loan repayment plus interest and both are exempt from GST.
SECOND HAND GOODS- RECORD KEEPING
is allowable to claim GST on second hand goods which are purchased for
business use even though they may be purchased from a non-GST registered
supplier. In many cases you
will not receive an Invoice. You should, however, keep a record of:
name and address of the supplier
date upon which the second hand goods were acquired
description of the goods supplied
quantity or volume of the goods supplied, and
consideration for the supply.
DEDUCTIBILITY OF EXPENSES ON EMPTY RENTAL
is generally accepted by IRD that there are periods where no rental
income is derived from a rental property because of a change in tenancy
or because a property is undergoing repairs.
However, if a property was empty for a significant period, IRD
would need to be satisfied that there remained an intention of making a
profit. In this
respect, it is necessary for the property owner to show that he/ she has
actively marketed the property for rental purposes.
IRD may require evidence such as advertisements lodged or
confirmation from a letting agent that the property was on the books as
FOR TAX REFUNDS
Under current law, taxpayers are able to claim refunds up to a period of
eight years for excess tax paid. In
proposed legislation, that timeframe reduces to four years except where
there has been a “clear mistake” or “simple oversight” on the
taxpayer’s part. To date IRD has not been forthcoming about what it
considers to be a clear mistake or simple oversight.
LIABILITY FOR PROVISIONAL TAX IN THE FIRST
YEAR OF TRADING- DIFFERENCE BETWEEN SELF EMPLOYED PERSONS AND PARTNERS
person commencing person as a sole trader, or a member of a partnership
who is allocated a share of partnership profits, or a shareholder in a
company who is allocated shareholders
if the Residual Income Tax of a Company in the first year of trading is
in excess of $2500.00 it is necessary for the company to pay Provisional
Tax in that first year, and interest will be charged by IRD due to lack
of paying this.
McLEAN AND CO DECEMBER
2004 NEWSLETTER PAGE 6
DEDUCTIONS FOR STOLEN MONEY
has recently been publicity about frauds perpetrated by dishonest tax
agents who paid client’s tax refund
cheques and client’s cheques made out to IRD into their own bank
accounts. One question
that arises is whether the clients can claim a tax deduction for the
DB 33 of the Income Tax 2004 allows a taxpayer carrying on a business a
deduction for losses incurred as a result of misappropriation of any
property by a person who is employed by, or who renders services to the
taxpayer for the purposes of that business.
deduction applies to all types of property, so can include cash, trading
stock or fixed assets. No
distinction is made between revenue or capital items.
The deduction is available in the year the loss is ascertained or
such earlier year as the Commissioner considers equitable.
are some exceptions. Losses
cannot be claimed when:
the amount has already been taken into
account in calculating the income, such as cash or cheques stolen but
claimed as items of expenditure, or
the theft is perpetrated by a relative
of the taxpayer, or in the case of a company, by an associated person or
a relative of the associated person, or in the case of a trust, by the
creator of the trust, settler, or a beneficiary
The loss also needs to have been incurred in the course of carrying on
of the taxpayer’s business.
In the case of tax agents, the agent would need to have carried
out the theft in the course of rendering services to the taxpayer’s
business for the loss to be deductible.
Any amount deducted that is subsequently recovered, whether through
insurance or restitution etc, is gross income in the year of recovery
DOES YOUR HOBBY BECOME A BUSINESS?
are probably operating a business if you charge other people for the
goods/ services you produce, you supply your goods/ services on a
regular basis and you intend to make a profit from supplying your goods/
CLOTHING AND UNIFORMS
the purchase, replacement or maintenance of conventional clothing is not
tax deductible. However,
a deduction may be allowed when the clothing is necessary and peculiar
to your business, or where abnormal expenditure is incurred on
order to qualify for a deduction, uniform items must be clothing that
would not be normally be worn for private purposes and can be uniquely
identified with your business.
The unique identifier could be a prominently displayed permanent
logo or the uniform’s distinctive pattern, colour scheme or style
clothing is deductible providing the items are purchased for work.
This is likely to include:
hard hats, safety goggles, work gloves, milking aprons, work
boots, leggings, ear muffs, overalls and rainwear.
protective clothing costs are not deductible if the items are purchased
for a non-business activity, such
as fancy dress or a hobby. Underclothes,
socks, jeans, shirts and jerseys are conventional clothing items.
Only in rare circumstances will these be regarded as protective
McLEAN AND CO DECEMBER 2004
NEWSLETTER PAGE 7
HOW MUCH IS ENOUGH FOR
we be saving for our retirement or paying off our mortgage?
For most of us, we should be clearing debt first and paying our
mortgages as fast as we can. However,
with most Kiwis, once they have paid their mortgages, they start to
enjoy their improved financial position and buy a new car, renovate the
kitchen, go on overseas holidays or buy a bigger and better house and
put themselves into debt again. Meanwhile,
one year, two years, or five years go by and while these Kiwis have a
great time, their financial position does not improve.
While paying your mortgage should be your first financial
priority, you must also ensure than once it is paid, you use the same
savings regime to build a nest egg for your retirement.
can’t we rely on the Government to support us in retirement?
Well we can under the present superannuation allowances, so long
as we happy to stay close to home. A
married couple, each 65 or over, will receive $383.22 after tax each
week in superannuation. While
some superannuitants can live on this income, they do live a very frugal
lifestyle. If you want to
travel, visit the grand children and buy them nice presents, or go the
rugby or cricket tests in
Wellington and Auckland, then you will need to have a retirement nest
egg to supplement your Government superannuation……assuming it is
still there when you turn 65!
much will you need in retirement? That
depends entirely on the lifestyle you want to lead, how much you want to
leave your children, and how long you are likely to live.
I was recently advising a 67 year old client who was adamant he
needed $1 million before he could retire.
He argued that he could live on the $50,000 income this (bank)
investment would generate. When
asked how much he wanted to leave his children, he said that they had no
expectation of inheritance, so I suggested that if he started spending
some of the capital in his investment, he could retire tomorrow.
His children would much prefer to have him around now enjoying
his retirement than going to his grave early and leaving a huge legacy
behind. I have never heard
of anyone on their death bed saying they wished they had spent more time
(Article supplied by Paul
Gallagher, Integrate Financial Services, Havelock North)
If we can assist further, please email McLean and Co. as follows:
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