Monthly Newsletter - December 2009

Editors Note

Merry Christmas and a Happy New Year. I wish all my Blog readers peace and goodwill for the festive season and good health, happiness and wealth for 2010.

This edition includes an inspirational quote, a funny picture, a market commentary and main index returns during November 2009, and a feature story. I encourage you to make comments.

The major world sharemarkets, with the exception of Japan, recovered from their falls last month to post solid gains during November.

Inspirational Quote

Every decision you make - every decision - is not a decision about what to do. It's a decision about Who You Are. When you see this, when you understand it, everything changes. You begin to see life in a new way. All events, occurrences, and situations turn into opportunities to do what you came here to do.

Neale Donald Walsch (Author)

Funny Picture

Supposedly a picture of retrenched employees from Lehman Brothers Bank who staged a protest by blockading the entrance to the Bank's Headquarters in New York.

Market Commentary 

The major world sharemarkets, with the exception of Japan, recovered from their falls last month to post solid gains in November.

Performance scorecard to 30 November 2009:

Indexes used: Australian shares: S&P/ASX 300 Index, Australian listed property: S&P/ASX 300 A-REIT Index, International shares: MSCI World ex-Australia Index (net dividends reinvested), Australian fixed interest: UBS Australian Composite Bond Index, International fixed interest: Barclays Capital Global Treasury Index (hedged into Australian dollars), Cash: UBS Australian Bank Bill Index.

Positive economic news and new corporate listings, Myer and Kathmandu, helped to lift confidence in the Australian sharemarket in November. The resources sector surged over the month with the materials sector rising by around 8% as commodity prices remained strong. Despite volatility within the sector, Australian real estate investment trusts delivered a positive return over November.
 
In the Reserve Bank of Australia's (RBA's) November meeting Governor Glenn Stevens commented how economic conditions in Australia had been stronger than expected and measures of confidence had recovered. While inflation had been falling for the past year the RBA expects it to rise over the coming year in line with expectations.
 
The US market performed strongly over November returning 4.5% (in local currency terms) as the economy recorded its first positive quarter of GDP growth in more than a year. Unemployment continues to present a problem with the unemployment rate rising above 10% in October.

Later in the month, news out of the middle east shook markets and highlighted that credit problems continue to plague the global economy. Dubai World (Dubai Government's financing arm) announced it was seeking a stand on more than US$60 billion of debt repayments for a period of six months.  

The Australian dollar continued to strengthen over November. After reaching a high of US 94 cents the local dollar settled at US 90.4 cents by month end. 

The RBA lifted the cash rate for the third consecutive month at its 1 December meeting, with the official rate now sitting at 3.75%.

In the November RBA meeting Governor Glenn Stevens said: "The adjustments at the October and November meetings will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead."

Falling bond yields helped to lift the Australian bond market over the month. Strong demand for government bonds from the banking sector and downward revisions to budget forecasts helped support the sector. 

Mr Stevens remarked that global growth had resumed. "With economy policy settings likely to remain expansionary for some time, the recovery is likely to continue during 2010 and forecasts have been revised higher."

The Market Commentary has been sourced from Vanguard Investments Australia Ltd.

Feature Story - 10 Rules for Achieving Financial Freedom (Rule 7)

Follow all 10 rules and you will be on the way to achieving financial freedom.

Rule 7 - Borrowing to invest

Borrowing to invest or gearing, increases the amount of funds you can invest in an asset. That can either boost your returns or multiply your losses, depending on how the asset performs.  That makes gearing a potentially risky proposition. However, as long as it's entered into cautiously and as a long term investment, gearing can be a very effective way to creating wealth, particularly for people on higher marginal tax brackets.

To take full advantage of the tax deductions associated with negative gearing, geared investments should generally be held by the partner in a couple on the highest marginal tax bracket.

For example, instead of saving $5,000 per annum to invest into an ungeared portfolio, this same amount could be used to cover the interest (after tax deductions) on borrowings of $109,951 to invest into a geared portfolio. This is based on a margin loan interest rate of 8.5% and the highest marginal tax rate of 46.5%. Based on margin loan interest payments of $9,346 and a tax refund on the interest payments of $4,346 per annum, the net cost is $5,000 per annum.

Assuming an annual return of 10%, after 10 years of regular savings and allowing the benefits of compound interest using a geared portfolio, you'll have $185,274 (consisting of $50,000 contributions and $135,274 investment returns). This is more than double the amount from using an ungeared portfolio, where you'll have $84,252.

Assuming an annual return of 10%, after 20 years of regular savings and allowing the benefits of compound interest using a geared portfolio, you'll have $682,745 (consisting of $100,000 contributions and $582,745 investment returns). This is also more than double the amount from using an ungeared portfolio, where you'll have $310,478.

Gearing is a great way to create more wealth.

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Past Issues

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Important Information

The above information provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The above information doesn’t take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser.