Saturday, 7 July 2012

Aussie Bank Shares V Term Deposits

A number of people have said to me, "you are far better off having your money in term deposits than in the stock market in these uncertain times".

My answer to them is, "think about a bank as a business, you are giving your hard earned cash to them, to use how they want (to make money) in return to give you a small percentage".

Lets look at a live example. I invested $10 000 in the purchase of 500 WBC (Westpac Bank).  Over the year I had 2 dividend payments from the investment amounting to $810 paid to me.  They where fully franked meaning that the amount of money paid to me had tax paid on them by WBC.  A little like an employer paying your wages and paying the tax on your wages for you.  The facts are that I had received a payment of 8.1% of my $10 000 investment with tax already paid on the earnings.  At the end of the financial year this will be added to the tax my employer has paid on my income, a gross income will be derived and a possible refund may be received.  Coupled to this is the share price of WBC.  They went from the $20 I paid a year ago to $21.74 (today's price).  This price will fluctuate from day to day but in the long term should continue to grow.  So my $10 000 investment has grown $870 in value over the year, I have earned $810 with tax paid on it.

Compare this to the $10 000 invested in a term deposit with WBC.  The current rate is 4.55%.  Over a year of term deposit I would receive $455 paid to me.  At the end of the financial year I would have to declare this income and pay tax on the income at the rate decided by my gross income.  I in real terms have only made about 25% of return as the share investment.  Disregarding the share price growth, only 50% of the income as that invested in the WBC share purchase.

I hope this makes sense to my readers.  To me it is straight forward, but to many they may never have considered it.

This related link may be worth a read.

Saturday, 17 March 2012

Shares v Property

* The share market goes up and down.
* The property market goes up and down.
* You can buy a parcel of shares for a minimum of $500.00.  They may be Aussie share that pay a fully franked dividend (the tax has been paid by the company and you may even get some tax back at the end of the year).
* You cannot buy a property for $500.00.
* You can sell your $500 parcel of shares that may have gone up or down for $19.95 (tax deductible).
* To sell a property will cost $thousands (tax deductible)
* Over the long term Aussie shares will increase in value much faster than property.
* You can build up your share portfolio as fast or as slow as you seem fit without a huge outlay.
* To buy a property you have a huge outlay.
* When you own good quality shares you do not have to pay shire rates, water rates, maintenance and repairs, management costs, insurance and other hidden costs.
* When you own a rental property you have to pay shire rates, water rates, maintenance and repairs, management costs, insurance and other hidden costs.

These are just a few facts to consider before making an investment in either property or shares.  You have to be comfortable with the decision you make.  You have to consider your financial situation and never let a financial adviser tell you what is best for you.  My father retired 10 years ago.  He went against his financial adviser's advice and pulled out all of his superannuation.  His mate of the same age followed the advice of the financial adviser and left his money in the superannuation fund.  My father paid a small amount of tax and has his money in term deposits earning good income.  His mate lost over 1/2 of his superannuation investment value due to the Global Financial Crisis.  A financial adviser will usually steer you with advice so he/she will get commissions.  A good financial adviser will give you options and let the final decision be made to you.  Always get advice if you are not sure.  If you are sure don't get confused by paying a financial adviser, it all gets back to you and your decision.

A little over 10 years ago after I sold my rental property I decided to buy some shares.  The price of Woolworth's shares was $2.50/share.  Today's price of Woolworth's shares is $25.67/share.  That is 10 times the price it was 10 years ago.  The property I bought for $86 000 and sold for $101 000 10 years later, that cost me a fortune on Interest, repairs and maintenance and heaps of hidden costs as well as agents fees for selling and stamp duty when purchasing had actually cost me dearly.  However lets say I was the buyer of the property for $101 000 10 years ago.  The property is now valued at $330 000.  It has gone up a little over 3 times.  I would have to be paying all the associated costs with a property so in real terms I would have to take all the out of pocket expenses off the real gain.  This does not look at all attractive. Compared to the Woolworth's shares.  If I purchased $101 000 of Woolworth's shares I would have been receiving a fully franked dividend every 6 months and today's value of the parcel of shares would be (10 times)  over $1 010 000.

You may say the money invested in the property had tax deductions for all the expenses.  Well if you had borrowed the money for the shares the interest would be tax deductible.  I know that the less you have to put into your pocket for a return is a better investment.  Who cares about the tax deduction if you are having to part with less money.

I hope this little keep it simple chat will help you understand the facts on shares v rental property.  I believe in buying your own property to live in rather than paying rent.  Pay it off and own it outright before investing in any other investment.  Don't worry about keeping up with the Jones's.  Get a good share portfolio and say to yourself, "who cares about the Jones's buying a bigger house with a bigger debt and higher rates, I can sell my shares and my house any time I want to buy one bigger cash, if I want".

Ever thought of owning enough shares to live off the fully franked dividends received when you retire?  I do and that is what I'm aiming for.

Look forward to the next blog where I'll delve a little deeper and give a few hints for successful investing in shares.

Paul Harvey - Aussie Shareman