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Warren Buffett’s investment advice to his successors

In a letter to his Berkshire shareholders, dated 28 February 2014, Warren Buffett said that he was advising his trustees to put 10% of his funds into short-term government bonds and 90% into a low-cost S&P 500 index fund, as he believes the long-term results from this policy will be superior to those attained by most investors.

He also suggested that people avoid the ‘frictional costs’ of active trading. As he puts it, ‘ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.’ Or, as we would say at JDL Strategies, ‘invest in stocks as you would in property – as a long-term asset.’

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How do you choose your home loan?

How do you choose the mortgage on your home? According to the Australian Mortgage Snapshot Study 2013, 83% of Australians base their decision on interest rates.

In my experience, there are two things that people commonly check when applying for a mortgage – the interest rate and the monthly repayment. So if the interest rate offered by the bank (or broker) seems appropriate and the repayments are affordable, people simply take the loan. Their thinking goes like this: Can we afford the monthly repayment? Yes. OK, let’s do it!

Does this sound familiar?

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How you can benefit from property cycles

Yes, property cycles are real. There are upswings and downswings, and residential property is an especially sensitive sector.

One of the reasons that property is such a good long-term investment in Australia is that the overall trend line, for as long as data has been recorded, is upwards. Note that the short-term has also been positive – the recently released Knight Frank Global House Price Index puts Australia in the top 10 countries for house price growth over the past 12 months.

For the last 50 years economists have been exploring the connection between property prices and business cycles. Research has shown that, while property prices are influenced by the health of the wider economy and financial conditions (economic growth, inflation, interest rates), the correlation is only rough. Historically house prices move in smooth, long cycles. So they tend to be deeper and longer than business cycles.

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So how can you best protect your current and future assets through a divorce?

No one plans to split up when they marry, but the reality is that, over the last decade, between 11 and 14 couples in every 1000 marriages were granted a divorce each year.

When do most divorces happen? According to ABS figures, the median duration of marriage to divorce is around 12 years, and the highest percentage of divorces are being granted to people between 40-44 years of age.

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Tips for breaking the debt cycle

If you are worried about paying your bills and stressed about your level of debt, then you are not alone. Debt and financial stress are among the biggest depression triggers. The fear and anxiety that go with financial stress can cause a serious loss of self-esteem, put marriages at risk, and lead us to feel ashamed, unhappy, inadequate and secretive about our financial position.

So how can you turn around your financial pressures and get out of debt?

Here are a few tried and tested tips to help you break the debt cycle.

Make a list of all your debts. Write down all your debts, plus the interest rates you are paying on those debts.

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What’s happening with negative gearing

More and more Australian property investors are waking up to the huge advantages of negative gearing as a tax minimisation tool.

In a nutshell, negative gearing allows you to offset costs associated with your rental property(s) against your taxable income, so long as the property is producing income and your intention is to achieve a positive net cash flow.

Common deductions are interest costs, capital works, depreciation, repairs and maintenance, and property agent fees and commission. A detailed list of available deductions is provided by the ATO on its website.

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Are you stuck on the rental roundabout?

There are plenty of renters out there. This is good news for property investors, who need tenants for their properties. And affordability seems to be the main reason they continue to rent.

So why do renters continue to rent, rather than buy a property? A survey of 1200 renters across Australia by RealestateVIEW.com.au in April came up with some interesting findings. Here is a sample.

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Tips for buying at auction

Buying at auction is a nerve-wracking and emotional experience. The best way to approach it is to arm yourself with a strategy – and then stick to it!

So what should you include in your strategy?

Do your homework

Try to develop a realistic understanding of the market value of the property you wish to buy. The real estate agent will not tell you this. So you have to check comparable recent sales figures in the local area. You can do this through an online search – or, for a fee, a registered valuer or your lending institution can give you an opinion.

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Why you need to avoid cross-collateralisation

Knowing the implications of cross-collateralisation is crucial if you are a serious property investor.

So, what is cross-collateralisation?

Cross-collateralisation is a term used when the collateral (or security) for one loan is also used as collateral for another loan. And the reality is that many investors have cross-collateralised loans without knowing it.

For example, let’s say you borrow from Bank XYZ to purchase your home, and this is secured by your house. You then want to buy an investment property and approach Bank XYZ for a loan. They will use both the assets as cross-collaterals for the investment property. It becomes even more complex if you wish to buy a second investment property.

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