Christmas Spending

"Don’t let Christmas card red
"Turn into credit card dread"
Lyn Bell

Christmas seems to come around earlier every year, don't you think? Is it because we are putting the decorations out earlier and earlier. I'm sure that's got a lot to do with it.

Just a warning here, don't get carried away with the credit card as you could be paying off this year's Christmas gifts at this time next year. Planning for Christmas spending throughout the year is a good idea. Such as, putting a little aside each pay day into an interest bearing account and buying a regular sum of Christmas club vouchers each time you buy your groceries. This is actually a great way to have that bit of extra cash for Christmas goodies. The supermarket sells the voucher below the actual value and your return is tax free. Often the supermarket will have a special night where you can spend your vouchers and get extra discounts as an added bonus.

Portfolio Risk: Diversification is not the only way

In a properly diversified portfolio it is important to not only diversify within an asset class but ensure you have assets that work ‘out of tune’ with one another. If you were to have all of your investments performing well at the same time beware as when there is down in the market they’ll all most likely head the same way.

Simplistically let’s look at it this way: you have two investments a winter one and a summer one. They both perform well in season but not so well off-season – they could be positive 10% and negative 10%. By placing the two together you then get the average return of the two.

Investing is About Discipline: Avoid the next HOT tip.

Two of the biggest demons you have to deal with when investing are fear and greed. Both are valid human emotions, but both can get in the way of logical, disciplined investing. If you can manage both your greed and your fear, you can stay away from the lemming-over-the-cliff mentality that grips so many other investors. This applies to any short term comparison between different markets, assets or managed (mutual) funds.

Temptation can be a scary thing and the temptation to run to the smoking hot and fashionable investment of the week is extremely high, so high in fact that many investors take to it like a month to a flame. If you don’t want to get burned, avoid ‘hot’ investment tips from your friends and use discipline as your number one investment strategy.

The difference between a finance company and a bank.

What is the difference between a finance company and a bank?

There’s actually not a lot of difference between a bank and a finance company as they both accept funds from the public to be used for any manner of lending. Lending can include loans for housing, car finance, business ventures, personal loans and more.
The main difference would be the risk level and the fact that banks are more regulated than a finance company. A finance company will lend to those unable to obtain funds from a bank. In saying that, there is a place for finance companies as there are many projects that would never get off the ground if non-bank lending was unavailable.

Either financial institution could fail (an inability to meet its credit obligations) if there was a run on its money or a case of fraud or of mismanagement. In New Zealand we are seeing the failure of many finance companies but we have seen bank crisis and bank failures in the past. There has been the Great Depression, the Japanese banking crisis in the 1990’s or the Savings and Loan Crisis in the USA in the 70’s and 80’s. Of course there’s also been fraud such as in the case of Barings Bank, one of the oldest merchant banks in the UK.

An interesting paper on Bank Failures in Mature Economies was prepared in April 2004 for the Basel Committee on Banking Supervision.

Insurance: Are you comparing apples with apples?

I have just finished reading the real life case of a business partnership who had received good advice from their adviser. They had appropriate insurances in place two of which were term life policies to fund an equity transfer, commonly called “buy/sell”. But why would this make news?

The story begins when the partners (let’s call them Joe and John) went to their bank to meet the new business manager who was looking after their loan. He saw an opportunity to refer Joe and John for some up-selling and referred them to the bank adviser who saw a large insurance premium on the business profit and loss statement. The adviser prepared a quote showing a substantial reduction in the premium but failed to complete a fact find and look into details of the existing policy.

One of the partners, John, had a health condition which was allowed for in the existing policy but not the new quote. Joe and John asked their adviser if he could do better. He asked the two whether they were comparing ‘apples with apples’. But by now they were both viewing this as a cost issue.

He realized that he would not be able to compete on price and still allow for the loading on the partner with a health problem. They would not hear of staying with the same policy. The adviser quoted for a new cover with a rebate of commission.

An application was made. In the meanwhile the policy of Joe, the healthy client, was due to be renewed. Against the advice of the adviser who recommended putting the policy on a monthly premium he decided to cancel the cover, after all he couldn’t see any benefit in paying for insurance that he was about to cancel.

I’m sure you can see what’s coming – Joe, the healthy client had developed a condition unknown to him and his cover was declined.

The bad news was not only that he had a condition he was unaware of and that was likely to get worse but the business was now in a riskier situation than before. Unable to reverse the decision of cancelling his existing cover he now has no insurance and is unable to get any cover.

Not only that his family are now in a vulnerable situation. After all it is those we leave behind that we get insurance for.

3 Golden Rules to Avoid the Debt Trap

By Lyn Bell

To avoid debt don’t get a loan – simple isn’t it? But, is it really that simple?

Sometimes we can’t avoid having to borrow otherwise how are we to get our new home? Not many of us would have the cash to buy it outright. But what you need to understand is that there is good debt and there is bad debt.

So what is good debt? Good debt is for things that appreciate in value such as property, or a successful business. It has the potential to bring in an income or to increase your earning capacity (such as a loan for education).

Bad debt on the other hand would be a credit card that is never paid in full each month. Remember that expensive new restaurant you tried for that special night out? The night out has long gone, the food consumed and the wine drunk. If the credit card has not been paid in full that dinner has probably doubled in price and the interest is now what’s causing the heartburn and headache.

• The golden rule then is to only borrow for things that appreciate in value. Know the difference between good debt and bad debt.

What about a car loan? Is this good or bad? Well, generally you should save to buy a car but if transport is essential (and not just a desire) sometimes you may need to borrow. But make sure it’s the smallest amount possible as a motor vehicle depreciates as soon as it’s driven off the lot. And it’s so easy to end up owing more than the car is worth. Better still get a cheap car that will get you from A-B and SAVE for an upgrade.

• Golden rule two – always pay your credit card in full each month. Only place thing on your credit card that you know you can pay for when the bill comes in.

Do you really need the latest technical gadget? These days you will find that electronics almost always depreciate in value. So why would you go out and use a credit card to buy an expensive electronic gadget when it will lose its value after it’s purchased? My laptop cost nearly $6000 a few years ago and now looks outdated, is slow and doesn’t do half the things I could now get for $1500. Luckily I didn’t borrow for the purchase – I might still be paying it off and feeling quite sick!

Shop at the sales – most people love to get a bargain. But don’t get carried away by buying something that’s too small (you’re going to lose weight, yeah right!) and ill fitting or something that you wouldn’t even consider buying normally at full price. That bargain may end up forever with the price tag hanging off, and that’s not a bargain.

In your budget you should have catered for clothing so stick to the limit you set yourself and don’t load up the credit card.

• Golden rule three – set up a budget and allow for savings, emergencies, tithing, bills and spending (that means entertainment too). Know where your money is going and be in charge.

It’s easy to get into a cycle of debt. Credit cards never seem to reduce when you pay only the minimum – the payment often covers the interest with barely much more. And interest on credit cards is one of the highest you can get.

Used wisely credit cards will save you money but used as an endless source of spending and cash you will find yourself on the debt merry-go-round. Credit card companies and banks will continue to thrive while many consumers get further into debt.

Be a wise credit card user, and always pay the account in full on, or before, due date. And never spend more than you earn and use the three golden rules.

Cancer...Did you know....?

Last Friday in New Zealand was Daffodil Day the symbol for the Cancer Society's official collection day. Did you know that:

• About 7,500 die from cancer each year, with the number expected to increase to about 9000 by 2012 (Ministry of Health 2002).
• In 2000, cancer accounted for approximately 29% of deaths in New Zealand (NZHIS 2004).
• Cancer is the leading cause of death for Maori women (78% higher than for non-Maori) and the second highest cause of death for Maori men (Minister of Health 2003).
• 1 in 3 New Zealanders are affected by cancer.

Makes you think, doesn't it?

Have a health check up and make sure your insurance requirements are up to date and appropriate for your circumstances.

What is NINJA ?

In financial terms NINJA has nothing to do with the Japanese origin of the name. This is what a type of housing loan has become known as in the USA.

It means No Income, No Job, no Assets.

Unfortunately there were unscrupulous lenders who made the loan application criteria fit and as a result when house prices dropped there were problems - i.e. the sub prime housing market. Sub prime loans are given to those borrowers who do not qualify through mainstream lenders.

In New Zealand we have 'lo doc' (documentation) or 'no doc' mortgages. I would hope that intermediary brokers here would not follow the path of those in the US.

Strategies for investing

Some strategies for investing:

1. Understand what your tolerance is for risk or your investment style
2. Invest for medium and long term, not for the next few months. Take advantage of the magic of compound interest.
3. Allow for market cycles - the ups and down of the market. We are all human and are affected by optimism and pessimism that is what affects cycles. REMEMBER. Three strategies for market cycles:
   
1. Invest in gloom, sell in boom
2. Invest in gloom and hold - like Warren Buffett
3. Invest for the medium and long term and ignore the cycles.
4. Diversify - 'don't put all your eggs in one basket'.
5. Seek good advice.
6. Avoid fads - or if you do buy them, get in early and get out early e.g. dot com.
7. Beware of being overly influenced by the media. Their job is to report the sensational. They're happy to report the negative and ignore the positive. It sells more papers.
   

It's Global - this bumpy ride

Yesterday the New Zealand sharemarket staged another decent rally and closed more than 1% higher as investors returned to hunt out bargains. Remember, buy when the market is down :)

Asia took a hammering last week but Japanese stocks continued to recover on Tuesday.

The Australian stock market finished higher yesterday with signs that some stability might be returning after the market was rocked by concerns over US sub-prime mortgages.

See my post dated 16 August for the sorts of reasons that this happens.

Market rollercoatser

Volatility in the markets remained high last week. It is becoming extremely difficult to escape the news about the deteriorating environment of mortgage and corporate lending sectors in America.

Here in New Zealand yet another Finance company collapses as we awoke to the news of Nathan Finance this morning.

Equities confidence has also been rattled by the dive of the New Zealand dollar, which has lost 15 US cents in three weeks and continued trading wide daily ranges.

Stock market go up and down

We all know that stock markets are constantly moving up and down. Over many years history has shown that markets go through cycles and the current volatility is a normal part of the investment cycle. This means that markets sometimes move down as well as going up.

Panic selling and buying in volatile times has been shown to be one of the worst strategies a person can use.

As we know, what happens in one market influences another, hence the term “when America sneezes the world catches a cold”. The problem is that human emotions can all too easily magnify the effect. Sentimental opinion is based on what people think will happen, as opposed to what really might be. Bad news in one part of the global market leads people to expect similar bad news in their own local market. This then causes them to start selling stocks irrespective of whether the problem is relevant to their market and so it goes on.

Remember why you invested in the first place. If the investment looked good then has anything really changed? Has your time horizon for the investment changed? Don’t let it be fear that makes you sell.

Interest rate rises and mortgages

Once again the OCR (Official Cash Rate) has been increased affecting our mortgage rates here in New Zealand. With interest rates constantly increasing here are some ideas to help prepare when your mortgage fixed rate comes up for review.

1. Complete a budget so that you know how much you have as a surplus. If there's a deficit and you have less money to spend than you have coming in, tweak your spending and see where you can save. Get rid of unnecessary spending. You may need to ‘pull your belts in’.

2. Don't put all your mortgage debt on to one term, split it so that you have say six months, one year, two years. This way you can take advantage of rates if they have lowered in the interim, or at least you won’t have them all maturing at the same time. Also if you have the benefit of receiving a lump sum payment (bonus or inheritance) you can pay it off one of the loans as they fall due.

3. Do not take a term longer than two years. This is only my personal opinion. I have seen too many people that have fixed for longer terms only to find they are locked in and if they want to sell or the rates have come down there are penalties to change the term.

I remember when interest rates where up to 22% - let’s hope we never see those kinds of rates again.

Protect against credit card fraud

The most common way for criminals to get credit card information is through phishing, which involves a fake email that appears to be sent from your credit card company. Normally, this fake email states that there was an error with your account, or that it was accessed by unauthorized personnel and needs your attention.

Spotting fake emails isn’t hard to do - as long as you know what to look for. The most obvious hint is the fact that they don’t even have a credit card from the company that has sent the email. For others, the link is what gives the fake email away. Whenever you get an email from a credit card that you believe to be fake, you should always hover your mouse over the link, then “right click” the link with the mouse and select “view source”. If the link is indeed fake, the website address that comes up will be something other than that of a credit card company.

Why Diversify?

“Don’t put all of your eggs in one basket!” You’ve no doubt heard this said many times throughout your life…and when it comes to investing, it is even more important. Diversification is the key to successful investing.

The key is to invest in several different areas and not just one. That means different industries within equities, different companies for your fixed interest and bonds, as well as a mix of properties. It also means including international investments.

Having all your money in one investment alone is dangerous. If that lone investment takes a significant plunge or worse still is in receivership, you will most likely find that you have lost most or all of your money. On the other hand, if you have invested in ten different shares, and nine are doing well while one plunges, you are still in reasonably good shape.

By diversifying your investments, you will find that you have a lower risk of losing your money, and over time, you should see better returns.

Pay yourself first

It's nearly always possible to save a little money no matter how small the income is and no matter high your expenses seem. Even if you're only able to tuck away enough for one coffee a week, I think it's wise to get into the habit of saving early on. Taken out of your income before you have the chance to spend it and you'll soon get used to not having it. And when the bigger dough starts rolling in, you'll already have some sort of system set up to put money away.