| Welcome to the April issue of the Select Wealth Management Dashboard Newsletter. The end of the first quarter has come and gone, the Easter Bunny has done her work, and now we settle into the pattern of the seasons as autumn approaches.
Some things in life are predictable. Your wage / pension payment hits your bank account every other Wednesday, autumn follows summer, Apple release a new iPhone every few years, the cost of goods and services increase over time. We know these things, and come to accept them. But the fact is, most things in life are unpredictable. This is particularly relevant and important to remember when investing. Last month, the tax treatment for investment property changed. The change came out of left field and seems to have caused a lot of debate and a fair amount of criticism (particularly from the property investment community). Commentators seem to feel that the change in rules is unfair and unwarranted. Historically, if you owned an investment property and had a mortgage against this, the interest payments were a tax deducible expense. Moving forward, this will no longer be the case. The maths is simple. Consider a typical scenario where you own a rental property worth $500,000, and you have a $400,000 mortgage against this. Assuming a 3% interest rate, you would be paying $12,000 interest every year on your mortgage. In the past, you could claim this $12,000 as a tax deductible expense, so you would get up to 33% (or $3,960) of this back. Not anymore. Now I don't have a view one way or the other on the new tax rule. Nothing I say or do is going to change this, and the fact is that tax rules change all the time. I am also not surprised by the disappointment and push back from property investors - it's hit them directly in the pocket, so of course they will be upset. But the thing I am continually surprised by is how often we overlook (or choose to ignore) the fact that all investments carry risk. (This thinking seems particularly prevalent when it comes to investing in property - safe as houses, right). But we have to remember that risk applies to all forms of investment - buying a business, owning shares, speculating on Bitcoin, and yes, even investing in property. Think of our previous example of the $500,000 property with the $400,000 mortgage. If interest rates went up 1%, that mortgage would attract an extra $4,000 worth of interest every year. So a meagre 1% increase in mortgage rates would have a more profound impact on the investment than the new tax rule. So what about a 2%; 3% or more increase... A simple repair to the property (like replacing a broken heat pump) could cost as much as the new tax change. At the extreme, spare a thought for the Christchurch landlords whose properties were condemned from the earthquake and they couldn't collect rent for months (years in some cases) while they worked through the insurance process, all the while still having to service the mortgage. These risks are very real, and potentially materially more significant than the tax change. That's not to suggest you shouldn't invest though (in property or any other asset). The fact that there is risk involved is the very reason why you get a good return. It is a linear relationship with a simple equation: more risk = more potential return. There will always be risk, it's unavoidable. The key is to make sure that you understand the risks, and that you have the appetite and capacity to carry these risks. Don't just focus on potential return, consider both sides of the equation - risk and return. Before you invest in anything, ask yourself:
If you answer no to either of these, you probably shouldn't invest. We have come off the back of an extraordinary period of investment returns over the past decade. If you owned any assets (property, shares, a business) your wealth has increased significantly and without much disruption. (Spare a thought also for those people who did not own any assets). But now is not the time to grow complacent - it would be easy to fall asleep at the wheel. As bank deposits rates remain suppressed, I sense the focus is shifting from "balancing risk and potential return" to simply focusing on "potential return". Avoid this trap. Remember the risks, review your plan, stay disciplined. If you do these things, your wealth will almost certainly grow again over the next 10 years. The numbers have been reasonably subdued over the past 30 days. Mortgage and deposit rates remain largely unchanged, and share markets have had modest moves (although the German DAX is up nearly 5%). The NZ$ is weaker across all trading partners, and house prices had a sharp move upwards. Most notably for me, the New Zealand pension went up (as it does every April) by $20 per week per person. A married couple now receives $34,955 per annum after tax. This might not sound like a lot, but every April I marvel at the fact that we have one of the most generous pension programs in the world. How lucky we are to live in New Zealand! Here are the numbers for the past 30 days: |
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In terms of your Select Wealth Management portfolio, you will be receiving your 31 March performance report soon. If you have any questions about your report or would like to meet to review your portfolio, please do not hesitate to contact us - we are here to help. Finally, a quick update on our Giving Back program. The past month was relatively quiet, so we haven't made much progress with the Giving Back fund. However, I'm still hopeful that we should reach our target of $2,500 for Volunteer Hutt. You can follow progress at https://mifinancialplanning.co.nz/giving-back.html As always, thank you for your continued support, and the referrals of family and friends - I really appreciate it. Warm regards Dave and the team at Isaacs Financial Planning dave@mifinancialplanning.co.nz |
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This newsletter is intended for general distribution and does not constitute personal financial advice.