It is hard to find a greater mis-match than the Anglo-Zanzibar war, in which the British defeated the Zanzibarians in 38 minutes, with only 1 casualty, as against 500 casualties for the locals. This war is recorded as the shortest war in history.

A modern day equivalent to the Zanzibarians is private investors trying to short term trade. Let’s remember that every time we buy a stock, someone else is selling. And we’re saying to the other party, "you’re wrong and we’re right". But who is on the other side of the trade?  Sure, sometimes it might be a punter on a computer screen in his bedroom wearing pyjamas and drinking Red Bull, but chances are the other side of the trade is an institution, and more and more often now, a computer programmed by the institution to perform ultra fast short term trades. Is it really feasible that over 100′s of trades, an individual private investor is going to out-perform sophisticated and well informed institutions with the ability to trade in fractions of a second?

But all hope is not lost. At Guidance we’ve long held the view that short term trading is for mugs. Where private investors do hold the advantage is that we we can be patient. We don’t have monthly, quarterly, and yearly performance figures that we have to hit. Institutions do. In fact a few bad performance numbers and they stop getting money to manage, and their business after all is not earning the maximum return, it is obtaining money to manage.

So as private investors we must play to our strengths. Leave the short term gambling to the computers, and instead seek out good businesses and be in there as a true shareholder for the long term.

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Important changes to superannuation co-contributions

In November the Federal Government released the Mid-year Economic and Fiscal Outlook. Various savings measures were included in this with the aim of ensuring the budget returns to surplus in 2012-13.

Amongst the savings measures was a reduction in the generosity of the government’s co-contribution. Co-contribution is the process whereby the government contributes to your superannuation account, when you have made an after tax superannuation contribution. In recent years, the government has matched whatever you put in dollar for dollar, up to a maximum of $1,000. The benefit phases out as your income rises, as it is intended as a measure to help lower income earners amass more retirement savings.

From 1 July this year (ie. next financial year), the government will only contribute 50 cents for every $1 that you contribute. And the maximum they will contribute has halved to $500.

So for now at least, government co-contribution lives on, it’s just a little less generous than it used to be.

Opportunity

Get your maximum superannuation co-contribution this financial year – your last chance for a $1,000 payment.

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Behavioural Finance aims to understand how and why people make certain financial decisions.  Much of economic theory assumes people will act “rationally”, yet reality frequently upsets these elegant theories.  By gaining an understanding of how we interpret financial information and react to it, we can perhaps reduce the harmful effects of some of our instinctive “humanness”.

Regret Aversion

One Behavioural Finance concept worth grasping is Regret Aversion.  We instinctively try to avoid a situation of regret or disappointment.  It’s not hard to see how we have become hard wired for this trait.  If we burn our hand on the side of the toaster, we don’t put our hand their again.  However it’s a small step from this useful application of regret aversion to “well once at school when I spoke to the class, someone laughed, so I never talk in front of groups now”.

Often, regret aversion is at the heart of procrastination.  We can see that undertaking a certain action makes sense, but there is a chance this bad thing might happen, so lets just be safe and do nothing.  This thought process is why most people don’t become self employed.

We all know that share markets have had a volatile and difficult time over recent years.  It is tempting to conclude, “investing is for mugs, I’ll just put my money under the bed, it can’t go down that way”.

In 1990 the Australian share market declined 17.52%.  This was only 3 years after the 1987 stock market crash where markets declined over 30% in a matter of days.  Then, like now, there would have been some, applying the regret aversion thought process.  “I can’t stand any more of this volatility, I’ll just put my money in the bank where it is safe”.

Over the next 10 years, the Australian Share market gained an average of 14.8% per year, whilst cash earned between 5% and 6% for most of that period.

There is an interesting experiment reported by the Journal of Economic Psychology looking at peoples preparedness to exchange one lottery ticket with another.  Even though they could could achieve a bonus for exchanging, may none-the-less chose not to exchange, fearful it seems, of the regret they would feel should the ticket they gave away prove to be the winner.

Regret aversion is an understandable, instinctive, human trait.  However if we understand this natural tendency within ourselves, we can perhaps question our decisions.  Is this decision I’m making rationale given the current facts, or am I letting some past event, which has little if any relevance to the current circumstance, lead me in a direction that is not in my bests interests?

In order for your superannuation contribution to be tax deductable, you need to be self employed. The thinking here is that in this circumstance, there is no employer making superannuation contributions for you – you are your own employer. So therefore you can make contributions as though you were an employer. Employers claim superannuation contributions as a tax deductable expense, as they do any other expenses incurred in running their business.

Where it can get a bit tricky is where someone does some paid employment, and is also self-employed. The test employed in this instance is known as the 10% test. The income you derive from work as an employee, must not exceed 10% of the total income you earn for the year. So put another way, for you to be considered self-employed, you must generate at least 90% of your income from self-employment.

Want to to learn more about Self Managed Super? Download our free e-book SMSF – Australia’s most popular way to save for retirement.

Guidance Financial Services – specialist financial planning advice for business owners and the self employed.

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As our workforce becomes more highly skilled, and the services sector grows, businesses are about people. Yet strangely, few businesses insure their people, whilst putting great emphasis on protecting the premises from relatively rare incidents such as fire and theft.

To learn more about Key Person Insurance, download our free ebook – Key Person Insurance – a succinct guide for business owners.

"In a business with two male owners over 40 years of age, the probability of a key person insurance claim event occuring prior to them reaching age 65 is greater than 50%."

Source: OnePath

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Victoria’s Small Business Mentoring Service provides an affordable avenue for small business owners to gain outside expertise.

The non-profit organisation links volunteer mentors to businesses seeking help.  Typically the mentors are retired executives with a wealth of experience to share.

Started in 1986, the service claims to have helped more than 15,000 business owners over its 25 years of existence.

If you are a business owner operating a business with less than 20 staff, you might wish to consider contacting the Small Business Mentoring Service for help and support.

Heard about Self Managed Super and want to find out if it’s right for you?  Why not download our free ebook – SMSF’s – Australia’s most popular way to save for retirement

Guidance Financial Services – specialist financial planning advice for business owners and the self employed

Photo by Dan4th’s

We’ve recently published a new ebook:

SMSF – Australia’s most popular way to save for retirement

This easy to read booklet contains valuable information for anyone considering setting up a new Self Managed Super Fund.

To download your free copy of our SMSF ebook, click here.

Guidance Financial Services – specialist  financial planning advice for business owners and the self employed.

Photo by andymangold

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Self employed people don’t have sick leave.  If you can’t work, you don’t get paid.  Chances are for a week or two you can get by, but what happens of you were unable to work for 3 months, 6 months, or longer?

That’s where Income Protection insurance comes in.  You are effectively buying yourself long term sick leave.  You will select a waiting period, commonly 30 days.  Within this period you need to support yourself.  However if you continue to be unable to work beyond this waiting period, then a monthly benefit will start being paid.

The monthly benefit is typically determined as 75% of your normal income.  It’s not 100% because the insurer wants you to have an incentive to get back to work.  Hopefully three quarters of your normal income is enough to pay the bills and keep the household afloat.

Click here for an Income Protection Quote:

Income Protection quote

There are variations as to how the monthly benefit amount is determined.  It might be guaranteed from the outset or determined at the time of claim.  Advice here is essential.

Waiting periods can be varied to suit your circumstances, as can the period the benefit is payable for.  The most popular is for a policy that would pay a benefit until you reach age 65 (assuming you were unable to work for that period of time).

The insurance premium for Income Protection is typically tax deductable, which certainly helps.  It does mean that when a benefit is paid, it is assessed as taxable income.

Every self employed person should have Income Protection, yet only around a third do.

Contact us to talk through your needs.  We have access to all of the major insurance providers in Australia, so we can find the policy that works for you.  If you wish, we can arrange everything over the phone.

Phone 03 9870 6544 or email us here.

Guidance Financial Services – specialist financial planning advice for business owners and the self employed.

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

If you’re a wage earner, your employer takes care of your superannuation contributions.  If you choose, you can have little to no input in what is going on.

However the situation is very different if you are self employed.  Depending on the size and structure of your business, it may be that you are on the payroll and therefore receive some compulsory employer contributions.  However for most business owners that I deal with, if they are on the payroll it is for a nominal amount.  There major income comes from drawing down the profits of the business.

So lets consider the situation where either all or the majority of your income is derived by drawing down the business profits.  There are 4 key points to know:

1. How much must I contribute to super?

None.  As a self employed person there is no legal requirement for you to contribute anything into super.

2. What is the maximum I can contribute into super?

The current (2011/12) annual threshold is $25,000 of tax deductable contributions (note – you can contribute more in “after tax” contributions but that’s a separate matter).  If you are over age 50 there are currently provisions to contribute up to $50,000 in 2011/2, though this higher cap for over 50’s is due to cease.  The government is yet to confirm whether people over age 50 will continue to have a higher cap in 2012/13 and beyond.

3. Why should I contribute to super?

Because it is the most tax effective place in which to save for your retirement.  And you definitely need to save for your retirement because the Age Pension isn’t very generous and will only get worse as our population ages.

Also because of the annual contribution caps mentioned above, it’s not like you can ignore super until you’re 50 and then go hell for leather in contributing for the last 10 or 15 years of your working life.  You simply wont be able to put enough in to generate a comfortable retirement income.

4. But I hate giving my money to fund managers, all they do is charge me fees.

You should talk to us about setting up a Self Managed Super Fund (SMSF).  SMSF’s are very popular with business owners and the self employed, as they offer far more control in how your savings are invested.

Be very careful regarding the contribution limits.  If you exceed them the tax penalty can be quite severe.

Got some questions?  Give us a call on 03 9870 6544, or send us an email.

Download our Free ebook – SMSF – Australia’s most popular way to save for retirement.  Click on the green “Learn more about SMSF” on the right of this page.

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives. While every effort has been made to ensure the accuracy of the information, it is not guaranteed. You should obtain professional advice before acting on the information contained in this publication.

Guidance Financial Services – specialist financial planning advice for business owners and the self employed.

Photo from http://www.flickr.com/photos/guidancefs/

Standard & Poor’s released their review of the global banking system, ranking Australia third safest, behind  only Switzerland and Canada.  This assessment has provided analysts with confidence that Australian banks will retain their coveted “AA” rating.

The Financial Review today quotes Commonwealth Bank CFO David Craig as saying a downgrade from AA to AA- would have no impact on funding costs, however ”….if it was to (single) A, that would make a difference”.

With the Reserve bank recently lowering interest rates to stimulate the economy, what we don’t want to see is banks needing to raise rates to counter rising cost of funds (due to a reduction in their credit rating).  Small Business, including those hundreds of thousands of self employed contractors, are the well established engine room of our economy.  They require bank financing to grow and create new employment opportunities.  High interest rates choke off this potential for growth.

Guidance Financial Services – specialist financial planning advice for business owners and the self employed.

Photo by wolfgangfoto