Tag: Investing

Just throw money at it!

Will currency printing re-inflate stock markets?


There is an expression – 

‘There is no problem which can’t be fixed by throwing money at it.’

And during these times of viral contagion, this is exactly the course of action that the Governments of the world are taking, to keep their economies alive.

Over the past 4 weeks the Australian Government has announced a range of Covid19 stimulus initiatives worth $214 billion

In the US, a huge $US2.2 trillion stimulus package has just been passed by US Congress to keep their economy alive. 

And the story is the same in most countries around the world.

There is much debate going on as to whether this currency printing is right or wrong. Regardless, the massive quantities of currency flooding into the world economy, is a macroeconomic factor which the Financially Awakened must consider when making investment decisions.


Photo by Burak K from Pexels

Consider the stock markets of the world – they are down circa 30% off February highs. And nobody knows when the bottom will be. All one can do is analyse the information and hand and make strategic decisions accordingly.

Consider present circumstances. There are a number of macroeconomic factors which are stock market negative. These factors could drive stock prices down further. They include:

  1. Falling production levels.
  2. Substantially reduced domestic and international trade.
  3. Rapidly rising unemployment rates.
  4. Uncertainty around Coronavirus containment.

However, a greater impact may be felt from two positive countermeasures now in play:

  1. Currency printing (discussed previously).
  2. Low and negative interest rates – meaning negative real returns for holding cash.

Huge amounts of currency are being injected into the world economy with virtually nowhere for it to go but back into stocks – either through expense support, sales revenue or direct share purchasing. And fortunately for financial markets, currency can be ‘printed to infinity.’

I take the view that these countermeasures could succeed in re-inflating stock markets… along with most other asset prices.

What do you think?


Furthermore, previously in our Good Money posts, we have mentioned how currency printing has the effect of devaluing cash savings. 

There are finite resources in the world and currency represents a claim over those resources. Printing currency does not increase the resources, it merely creates new claims over those same resources.

Historically, the result of excessive currency printing has been always been high inflation.

Will it be different this time?


GOLDSMITH


Gold destroys stocks and bonds over past 20 years!

Why gold should be the foundation of all investment portfolios.


If an investor made a single lump sum investment of $100,000 into the US Stock Market in March 2000 – their portfolio as at 31 March 2020 would be worth approximately $250,000 (1). This result assumes dividends were reinvested and no tax was payable.

Unfortunately for the stock investor, March 2000 was shortly before the Dot-com Crash. This early crash certainly hurt the overall performance of this asset class over a 20 year period, which averaged a mere 4.76% per annum.

A savvy investor might have noted that stock prices were high in 2000 and taken on a more conservative investment strategy by investing $100,000 in US Bonds. Assuming income was reinvested, over the past 20 years they would have turned their $100,000 into $270,000 (2).

This savvy investor took on far less investment risk and achieved a greater return – which in itself is an excellent result!

Or was it?



A third investor, both savvy and Financially Awakened was even more cautious and wanted to take on almost no investment risk whatsoever. This investor therefore invested their $100,000 entirely in gold.

Their March 2020 investment is now worth approximately $580,000 (3). More than twice that of the stock and bond investment portfolios.

The gold investor has achieved an average annual return of 9.24%.



The past 2 decades has been a bonanza for those cautious investors who focused their investment portfolios on gold. So the question remains –

Why doesn’t everyone build gold into their investment portfolios?

Plus a couple of other questions

Why don’t financial advisers and bankers recommend gold to their clients?

Why doesn’t mainstream media report on the out-performance of gold over other asset classes?

I would love to get your answers and comments.

GOLDSMITH


Charts and data thanks to GOLDHUB and the World Gold Council.
https://www.gold.org/goldhub

Metrics:
1. MSCI USA Net Total Return USD Index 1971+
2. Bloomberg Barclays US Agg Total Return Value Unhedged USD 1976+
3. LBMA Gold Price PM USD 1971+


Notes on results and disclaimers:

  • All results are hypothetical
  • Past performance is not a guarantee of future returns and data and other errors may exist.
  • The entered time period is automatically adjusted based on the available return data for the specified assets
  • CAGR = Compound Annual Growth Rate
  • Stdev = Annualised standard deviation of monthly returns
  • Sharpe and Sortino ratios are calculated and annualised from monthly excess returns over risk free rate (1-month t-bills)
  • Stock market correlation is based on the correlation of monthly returns
  • Drawdowns are calculated based on monthly returns
  • The results use total return and assume that all dividends and distributions are reinvested. Taxes and transaction fees are not included

IMPORTANT: The calculations and any other information generated by this tool are provided by Silicon Cloud Technologies, LLC based on the back-testing functionality of their Portfolio Visualizer software. Note that the resulting performance of various investment outcomes are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. World Gold Council and its affiliates and subsidiaries, provide no warranty or guarantee regarding the functionality of msgid the tool including without limitation any projections, estimates or calculations. For more information on the data used for each asset class, please visit our FAQs

* The investment horizon for the hypothetical analysis starts at the end of the month selected in the “from” date and ends at the end of the month selected in the “to” date. Quarterly, semi-annually and annually rebalancing as well as periodical adjustments, if any, happen on a calendar basis (eg, March, June, September, and December where applicable) regardless of the starting investment period. For more information, please visit our FAQ

We should scrap compulsory retirement savings systems – now!

For the vast majority of us – superannuation and other retirement products have failed us dismally. It is time to scrap these systems and products… and start over.


A short time ago I introduced a new page to Goldsmith Money, titled ‘Lost Retirement’. In light of Coronavirus, I thought it timely to expand upon this topic.

We previously discussed the depleted balances of superannuation and pension accounts attributable to stock market crashes. It is certain now that the market crashes of 2008 and 2020, accompanied by negative interest rates and excessive money printing, will see these products fall well short of the promises they made.

The compulsory superannuation and pension systems of the world have completely failed the working class of the past 20-30 years. Meanwhile the ultra-wealthy were able to use these systems to minimise their income tax obligations for 3 decades and potentially enrich themselves selling these failing products.

And the products will not only fail to deliver the retirement income stream that the vast majority of workers will need – they have left workers highly vulnerable to economic downturns and the Black Swan events such as Coronavirus.


Photo by Nathan Cowley on Pexels.com

Nations of the world have been forcing their citizens to contribute a percentage of their wages and salary to retirement products. In doing so they have significantly reduced their ability to:

  1. Save money for times of financial hardship.
  2. Repay their debts more quickly.
  3. Build a alternative passive income streams to replace lost wages and salary.

At present, millions of workers have been left unemployed due to a worldwide economic coronavirus shutdown. Readily acessible personal savings and alternative income streams would have saved a great deal of hardship, for a great many. It would have also saved governments a great deal in support payments.

Regardless of major catastrophes however, workers should have personal savings set aside for all manner of contingency. Sickness; redundancy; repairs and maintenance. Workers should also have funds available to take advantage of investment opportunities which might arise.

The points I have made here might be considered personal liberty arguments for the scrapping of compulsory superannuation. Giving an individual the freedom to invest and save for their own retirement, as they choose. In addition to personal liberties however, there is also data to show that current systems are not simply failing the workers, but the economy as a whole.

Cameron Murray of the University of Sydney, in his article titled Superannuation isn’t a retirement income system – we should scrap it argues that these compulsory superannuation systems are inefficient, costly and ultimately depresses the economy. He eloquently states:

It is better thought of as a growth-sapping, resource-wasting, tax-advantaged asset purchase scheme aimed at the already wealthy, which is unlikely to do much to reduce reliance on the age pension.

There are many reasons to scrap this system which has failed so many and I have touched on just a few here. It is up all of us now to capture all the reasons and then petition our governments to do so.

GOLDSMITH


Lost Retirement

Lessons in retirement planning


Witnessing the wild mechanisations of The Great 2020 Coronavirus Stockmarket Crash presents the perfect opportunity to open up a new discussion on the matter of retirement savings. More specifically – superannuation, retirement and pension products and the government regulations which compel us to use them.

For the past 30 years Governments around the world have been ‘encouraging’ their citizens to save for their retirement.  Well ‘encouraging’ may not be a strong enough word. Governments have generally ‘forced’ their citizens to contribute 9-15% of their wages and salaries towards retirement savings products. And over the past 3 weeks, we have seen trillions of dollars wiped off the value of these products. So let’s examine.

Let’s assume the average worker is likely to spend their wages and salary in the following proportions:

  1. Income Tax – 30%
  2. Housing – rent or loan repayments – 25%
  3. Generally living expenses – 25%
  4. Surplus funds available for other investment or luxury spending – 20%

Then the Government came along and said ‘no, we want you workers to put your final 9-15% into special financial products which you cannot touch until you retire’.  The diligent workers are now left with disposable income of a mere 5-11% of their gross pay.

So the workers did as they were told. They allowed for their employers to deduct part of their wages and salaries and send it off to these retirement product providers. Putting their faith in the promises which the politicians, the bankers and their union representatives had made.

Every payday they effective transferred money into these products. Many of which were paying large fees to the product trustees and the investment managers.  This didn’t matter though – for in the end they would have a sizable nest-egg to see them through retirement.

Meanwhile the workers were forced to forego the early repayment of their home loans; the purchase of investment properties; the investment in hard assets; or, simply the enjoyment of life through the purchase of luxury goods and services.

Then along came the GFC. These retirement products lost half their value in 12 months… but this was okay, as there would be time to build it back up.

Now the Coronavirus Crash is upon us, markets are down 35% and so too are the retirement savings products.  Only this time – we are 11 years on from the end of the GFC.  Is there still time to make it back up? 

Interest rates at Nil%, even negative.  Corporate profitability is down and is likely to stay this way for a  number of years. An entire generation has now seen their retirement plans lost. 

So here is a question – why couldn’t the workers simply be trusted to use their additional disposable income to repay their home loans quicker?  


Photo by Kelly Lacy from Pexels

Surely the best way to provide for yourself in retirement is to own your own home outright – yes?

As explained in this previous post https://goldsmith.money/2020/02/23/risk-free-return/ – the early repayment of a home loan generally provides you with a risk-free and tax-free return, equivalent to the going home loan interest rate.

So another question – if those in power genuinely wanted to assist citizens to prepare for retirement – why didn’t they incentivise them to simply purchase a home and repay the debt as fast as they could?

Not enough questions were asked of politicians and bankers post the GFC – will they be allowed to get away with this for a third time?

The importance of the topic cannot be understated. This post will now become a new feature page of the Goldsmith Money website.

I would love to get your thoughts on this topicplease be sure to comment below.

Be well.

GOLDSMITH


How much should you pay for your new home?

Intrinsic Value – Part 2


Determining the intrinsic value of a potential home purchase is not overly different from determining the intrinsic value of an investment property.

When it comes to a home purchase the ‘expected net annual earnings’ are replaced by the ‘annual net rental savings’ you achieve by purchasing the home rather than renting it.

Even with a home purchase there must still be a ‘Required Rate of Return’ as there are still costs and risks associated with home ownership and you must be compensated for this. Risks include financing and opportunity costs, structural risk, market risk and government.

So let’s analyse. A house comes onto the market and you feel it would make a nice home.  Three bedrooms, two bathrooms and a decent sized backyard for your children.

You are currently renting a similar property, of similar age, similar condition, in a similar location for $450 per week. You expect that this new property might be rented for a similar amount. However, as a homeowner you will be paying some larger annual expenses you would not be paying as a renter. These expenses include council rates, water rates and insurance. Let us assume $3,000pa total for all. 

You know that the current standard home loan interest rate is 4%, so you apply this as the required rate of return.

What is the intrinsic value of your potential new home?



Let’s start by revisiting our Intrinsic Value formula.

Intrinsic Value = Expected net annual earnings / Required Rate of Return

Adjust the formula for a new home purchase calculation, as discussed previously.

Intrinsic Value of new home = Expected annual rental savings less major ongoing homeowner expenses / Current standard home loan rate

= (($450*52))-$3,000) / 4%

= $20,400 / 4%

= $510,000

The intrinsic value of the property is approximately $510,000 and this is the maximum you should pay, including all associated purchase costs.

Should borrowing costs fall, so too do the risks associated with asset ownership. Should borrowing costs rise, so too does the risk of property ownership. The discount rate applied should be adjusted to compensate you for the risks assumed. By simply applying the current standard home loan rate, your required rate of return will adjust automatically with market conditions.  

Understand that you are taking on more risk buying an investment property than you are when buying a home.  Afterall, you don’t need to find tenants to rent your home. So be sure to apply a higher discount rate to calculate the intrinsic value of a potential investment property. Whilst this does mean that the same property could have two intrinsic values, this is fine.  Paying a little more to secure the home of your dreams is not necessarily a bad financial decision. Just be sure to get a discount on the investment property. 

When all is said and done, if a seller is demanding more for your dream home than the intrinsic value, you are probably better off financially by continuing to rent and waiting for a pullback in general property prices. 

Finally, when it comes to a home purchase it is likely to be one of the largest and most important financial decisions you ever make. Please be sure to thoroughly examine the property before signing up to buy it.

We will be back to examine intrinsic value soon, this time with respect to share purchases.

GOLDSMITH


Image by Pexels from Pixabay

Risk-Free Return


The third foundation block, paramount in your financial awakening is an understanding of the Risk-Free Return. I say paramount, as before you make any investment decision you should know exactly what return you can make, taking zero (or near to zero) investment risk.


Why take on additional risks, when you can reach your destination safely?


When it comes to risk-free returns there are different types, depending on who you are and the country in which your reside. 

In the case of an Australian Citizen, I consider that there are 5 types of risk-free returns… plus… 1 risk-free asset worth an introductory mention.

The first of the risk-free returns is the $US 10 year treasury bond – considered the risk-free investment of choice for bankers and fund managers the world over for 3 generations – currently paying interest of 1.47%pa.

The second, for an Australian, would be an Australian Government Bond – currently paying 0.93%pa.

The third would be a term deposit with a Big 4 Australian Banking institution – currently 1.5%pa

Presently, funds held on account with any Australian financial institution are backed by the Government Guarantee up to $250,000 per entity, per institution.  As such a term deposit with a small Credit Union, has about as much risk of default as an Australian Government Bond. So forth, other term deposits. Currently 1.75%pa.

The fifth risk-free return – is the most important risk-free return of them all. It is generally a tax-free return and its nature is ‘debt reduction’. These ‘debt reduction’ measures might include, assuming no early payout penalties:

  1. Early repayment of a home loan – will currently save you circa 3% pa.
  2. Early repayment of an investment loan – should save you 3-4%pa.
  3. Early repayment of a credit card – save 20% pa.
  4. Holding cash in a 100% loan offset account – save 3-4% pa.

Before you make any investment decision you must at least give consideration to these 5 risk-free return opportunities, as described above and particularly the last. However, please be sure to ask about any early payout penalties on loans and other finance you might been looking to repay.

Over the coming weeks I will provide you with examples on how to apply the risk free-return concept to your financial decision making processes.

Now I mentioned that there was also a single ‘risk-free asset’. Care to take a guess what this might be?

Occasionally it is referred to as a ‘barbaric relic of a bygone era’.

The bankers and the ultra-rich have been telling you it is worthless for 120 years. ‘Just a commodity’ they say. Yet over the past 20 years alone, this risk-free asset has grown in value by approximately 450%. 

In case you haven’t guessed already – this risk-free asset is… GOLD. Yes, GOLD is a ‘risk-free’asset.

It is important to be clear here. GOLD is not risk-free because it provides you with guaranteed income or annual capital growth. Physically held GOLD is risk-free, because it is not a liability of any other party. Meaning there is no risk of default.

Don’t just take my word for it though. On 31 March 2019, GOLD was reclassified as a ‘Tier 1’ asset under the Basel III International Regulatory Accord. Meaning that for the purpose of International Banking Standards, GOLD is now always considered a ‘ZERO risk asset’.

We will be discussing GOLD in much more detail here at the Financial Awakening, over the months and years to come. And with great personal pride and pleasure.

GOLDSMITH


Image by Hermann Schmider from Pixabay

Intrinsic Value


If I were to ask you ‘how much a house was worth?’ – would you know? Or how much a share is worth? A business? A bond? Or an annuity?

Chances are, you don’t know.  Don’t feel bad though – there would be many financial professionals who don’t know either, if this is not their field of expertise.

When it comes to a property valuation, many investors and home makers may be guided by a real estate agent. They might also look at recent sales in the area.  The problem with this method is that they are relying on the opinions of others.

In the case of shares, investors and traders may simply assume that the current market price is the true value. In fact, the ‘Efficient Market Hypothesis’ proposes just this.  That all news and information concerning a stock is reflected in the share price and as such the share will always trade at its true value. If this was true then there would be little or no opportunity for a buyer or seller to profit from market inefficiency.

In the case of a business asset, your accountant might tell you that the business is worth a multiple of EBIT or EBITDA, in accordance with a predetermined industry standard. Again you are relying on the subjective opinions of others to determine the value.

Finally – some might adopt the old adage, an asset is only worth what someone else is willing to pay for it. Once again – relying on the subjective opinions of others, with little to no regard to their personal motivations.


So how much is an asset really worth?


For the individual and putting all emotional attachment aside, an asset’s worth is determined by two factors:

  1. The future net cash flow created by the asset.
  2. The investor’s required rate of return.

Or put more technically – an asset is worth the ‘sum of all its discounted future cash flows’. Otherwise known as its Net Present Value’ or the ‘Intrinsic Value.’

Financial analysis such as cash flow discounting is very much a specialised field.  The basics however are not beyond the average person. The purpose here is to lay the foundation for your Financial Awakening, not to frighten you with a myriad of mathematical equations. 

So I will now give you one simple formula to learn and remember. This formula will arm you in your investment decision making and may even start you down the path of complex asset valuation modelling.  This formula is:

Intrinsic Value = Expected net annual earnings / Required Rate of Return

Expected net annual earnings is the total average annual income expected to be received less expected regularly occurring expenditure; excluding interest and other finance costs.

The Required Rate of Return also referred to as the ‘discount rate’, is a personalised rate which ensures that you will be adequately compensated for taking up the risks associated with asset ownership. 

Let’s look at one quick example, close to the hearts of many.

The Investment Property

If a potential investment property can be let out for a net annual rental return of $25,000 – this annual cash flow has a value.  If I require a 5% per annum return from any real estate investment I make, using the Intrinsic Value formula I can quickly calculate the maximum price I should pay.  

Intrinsic Value = Expected net annual earnings / Required Rate of Return

= $25,000 / 5%

= $500,000

I have now calculated that the property has an intrinsic value of $500,000.  This is the maximum amount I want to pay for the property, understanding that I am targeting a return of 5%pa.

Let’s look at the same investment property, only this time we as potential investors require a rate of return of 7.5% pa.

Intrinsic Value = Expected net annual earnings / Required Rate of Return

= $25,000 / 7.5%

= $333,0333

This example clearly demonstrates that if we want to achieve a higher rate of return, we must pay less for that asset initially. Which brings to mind another adage –

A great investment is determined at the time of purchase, not the time of sale’.

At this point some of you might be thinking – what about the capital growth?  Shouldn’t the capital growth be taken into account when calculating the intrinsic value, not just the rental income?

Let’s consider this – why does an asset grow in value? 

Well we now know that an asset’s value is the ‘sum of its total discounted future cash flow’. So the capital growth of an asset must be simply the result of the growth of that expected future cash flow.  

This future increase may be the result of higher than expected demand for rental properties and thereby higher rents. It could also be the result of a property rezoning, which may change the overall income earning potential of the asset.

Alternatively – government and council policy changes, tax changes, property damage and demographic shifts could all in turn impact negatively upon the property’s cash flow and thereby cause a reduction in the value of the property.

So use this formula as your starting point in your decision making process, knowing that there could be good surprises, or unpleasant surprises in the future. The formula is a solid guide to what you should be paying for an investment asset, but it is only the beginning of the research you should be doing.

If you do come across a property which you feel has tremendous income growth potential, model the cashflow and re-calculate the Net Present Value. There are plenty of online guides and calculators to help you do this.

Finally don’t forget to give consideration to imposts such as stamp duty and land taxes, as these will make a difference to your investment returns.

In my next post on Intrinsic Value, we will take a look at home purchases. Buying a new home is a very emotional decision, but if we were to put emotion aside… how much should we really pay?

GOLDSMITH


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