Spring 2012
Money Works Financial Planning Pty Ltd SEPTEMBER 2012
Understanding Risk in Investing...
Inside This Issue: Understanding Risk in Investing
1
Pimco Decoding Developments in the Eurozone
2
Saving Money
3
Learn from Failure and Confirm with Success
3
It can happen to anyone—Story of Craig Swingler
4
Mark Carn
6
Action Coach
RMIT University in Melbourne explains that investment risk is simply “the difference between the expected return and the actual return on your investment!” Understanding the risk your money is exposed to is one of the most important attributes of investing. Let me ask you: if you have superannuation with a particular company how is your money invested? Is it invested in growth investments i.e. shares or property? or is it invested in fixed interest i.e. bonds, securities and cash or a mixture? Most clients I talk to don’t know, they may know the company their superannuation is with but do not know how their money is invested. Some clients may know that
sacrifice short term growth, for taxation and security, not to mention inflation. The bottom line is typical “Growth” style investments such as shares and property will outperform income style investments such as fixed interest and Cash over the long term, being 10-20 years by approximately 1.5 – 2.5%. Over a period of 30 years with a fund balance of $10,000 the differences are quite dramatic with income assets such as Cash totaling $118,293 and Fixed Interest totaling $224,742, growth assets such as Australian Shares totaling $299,984 and International Shares totaling $168,234 as seen on the Vanguard 2012 Index chart (www.vanguardinvestments.com.au). So
their money is in a “managed fund”, or “balanced fund”. This option is usually the default fund and is used when you have not chosen an investment strategy at application time. A standard “balanced fund” which may have 50% of its assets in Growth style investments (Int. /Aust. Shares & Property) and 50% in income style investments (Cash & Int. / Aust. Fixed Interest) would not be appropriate for an investor that is growth orientated. That is, someone who understands markets and the volatility attached to these markets. In that case they may be looking for growth assets and need to make their investment perform well over the long term. He or she may wish to
if you don’t know your “Risk Profile” and you don’t know how your investment/ super is managed, it could be costing you thousands. As a financial planner, I am trained in helping our clients find this through risk profiling so they can sleep at night knowing full well their money is working for them in the assets that they feel comfortable with. Written By Chris Harris Source: Vanguard 2012 Index Chart
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Pimco Decoding Developments in the Eurozone Central Bank Focus: What news is good news?
An orderly liquidation of debt requires economic growth. By boosting asset prices, central bankers have sought to proWhat news is actually good news? The recent, and now mote economic growth and buy time for the fiscal authorities famous, words by European Central Bank (ECB) President of the developed world to formulate and implement growthMario Draghi that the ECB would do “whatever it takes” to orientated policies. Global investors have been patient, but save the Euro, gave financial markets a brief reprieve from the repeated failure of policymakers has their patience runthe poor performances experienced of late. Though despite ning thin. this, we still have not seen yields on riskier peripherals drop to sustainable levels. A better understanding of what exactly No amount of central bank liquidity by the Federal Reserve, central banks do may give people a clearer picture of what the ECB or any other central bank can possibly fix what ails news to look out for when trying to pinpoint the signs of re- the developed economies. The ECB, for example, can’t fix covery. the fact that Italy ranks 109th out of 183 countries in providing electricity. Nor can it fix the fact the Spain ranks 133 rd in It is important to mention here that no central bank ever created anything tangible- you won’t find any stories about a the ease of opening a business. How about Greece? Fed chairman discovering electricity or creating the light bulb. For this reason, it is fantasy to think that central banks can keep the game going for long. What central banks are best at creating is fiat currencies, and these are only as valuable as what they are backed by, whether it be gold, silver or the productive capability of a nation.
Can the ECB reduce the size of government, improve tax collection or reduce the number of occupations Greece considers so hazardous that hairdressers, pastry chefs and clarinet players can retire in their early 50s? In the US can the Fed reduce the outsized growth rate of the entitlement
system? Central bankers can do nothing about these competitiveness issues, but the restoration of growth and comThe ECB can only provide a bridge for the EMU’s problems, petitiveness is essential to improving the ability to repay not a solution. Its decision to cut all policy rates by 25 basis debt. Central Banks can only provide a bridge
points (bps) last month signalled the bank’s ongoing willing- Implications: Looking through the haze of newswires ness to provide that bridge by creating time for political and fiscal agents to implement durable solutions. Judging by the What the recent “whatever it takes” saga has told us is that it gyrations in yields on southern European bonds since the is important to look through the superficiality of news events ECB’s meeting, however, markets were evidently disap- and try to understand the real implications. ‘Unconventional’ pointed the ECB did not announce further ‘unconventional’ measures, like quantitative easing using ESM bonds, can be measures to shore up Europe’s’ dysfunctional bond markets. yet another bridge that buys politicians more time but is Market expectations for ‘unconventional’ measures derive from at least two sources. First, since the ECB crossed the Rubicon in 2010 by buying Greek government bonds, markets now believe the bank will do whatever it possibly can to prevent the MU from breaking up; the costs of not doing so would be too great. Indeed, the ECB currently holds €211 billion in securities from previous forays into the bond market. Second, some market participants, policymakers and influential figures, like Italy’s prime minister and the head of the IMF, are lobbying the ECB to buy even more in order to drive southern European bond yields lower. Such proposals are short-sighted and address the symptoms rather than cause of the EMU’s problem. Buying bonds without fixing the design faults in the EMU’s governance structure is a near-term fix whose beneficial effects, like painkillers, will soon wear off. Central bank liquidity can’t turn the lights on in Italy:
short-sighted and does not solve the root problem. Looking ahead we should be looking for news events that promote the prospect of higher growth, greater developed world competitiveness and improvements in governance structure.
Unfortunately for the global economy, we have not yet seen any real signs of these. When it comes to Europe there is only one thing we can say with certainty: This crisis is not yet over. Source: PIMCO Decoding Developments in the Euro zone August 2012
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Saving Money I am often asked the question “How
as you receive them and spend the
even miss the money”. He is a retiree
do I get ahead, I have so many bills and my credit cards are out of con-
remainder on whatever else you require/choose to. The idea being that
who lives modestly so to be able to save $500 in a matter of weeks is a
trol?” When this question is posed to me immediately I think of a book I
you will always work within the confines of what funds you actually have
large accomplishment for him as he did not think he was going to be able
read many years ago called “The Richest man in Babylon”, this book is
available - SAVE FIRST SPEND LATER.
to do it, but he did and simply by paying himself first.
set in Babylon 6000 years ago and based on stone tablets uncovered in an archaeological dig in the late
Not convinced yet, here is an exam- The simple rule is- to save part of ple; two weeks ago I was in my Port what you earn and more importantly Lincoln office with a client who has to save effectively you need to pay
1800’s. The main focus of the book is been with me for eight years. He had the 5 laws of wealth, which funny a problem with spending and we had enough are as useful today as they discussed this in detail back in May were 2000 years ago. The main one I when I last saw him. I recommended will discuss in this article is the “First that he put aside an affordable porLaw of Wealth”- which states save tion of his income each week. He was first, spend second otherwise known very reluctant to take this advice on as the 10% rule. because it meant ‘change’. He said The reason this applies to the above he would carry out my instructions
yourself first before anyone else. It’s basically because our subconscious knows how much money we have and we have the unfortunate habit of “spending”. We feel good when we purchase these new shoes, that new shirt or have saved 20% because XYZ was on sale. Let’s change the habit of spending to the habit of sav-
question is because it outlines a basic and when he saw me last week he ing. principle of saving, whereby you save was excited as, he had really made 10% (or a denomination of your
an effort. He now has saved $500 in
choosing) of your earnings as soon
just 6 weeks and he said, “I didn’t
Try it out and tell us what you think!
Learn from Failure and Confirm with Success Most people think that failure is bad and success is good. I want to help you change your thinking about that if you fall into that category. I will give you that failure isn't fun and success is, but I think the following is true: Both failure and success are good... if you know what their specific purpose is. Of course we know that success is good, but why? Success is good because it confirms things for us. Success confirms our plans. Success confirms our decisions. Success confirms our resources and strategies. Success confirms our hunches. Success confirms our teamwork. Success confirms our risks. Success confirms a lot of things! So when you are successful, ask yourself the following question: What does this success confirm in my mind? Now, what about failure? What is the role of failure and how in the world can it be GOOD?
Failure teaches us that we need to change our teamwork. Failure teaches us that we need to change our risks. Failure teaches us that we need to change a lot of things! But at least now we know one more thing that won't work! With every failure, we learn one more way we can abandon and focus in on what may be the correct way in the future! When we look at it that way, we set ourselves up for a powerfully successful future! So when you fail, ask yourself this question: What does this failure teach me? Remember, Success and Failure are both good. They can both be your friend... If you know what role they are to play in your life.
Learn From Failure and Confirm with Success. ‘I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. 26 times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.’ – Michael Jordan, USA Basketballer
Failure's role is to teach us. We learn from failure.
Writen by
Failure teaches us that we need to change our plans. Failure teaches us that we need to change our decisions. Failure teaches us that we need to change our resources and strategies. Failure teaches us that we need to change our hunches.
Mark Carn Action Business Coach *For further insights please visit http://www.actioncoach.com/markcarn
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Page 4
It can happen to anyone! The story of Craig Swingler In December 2005 a referred client came to discuss his need for Income Protection to make sure his income was covered if he couldn’t perform his duties and his family would be taken care of if he lost his life. His name was Craig and Craig had his own Home Construction Company. He is a tall man, very fit looking as he also teaches and practices the art of Judo, Craig is a SENSEI. On our first meeting we sat and discussed his needs, looked at his current finances as well as assets and liabilities etc. From there I made my recommendations. I completed the Statement of Advice which includes; Income Protection, Life Insurance and Total of Permanent Disability for $400,000 cover. Craig accepted my advice and we completed the appropriate application form in a few weeks. Craig had the cover he was looking for to protect himself and his family. Over the following few years we had reviews and I also got to know Craig’s wife Yvette. The relationship between advisor and client was as usual getting strong; Craig informed me that he wanted to try Parachuting. Now, with the Life Insurance and the Life Insurance ACT 1945, updated in 1973, Life Insurance in Australia, once accepted by the insurer- is guaranteed, which means, as long as you were truthful and disclosed all
relevant information at the time of application, your insurability is guaranteed regardless of change of health or change of occupation. On the 13th of November, 2007, we were notified from Craig’s brother in law, Peter that Craig had a Parachuting accident. He had suffered a tear in the aorta valve (to the heart), bleeding compound broken left femur, broken right femur and a broken jaw. He also had eight broken ribs, a punctured left lunge, internal bleeding, fractured neck, back and foot and left collarbone separation. My staff started the claims process and I met with his wife and Peter, his brother in law. Yvette came to see me to go through the claims process and I explained how it goes and how we can, as their advisors, assist in the process. She explained that Craig is in and out of a coma and he is now undergoing surgery on his heart and his legs. So, what happened? It was November the 10th, 2007 when Craig went on what he thought would be the ultimate adrenalin rush... parachuting. Having been practising martial arts for 30 years, he and his class decided to do the daring activity 20 years ago. But with a commitment to teach self-defence, he had classes to take on the scheduled day. Twenty years on he decided to go solo and com-
plete the parachute training. Again he was faced with another setback because the plane was too full. It seemed signs were stopping his fate, which he was yet to realise. On his next attempt the wind was too strong and would be too dangerous. He said with all the complications at that point he was happy to say "I don't need to do it.” Two weeks went by and he was asked to come back and give it another shot. Craig had a barbecue organised for 16 people that night, but this wasn't going to be another excuse. He thought he would be jumping at 8am and would have plenty of time to be back for the barbecue. By this point Craig had previously completed his training to perfection, scoring 100 percent in his theory exam. He wasn't afraid; he wanted to get it over and done with as he had done double the normal training. At 14,000 feet he took the plunge he had anticipated for so long. He said because he had been doing martial arts for so long he learned to control the adrenalin. He was finally completing what he started quite some time ago, something that would be over in less than a minute. After checking his watch for the correct altitude and following procedure he pulled his chute. Complications with his chute resulted in the most dramatic change as he took the biggest spiral of his life. Plummeting through the Adelaide skies at a rapid rate of over 100 kilometers an hour,
Money Works Financial Planning Pty Ltd everything was over in 30 seconds. He fell to the ground in an open paddock. And though this day was far from lucky, his luck hadn't run out just yet. At this very time an ambulance is travelling up Port Wakefield Road the crew had witnessed Craig’s descent and is now travelling at top speed to Craig’s Drop Zone. Doctor’s and specialists have already been warned of the Parachuting accident and by the time Craig arrives at RAH he is rushed straight to surgery, to save his life. Such a critical condition, Craig may not have seen past that day. Three heartbeats would have been fatal if the tear were any bigger, according to the doctors.
With the help of staff at the rehabilitation centre he had been able to progressively move from being wheel chair bound to a walking frame, elbow crutches, two walking stick, one stick and now walks without the use of any assistance again. He now looks at life differently, because in rehab he realised there is always someone worse off than you and to be grateful, one thing he is especially grateful for is the tremendous amount of support from his wife, children, family, friends, workers and acquaintances that have asked how he was doing and even strangers that have said prayers for his recovery.
Page 5 with the business development manager from Zurich and began the paperwork. This takes time as the claims officer always requires all the particulars- including health assessments before and after especially as it’s a TPD Claim. On the 25th of May, Zurich announced they are paying the Claim of $427,000 and the cheque is being sent to us, something I ask from all insurance companies. Below is myself presenting Craig with his Cheque. We are now planning the rest of Craig’s life, looking at his assets and his desire to continue to enjoy life in the best way possible.
In September 2011 (last year) we Over the following days, Craig is decided to try to claim for his Total placed in a induced coma, under- and Permanent Disability- we sat goes several operations and placed in Intensive Care. At this time, we are putting Craig’s Income Protection Policy claim through and miraculously he survives. His claim for I/P starts and for the next 12 months, Craig is being rehabilitated. Slowly he heals, splints are placed in his legs, his jaw is re-broken to realign, his chest and arms are slowly mending and he has to learn to walk again. Naturally my office was in constant contact with Craig and Yvette and I tried to see him as often as I could. On the 18th of January 2008, I visited Craig and Yvette at their home. Craig was now in a wheelchair and recovering remarkably well.
Picture: Chris presenting Craig with his Cheque from Zurich
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