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AUTUMN 05 Your newsletter from Aon Wealth Management Limited / Chris Jensen, representative of Jensen Financial Planning Pty Ltd Welcome! Having recharged the batteries over the Christmas and New Year’s break we are back into another year. In February this year Aon, our licensed dealer group, held its national awards night on the Gold Coast. With more than 190 advisers nationally, we were delighted to win the Bronze Individual Planners Award for 2004. On the business front we have just revamped our website ‘www.jensenfp.com.au’. The site will become a valuable tool in keeping you informed on what’s happening in the market place, as well as upcoming events. Your feedback is welcome, so please log-on and let us know your thoughts. If you have any queries please contact our office on [email protected] or phone 1300 722 711. Chris Jensen DipFP, CFP, Managing Director Jensen Financial Planning Property: open for inspection by Paul Clitheroe If there is an asset close to the heart of Australians, it’s residential property. And this year there are plenty of extra reasons to take an interest (so to speak) given the potential for a rise in rates, the differing opinions on the direction of property prices and the new phenomenon of using the equity in the home. Let’s look at interest rates first. The Governor of the Reserve Bank, Ian Macfarlane, has warned that rates are likely to rise and, with lenders reporting record levels of personal debt, even a small rate hike can cause a real squeeze. But there are ways to protect yourself or to help family members guard against rising interest rates. The obvious option is to pay off the home loan as quickly as possible. Infochoice.com.au calculates paying just an extra $50 a month into a $100,000 mortgage charging interest at 7.25 per cent will trim almost four years off the 25-year term and save roughly $21,500 in interest. Another tip is for those making monthly repayments to consider paying fortnightly. Instead of making 12 monthly repayments each year, paying every fortnight means making the equivalent of 13 monthly instalments annually as there are 26 fortnights in a year. This extra month’s repayment annually really makes a difference. While the consensus seems to be that interest rates are on the way up, there are varied views on where property prices are headed. One thing is for sure; most experts who don’t have a vested interest in selling property see prices going down. I recently read an article written by the economics editor of The Economist magazine that said property prices in Australia would fall between 20-30 per cent in 2005 to 2007. Their analysis indicated property was still significantly overvalued and suggested that investors were ignoring the link between yields and prices. The yield is the income the property generates and rents have been falling steadily. In this environment, investors are relying on capital gains to make the investment worthwhile. But with prices going nowhere, something The Economist says could be the case for the next decade, investors may not be willing to tough it out particularly if they are heavily committed. This would create an additional supply of properties putting downward pressure on prices. Speaking of pressure, the rise in the use of home equity loans has alarm bells ringing for the Reserve Bank of Australia who have commissioned research to investigate how consumers are using this new lending phenomenon. Put simply, they want to find out if these loans are being used for good or for evil. There’s no question that accessing the equity in your home has its advantages. Many investors have used home equity loans to build a nest egg that is separate continued on back page The Ghan - from working class to first class With its working class origins, The Ghan, has a special place in Australia’s history. Its name is taken from the Afghan cameleers who blazed a trail through Central Australia, delivering general supplies, as well as pianos, motors and furniture to outback towns in the Northern Territory. In 1929 a railway track took over the cameleers route from Adelaide to Alice Springs, though the tracks were prone to flooding and the train often ran weeks (or months) late. A new track was established in 1980 with termite proof sleepers. In 2004, the track was extended from Alice Springs to Darwin. Restaurant, themed around the gold mining town of Tarcoola and the Melbourne Cup winner of the same name. Guests can also take optional side trips, Tony Braxton-Smith says Katherine Gorge and Alice Springs are very popular. “Many choose to take a helicopter trip over Katherine Gorge so they can take in the full grandeur of the 25 million year old sandstone canyons, while others prefer to enjoy the sights by boat. In Alice Springs, guests can go on a locally guided tour of the Desert Park where they can get up close to the plants and animals of the outback.” Today guests making the 2979 kilometre trip can expect to travel more comfortably than the cameleers did. On its first trip from Adelaide to Darwin the on-board catering team brought with them 75 kilograms of barramundi, 62 kilograms of gourmet cheese, 45 kilograms of beef, 240 portions of pate and 1440 bottles of fine wine. More than 8000 meals were served on board freshly prepared by eight chefs. Tony Braxton-Smith, Chief Executive Officer of Great Southern Railway said that more than 70,000 guests have taken the epic journey in its first year of service to Darwin. “People are drawn to The Ghan as it offers the trip of a lifetime. You can sit back, enjoy a drink as you watch the passing landscapes - the rusty reds of the MacDonnell Ranges and Ayers Rock, and then to Tennant Creek, Katherine and the tropical splender of Darwin.” Once on-board, the Gold Kangaroo Service offers guests twin or single sleeper cabins with a lounge during the day that converts to a comfortable bed at night. Twin cabins have their own ensuite including a shower, and are serviced daily. Restaurant cars each have a historic theme inspired by the outback, including the Tarcoola There’s also Stuart Restaurant (as a tribute to the explorer Stuart) plus the Cooper Pedy Lounge and Dreamtime Lounge. Quick facts Above: The legendary Ghan Below: Menu - Gold Glass Service ~ The extended service from Adelaide to Darwin cost $A1.3 billion to build. The construction of the new line involved 120 bridges, 2.3 million sleepers and 143,000 tonnes of steel for the track. ~ Since its inception, ticket sales have surpassed $A15 million. ~ The railway is still an important trade route with defence equipment, motor vehicles and raw materials being transported. Other classic train journeys The Orient Express - destinations include Paris, Venice, Rome, Budapest, Prague and Istanbul The Trans Siberian Railway - Moscow to Beijing The Blue Train - Cape Town to Pretoria, Africa Eastern & Oriental Express - Bangkok to Singapore The Deerstalker Express - London to the West Highlands in Scotland The Canadian - Toronto to Vancouver, Canada Indian Pacific - Sydney to Perth, Australia Rising dragon The Chinese economy is growing at around 8-9 per cent per year. We asked Mark Dutton, ipac’s Chief Investment Officer, if there are any opportunities for Australian based investors to benefit from this surging economy. Dutton says direct investment in the Chinese share market is difficult, given it operates very differently to Western share markets and with only a small portion open to foreigners. “Investing directly in the Chinese stock market may not be the best way to benefit from the growth in China. South East Asian countries geographically close to China have benefited from improved trading conditions.” “Many of these developing countries are included in the Global Emerging Markets index, so investors with exposure to emerging markets could potentially benefit from growth within the region,” he said. Dutton says that with a population of 1.25 billion, many Western companies are keen to get access to millions of potential Chinese customers. “Companies selling everything from fast food to consumer products to financial services are all vying for a slice of the action. Many of these companies have been building a presence in China over the last decade or so.” Well-known companies like KFC, McDonalds, Avon, BP and Volkswagon are amongst the Western companies treading a well-worn path to China. Dutton suggests investors look closely at the companies already in their investment portfolio, as they may own shares in companies already in China or the surrounding region. “ Well-known companies like KFC, McDonalds, Avon, BP and Volkswagon are amongst the Western companies treading a well-worn path to China.” Dutton says that Australian resources companies have also benefited from increased demand from China. “The Chinese economy accounts for about three per cent of the world economy, but in recent years China has consumed a larger proportion of the world’s resources and commodities - up to 20 or 30 per cent of the world’s supply of iron ore, steel, cement and copper.” “Local exporters have benefited from the higher demand, and share investors have already seen a solid performance in the resources sector over the last couple of years. The question is how long will the resources rally last? With demand continuing the rally could last for a while yet,” Mark said. “It’s worth remembering that despite all the talk, the Chinese economy accounts for just three or four per cent of the world economy. So yes, it’s growing strongly and there may be opportunities for investors, but this should be balanced against basic investment principles like diversification and avoiding all the speculative hype,” he said. The following graph demonstrates the out-performance of the Resources index against the Industrials index over the last five years. Industrials: S&P/ASX 300 All Industrials Accumulation Index Resources: S&P/ASX 300 All Resources Accumulation Index 240 220 200 180 160 Investing in global share markets like the United States is another option. “Many companies are already out-sourcing production to China - as they did with India over the last few years. Examples include carmakers, computer manufacturers and telecommunications companies. In reducing their costs they can improve their profit margins, leading to higher dividends and share prices,” he said. 140 120 100 80 Jan 00 Source: IRESS May 00 Sep 00 Jan 01 May 01 Sep 01 Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 May 04 Sep 04 Jan 05 continued from front page to the home by investing in other assets like shares. They have been attracted by the cheaper cost of finance. Unfortunately, things go horribly wrong when people see home equity loans as simply a slush fund to spend on depreciating assets. Sure if you have always wanted a boat and think you will put it to good use then a home equity loan is a reasonable source of finance. But, to state the obvious, you have to pay the money back. My advice on home equity loans is to use them to buy appreciating assets, or if used to buy lifestyle toys then crank up your repayments. Toys won’t last, debt will. Paul Clitheroe is a founding director of financial planning firm ipac, host of Channel Nine’s ‘Money’ reports and chief commentator for Money Magazine. Smart money management Often people think about contacting a financial adviser when there has been a change in their circumstances. Retirement may be on the horizon, or a change in their employment situation. Sometimes the death of a loved one triggers a phone call to an adviser. Asking a professional adviser for assistance during these times makes sense, as they can help you through the raft of rules and advise on the available choices. However, good financial advice can also help you to be smart with your money each week, which is fundamental to when you achieve your lifestyle goals. So here’s our guide to smarter money management. 1. What are your expenses? If you know where your money is going each week then you can take control. Over the last decade or so, changes to technology have impacted on household expenses. For example, 10 years ago, video rentals or a trip to the movies may have been regular expenses. Today, you may be spending money on DVD rentals, mobile phones, internet connections, home theatre and perhaps x-box games for kids or grandchildren. maintenance, fees and levies all impact on your cash flow. 2. Tax is an expense A professional adviser will treat your tax as an expense, and by advising you on smart ways to structure your finances, you could reduce your yearly tax bill. At the very least, your adviser can explore opportunities to better structure your financial affairs. 3. Smart strategies for success Once you know where your money is going each week, your adviser can help you make the most of any surplus. If you have a deficit (your expenses are greater than your earnings) your adviser can also assist with debt consolidation or debt reduction. These strategies can have a real impact on the amount you have left over each week to fund your lifestyle goals. What Generation X (25 to 45 years) and Generation Y (18 to 24 years) are saying about money ~ 59% have experienced a “bad debt” ~ 21% of Generation Y have mobile phone debts Create two lists for all the expenses that you have on a weekly (or monthly) basis. The first is for ‘regular’ expenses like utilities, cost of running vehicles, food. While the second is for ‘discretionary expenses’ such as holidays, gifts, clothes and entertainment. ~ 4 in 10 believe home ownership is not achievable People with investment properties should also record these expenses. Repairs, Source: CPA Australia survey by Newton Wayman Chong, 2004. ~ 64% have a credit card debt ~ One third feel over committed on the amount of their debt ~ 75% believe they will have to fund their retirement and not rely on a government pension Aon Wealth Management Limited Jensen Financial Planning Pty Ltd Chris Jensen Dip FP, CFP ABN 14 003 344 232 Australian Financial Services Licence No. 239187 Life Insurance Broker ABN 49 097 063 922 Corporate Authorised Representative No 253416 Authorised Representative No. 273571 Level 11 / 440 Collins Street Melbourne VIC 3000 Phone 1300 722 711 or 03 9211 3611 Fax 03 9211 3601 Email [email protected] Important Information: This publication has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision, you need to consider (with or without the assistance of an adviser) whether this information is appropriate to your needs, objectives and circumstances. This information is provided for persons in Australia and is not provided for use of any person who is in any other country. From time to time, we may bring to your attention products, services, or other information which may be relevant to your financial plan. If you no longer wish to receive this information, please contact us directly.