Set up to succeed

Give me 6 hours to cut down a tree and I’ll spend 5 hours sharpening my axe

The ever famous Abraham Lincoln personifies this all too well, setting yourself up with the right platform to succeed will make a hell of a difference in your after tax returns. This is dedicated to exactly that.

  • Be prepared
  • What entity do you trade in?
  • What is the true cost of transaction costs?
  • Tax?

Be Prepared

Let’s face it as humans we are, in the main, lazy.  How many of you still use Commsec? – Their best deal is still twice the price of some of the best offers in the market.Trading with Commsec once a week, instead of the cheapest broker costs you near $1,000 pre tax per year… Why? the power of inertia, that ease of doing what you always have done even when there are heavy incentives to change.

Inertia is a big killer on everything we do… that passive resistance embedded in a lack of change, it must be resisted.

Even if you see no immediate need to set yourself up to succeed (i.e. there are no gains for you at the moment) being ready to strike has value in itself. Establishing your accounts and being ready usually has no financial cost, so do it, I guarantee when you see the opportunities, you will fail to optimise your returns because you will want to move quickly and you won’t have the infrastructure ready.

A few tips.

  1. Go and get 10 copies of your ID certified. Without a doubt the biggest road block to opening new accounts. Having copies handy will reduce your mental resistance to trading.
  2. Understand the law. Not the bullsh*t you read on some blog. Its all there: austlii.edu.au
  3. Trading, like all ventures is not just the act of trading, it is about creating an environment where your default behaviour is successful invest in it.
  4. Don’t outsource your decision making. Everyone is out to make a dollar, this is especially true in financial services – even those people who are in the business of helping you.  They are there to inform you, but at the end of the day you are the decision maker, it is your life & you will live with the consequences whether you made the decision or not.
  5. Annuities are worth more than 1 off gains, saving $10 / week is worth much more in the long run than a one off gain of $5000. As addictive as trading is, most of us trade so that we don’t have to not because we want to do it more.
  6. Risk isn’t just a function of the market it is a function of the world – every decision in life carries risk

 

What entity do you trade in?

Imagine making an extra 30% profit on every trade you made. Not a pipe dream its the norm.  Trading in the right entity can make all the difference.  I will dedicate a lot of time to SMSFs over the next little while, they are powerful little beasties.

Just think about this though. Lets say you have $100,000 in investment capital you can put to work, and you have a good salary earning, lets say $180,000 / year.  You marginal tax rate before trading is 45% + 4%.  Earnings on your superfund are taxed at 15%.

 

The difference between owning in your superfund vs owning in your own name is… 34% of your profits, per annum. Take an investment you could make today MyState [MYS.ASX]  23,000 @ $4.61, it commands a healthy 9.1% yield before tax. In your SMSF this means you book  $8,089 in after tax income – investing in your own name will leave you with a $4,853 in your pocket AFTER TAX.

$3,200 after tax a year in a $180,000 job, means you need to increase your before tax wages by about $6,000. Lets compound the difference ($3,200 per annum) over 30 years @7%: $331,153.  Yes that’s right.  All other things being equal your $100,000 investment is worth $331,000 more because you invested in the right way.  Now clearly a lot of things need to stand still for this to happen, and frankly it highlights why I believe the superannuation system will change at some point in the future (and potentially why many of us won’t call Australia home in 20 years).

Now I’m not suggesting for a second you liquidate your Retail Superfund and slap it all into MYS, frankly that would be outright stupid, investing via superannuation also carries risk – liquidity, legal and legislative all play.

What I am highlighting though is that you should consider your circumstances, all the risks and balance them against the capital efficiency gains you get out of investing via a SMSF.

What is the real value in SMSF?

I will dedicate a lot of time to the advantages of having your own fund cost is by no means an inhibitor, forget this $200K minimum size thing, its viable on much lower balances.

We tend to use eSuperFund, it’s simple and effective and it works for many peoples needs. At $699 a year including your Audit it is far more cost effective at low balance levels.  Frankly, I believe there’s still value in it at $50K or $70K of FUM as long as you are still have a few years in the accumulation phase.

Unfortunately, whilst most media attention is focussed, somewhat rightly, on costs the value in the SMSF is in your ability to control it.

  1. You can control you tax position – when you buy and sell.
  2. You have access to your seat at the table opportunities, your buyback arbitrage, no index hugging holdings
  3. You control the fees you are willing to pay or not.

Most importantly in my view, you can see your money on a screen, you start to think about it like your other investments, it is your money again, which means you look after it. The psychological impact of this can not be understated.  

Today super is worth $1.8trn or about 25% of household net worth in Australia.  Outside of the family home (if you have one), it will likely be your biggest financial asset. For nearly all of Gen Y and most of Gen X, the step change in house prices will mean that it will probably be your biggest asset, and will remain your largest personal asset over your lifetime.

Back on topic – there are opportunities to make recurring savings in the thousands of dollars per year simply by being smart about what you do. Learn them

 

Our Model Entity Structure

This is our current trading structure that we adopt for a 2-person household.  You may want to do this in stages – ourfirst port of call was getting a SMSF sorted established and refinanced.

  1. Mr Smith:
    1. Low Cost Brokerage account.
    2. High interest savings account / low interest (mortgage) line of credit
    3. CFD Account
  2. Mrs Smith.
    1. Low Cost Brokerage account
    2. High interest savings account /low interest (mortgage)
    3. CFD Account
  3. Mr + Mrs Smith ATF for the Smithsonian SMSF.
    1. Low cost brokerage account
    2. Low cost super administrator
    3. High interest savings account
    4. CFD Account
  4. Smith Pty Ltd ATF for the Smithies Family Trust.
    1. Low Cost Brokerage account
    2. High interest savings account /low interest (mortgage)
    3. CFD Account

One final note, risk appetite is something that each person needs devote their own time to analysing, risk is not just about prices going up and down and how correlated that is with your sleeping patterns.  Legal risk is as big a class as Market Risk and here there are many shades of grey. You can push things a lot further than I am writing, take for example establishing multiple brokerage accounts in ones name to take advantage of 1-share opportunities for the same beneficial owner more than once. Make no mistake, it’s a breach of the Corporations Act, make no mistake though people breach the law all the time.

 

For a small fee, we are happy to assist setting up your accounts for you. E-mail us as info@ASX24.com

 

ASX-24

 

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