By Amanda Morrall
It is often said that if you don't know where you are headed, you're bound to end up lost or perhaps just spinning your wheels.
The advent of global positioning systems (GPS) may have antiquated this bit of Eastern wisdom, however the philosophy still largely holds true in the case of personal finances.
Amid the day-to-day quotidian affairs of life, most of us tend to get trapped in a financial hell-hole or else purgatory, where we're simply adrift.
Martin Hawes' latest book, "The Money Map,'' was devised as a navigational aide to get you moving.
As with other trips of a life-time, the mapping of one's financial fortune starts with a dream, says Hawes.
| For a chance to win a copy of Martin Hawes' latest book "The Money Map" email amanda.morrall@interest.co.nz |
In praise of having a dream
Normally derided as the airy fairy stuff of longing and wishful thinking, Hawes regards the dream as an essential compass to making one's fortune, whatever that might be.
He says only from a desired end point (the dream), can one begin to put in place a plan pegged with landmarks called goals to ensure a safe arrival at your destination.
The greatest financial traction is made when the two are working in tandem.
Hawes writes: "Without qualification, I would say that setting a goal for your finances is the most important part of planning them. If you were only ever going to do one thing about your finances, it should be to set yourself a big goal for your future.''
The dreams is the emotional underpinning of the goal, he says.
"If the dream is a warm, fuzzy vision of your future, your goal is quite the opposite; it is numeric, measurable and you know that you have either achieved it, or you haven't. The dream is the 'why' of what you're doing; the goal is the 'what.''
"It isn't good enough to work only towards a soft-focus dream of your future, it may be moveable, and you'll never quite know whether you're there or not.''
Hawes 'dream catcher' solution against head-in-the-clouds syndrome is a SMARTI-goal. It must have the following features: specificity, measurability, achievability and relevance. On top of that is should be time-bound and written.
Without those six facets, Hawes believes dreams will always remain just that.
It may seem like straight forward stuff but in his experience as a financial advisor, Hawes has found common sense sadly lacking.
His intention in writing the Money Map was to address those short-comings and oversights and to set people along a financial path that would have a better chance of finding an arrival.
The bare bones of a financial plan
The book challenges readers to ask of themselves:
"Where are you at this moment, where do you want to be at some point in the future and how do you bridge the gap between one and the other. That's the bare bones of a financial plan. You have to add a lot of flesh and sinew onto it, but the basic process is to say: `This is where I am, this is where I want to be,' then to draw a route between the two.''
As a book geared to general audiences, you won't find the usual financial jargon and intimidating equations for wealth creation.
Instead, Hawes works with the basics and impresses upon readers the importance of the building blocks as a means to reaching one's goals.
The only real prerequisites for wealth creation, is literacy and numeracy, bolstered by will, he says.
"The thing that holds people back is between the ears; it's attitude, and discipline.''
Hawes suggests that one's hunger for knowledge is more important than the knowledge itself; as without the drive, there is no fuel.
While Hawes has made a career from giving advice, he said the cornerstone of his teaching is to encourage people to take greater responsibility and interest in doing it themselves.
"Largely I am helping people by advising them about how to direct and manage their money themselves.''
Hawes acknowledges the pitfalls and risks of the DIY approach, particularly for those just setting off on the path.
The common mistakes
The most common mistakes? Taking bad advice from well-meaning relatives; investing before paying off debt; and investing in the "wrong" areas.
"The obvious one is finance companies,'' says Hawes, who had misgivings about the sector before it crashed and burnt and took mum and pop Kiwi investors down by billions of dollars.
"I thought at the time, it was writ large, a disaster waiting to happen. New Zealand has all these small unregulated banks and that's what they were. I thought that was a disaster waiting to happen.''
Concerns over investment property
Hawes harbours similar fears about the residential property market, New Zealand's investment of choice.
With wage constraints, mortgage obligations, rising interest rates on the horizon and low yields, Hawes doesn't like what he sees.
"We've had three of four years of very flat returns there and it could be that that continues for a fair while yet.''
But has residential property really underperformed as an asset class, relative to the alternatives?
Hawes said fair comparisons can only really be made over longer periods of time. On that basis, performance differences between the share market and residential property are only slight, with shares edging out property only by a thin margin.
So what can be read into historical benchmarks when weighing up the value of a residential property investment in today's market?
Using yields as a measure, nothing good, according to Hawes.
"When you look at conditions as they are now and try to extrapolate in to the future, what you can say when you look at residential property is that it is very low yielding.
"The yields are so low that to purchase a rental property is not really an investment at all. You are really speculating. Your investment can only stand up if prices rise and that's no different than speculating on gold or buying oil futures because there is no income there.''
Investing versus speculating
Hawes says those bent on property as an investment should understand the risks they are taking -- in terms of banking on a steady price increases for the housing sector.
"An investor looks foremost for income (capital gains is just a bonus) whereas a speculator just wants to see price changes one way or the other. Residential property at the moment, the yields are so low, you're really only speculating."
"For me to invest my money in property, I would need a really well located property, rented to the types of people who make good tenants and I'd want a net yield of 7% or else I'd say why brother, as I'd get a better yield with a listed property trust. Why would I bother owning only a single asset and having all the management difficulties.''
That's not to say that there aren't some viable properties out there that could make a good, solid investment. They're just likely to be few and far between, he says.
"Keep out" of property
"Where can you get a well located residential property leased to a really good tenant for 7%? I doubt you can. What's an intelligent response to that? It's to sit on your hands and to do nothing, to keep out of it. That's my advice to people with residential property at the moment.''
Investors' anxious for a change in the climate could be waiting for a while.
Hawes doesn't anticipate any notable improvement in the economy for at least three years.
"I think the global financial crisis (GFC) is likely to continue in a more subdued way. The difficulties that created the GFC are likely to go on for three to five years.''
That said, Hawes said his long-term outlook is a positive one.
"I think if you look out 10 years, human beings won't stop inventing things, businesses won't stop making money. So I'm very optimistic about the future but I think the next three to five years are going to be fraught and very dangerous.''
Cash is king
That may be cold comfort to those individuals who are cashed up and ready to invest.
Hawes and his business partner and wife Joan Baker cashed up in 2007 after getting nervous about a long period of conspicuous consumption coming home to roost.
They got out just in time and were spared the scorching losses many investors suffered with share markets tumbling 40% or worse.
While he has waded back into capital markets on a highly selective basis, Hawes says his short-term strategy is to stay put, mostly in cash.
For mortgage holders and others carrying debt, Hawes sees this period of low-interest rates and uncertainty as an ideal time to bury debt; the faster the better.
Watch for interest rates to rise
"I'd say make sure you use this time to cut the mortgage as fast as you can, when interest rates start to rise -- and it's not if but when -- cutting down debt will be much more difficult.''
43 Comments
Just in case you weren't kidding, let me tell you that when a bank "collapses" the loans it made will be sold to another bank, or in the worst case, to the government. But unless you have a no recourse loan (generally not the case in NZ) then you are still on the hook ... at least until you file for bankruptcy.
Yes, it is. Unless, of course, you're an RE parasite, in which case the idea fills you with dread, because your way of life is dependent upon an endless stream of suckers willing and able to pay far too much for houses. If that stream of suckers dries up, you may have to think about getting a real job, and for RE parasites that's pretty much limited to parttime work at Macdonald's.
Yup , governments are taking on debt much faster than private investors are de-leveraging in the developed countries ( i.e. us & US ! ) , stockmarkets & commodities will continue to be volatile ..
....so , keeping a little nest-egg handy , to pounce on opportunites as they arise seems good advice .
Nice piece Amanda. How do I get a free book? :)
Martin said "I would do well" by buying and holding my rentals long term (20 years) in the live chat the other week. I will stick with that advice. I'm paying down mortgage debt all the time and locked in a rental for 2 years cash flow positive recently.
On a non-property note, my kiwisaver growth fund returned me 8% after tax and fees for the lastest 6month period :)
I suppose at the end of the day its all about have an investment plan and working hard ;)
Martin Makes some good sence however i do not believe that we will see interest rates rise as high as everyone predicts.
Inflation is due to an erosion of a curency and so more are needed to purchase an item. Price rises are not an erosion of a curency only the result of the erosion called inflation.
Price increases due to shortages or speculation are not inflationary as they do not cause an erosion of a curency. All that happens is a redistribution of wealth from the holders of the commodity to the users of that comodity.
If we look at supply and demand we see that our supply side is what NZ produces plus what our trading partners produce for sale to NZ. In other words our supply side is a monster while on the demand side we have the $NZ. There can never be enough $NZ to purchase all of that supply. We run up a massive debt trying.So inflation is hardly likely. Of corse to balance local demand with global suply one needs a global currency and that's not going to happen any time soon.
Inflation, and hence erosion, comes from printing money and then lending it at interest. A mathematician would put it like this
Money = Money + Interest well interest must = 0
If interest is charged then the only way to balance the equation is
Money (old) = Money (new) + Inflation then we see that the money has depreciated ie eroded.
Wish i had more time to do this justice but in conclusion i say whatch the FED and ECB etc . When they start upping interest rates on the money they printed then we will have inflation.
I know Steven believes we will see deflation, and I see it as a possibility also. By paying down debt we see a lowering of the velocity of money, which reduces the money supply and is hence deflationary.
But yes we do have to watch the FED and ECB because what moves they make mean deflation, or hyperinflation if they keep printing. I don't think there are many other options for solve the situation we are in.
@Mike B - A few issues with your summary here. First of all, " Price rises are not an erosion of a curency only the result of the erosion called inflation" is a tautology, ie, price rises (that is inflation) is a result of inflation => not sure how much sense that makes.
Second, you fail to distinguish between tradable and nontradable goods and services. The global supply of goods and services is tradable, making up less than half of the weight of the CPI basket. The key part the Reserve Bank is focussed on is nontradable inflation, ie, goods and services that are not exposed to international competition, eg, haircuts, electricity => there is no global supply of these so price increases for nontradable goods and services (again, over half of inflation) are the result of local demand and supply.
Thirdly, "Of corse to balance local demand with global suply one needs a global currency and that's not going to happen any time soon.". You do not need to change currency to match supply and demand for tradable goods - if the cost of a good or service on the global market is too high for consumers, they will purchase less of it. Simple.
Finally, "Inflation, and hence erosion, comes from printing money and then lending it at interest.". Inflation doesn't have to come from increasing the supply of money, it can come from excess demand for a given quantity of money - we saw higher inflation here in New Zealand leading up to the 2008/09 recession owing to this factor. It can also come from limited supply of resources driving the price of goods higher and any host of other reasons.
The key point is that Inflation is not as simplistic as it has been spelt out in your comment and I find it irresponsible to come out with matter-of-fact statements that are simply narrowly-focussed or, worse still, untrue.
Sambo
To some extent i would agree with you if we were still back in the seventies, but we are not. We are in a global economy and so we must learn to think that way. What applied back in the seventies no longer applies today. When Adam Smith did his famous work on economics the world was vastly different. Britain had a Empire and dominated the world economy. China and India where not what they are today, yet people still believe in his economic theories. People must rethink their old ideas.
If people keep pushing up prices then clearly there is too much demand and what you say would hold true. However you talk about tradeable and nonetradeable goods as though our trading partners only had a limited supply to sell us, which is not true. The more they can sell us the better they like it, that's business. If you agree with that then you must also agree that if we do not match these imports with exports then we have a heavy supply side. Over the past ten years there has been a boom, everyone has been on a shop until you drop. This should have produced very high inflation rates throughout the Christian world, but all it did was cause massive debt as people borrowed heavily to buy those imported goods (regardless of the price).
If you argue that price rises cause inflation then you must also agree that price rises cause a devaluation of the currency. That is, a $100 will not buy today what it would have bought a year ago. Therefore it is price increases and not printing money that causes this devaluation. You must then also agree that:
a) a price freeze will stop inflation, so you must favour price controls
OR
b) the FED and ECB can print money till the cows come home and it won't cause inflation because it is price increases that are the cause.
Or you believe both of those.
When a central bank prints money and lends it out at interest, where does the money
come from to pay that interest? When you work that one out you will realise it is this which causes inflation. If you still disagree i will set out an example to prove it.
Thank you for your contribution to this issue.
@Mike B
Thanks for the reply. I guess we're all entitled to our opinion but I should respond to some of the points you make to keep the roll on.
I'm really not sure about the reference to the seventies. The little I know about economics in the seventies is that there was an oil shock (ie, supply shock not demand) which drove petrol prices higher and there were severe second-round effects with widespread inflation. While on a different scale, a similar thing occurred pre GFC, though the price of oil was more likely driven by a demand shock than supply.
Just on the following "you talk about tradeable and nonetradeable goods as though our trading partners only had a limited supply to sell us, which is not true." - Correct. Our trading partners cannot sell us electricity (3% of the CPI), cannot put up local authority rates (2%) cannot set fees for education or health (approx 5%), cannot supply us some vegetables, put up alcohol and tobacco excise duties, etc etc. The basket of nontradable goods and services makes up over half of the CPI, as mentioned, so yes - I stand by my statement.
On " If you agree with that then you must also agree that if we do not match these imports with exports then we have a heavy supply side. ", I don't know what this means but I'm guessing you mean if we have a trade deficit, to get the books to balance then we either need a positive investment income balance to balance the current account (the majority of the current account) or need a capital account surplus to pay for the goods we import. You mention that the huge demand for goods during the boom years should have led to higher inflation but you seem to be forgetting the supply side - during this time, the cost of goods coming out of China (and to a lesser extent, India) was likely falling as a lot of western businesses shifted to countires that could produce goods much cheaper than they could, which ultimately showed up in lower prices for a host of tradable goods (think shoes, clothes).
I don't argue "that price rises cause inflation", that, like I said, is a tautology. Price rises are, by definition, inflation!
On the final point about printing money causes inflation, not disagreeing with you there as ultimately, an increase in the supply of money leads to higher prices. No argument. However, it depends how the printed money is put to use. If it is being hoarded by the banks as their customers have very little demand for credit, then the supply of money in circulation is unchanged. That is currently happening and is one of the reasons why inflation has not directly resulted from the increased money supply.
Cheers
@Mike B
Thanks for the reply. I guess we're all entitled to our opinion but I should respond to some of the points you make to keep the roll on.
I'm really not sure about the reference to the seventies. The little I know about economics in the seventies is that there was an oil shock (ie, supply shock not demand) which drove petrol prices higher and there were severe second-round effects with widespread inflation. While on a different scale, a similar thing occurred pre GFC, though the price of oil was more likely driven by a demand shock than supply.
Just on the following "you talk about tradeable and nonetradeable goods as though our trading partners only had a limited supply to sell us, which is not true." - Correct. Our trading partners cannot sell us electricity (3% of the CPI), cannot put up local authority rates (2%) cannot set fees for education or health (approx 5%), cannot supply us some vegetables, put up alcohol and tobacco excise duties, etc etc. The basket of nontradable goods and services makes up over half of the CPI, as mentioned, so yes - I stand by my statement. On the tradable side of things,
On " If you agree with that then you must also agree that if we do not match these imports with exports then we have a heavy supply side. ", I don't know what this means but I'm guessing you mean if we have a trade deficit, to get the books to balance then we either need a positive investment income balance to balance the current account (the majority of the current account) or need a capital account surplus to pay for the goods we import. You mention that the huge demand for goods during the boom years should have led to higher inflation but you seem to be forgetting the supply side - during this time, the cost of goods coming out of China (and to a lesser extent, India) was likely falling as a lot of western businesses shifted to countires that could produce goods much cheaper than they could, which ultimately showed up in lower prices for a host of tradable goods (think shoes, clothes).
I don't argues "that price rises cause inflation", that, like I said, is a tautology. Price rises are, by definition, inflation!
On the final point about printing money causes inflation, not disagreeing with you there as ultimately, an increase in the supply of money leads to higher prices. No argument. However, it depends how the printed money is put to use. If it is being hoarded by the banks as their customers have very little demand for credit, then the supply of money in circulation is unchanged. That is currently happening and is one of the reasons why inflation has not directly resulted from the increased money supply.
Cheers
I like this - set your goal and figure out how you are going to get there.
I came back from my OE with nothing two years ago, we managed to secure a mortgage with a good deposit. I know there's risk involved but it's our house and it works out that instead of paying rent for a crappy unit that the landlord did nothing on, it's going to the bank. Makes sense in Auckland. I thought I'd prefer to keep the money in the bank, but there's nothing like having your own home...
Gavin so incomes in Auckland will double over the next seven years because that is the least they will need to do to assist housing to double in value from now over the same time. I hardly think so when so many businesses are struggling to give wage and salary increases to their staff as they are not making enough profits to be able to afford to do that. One of my friends is big in the appliance game and like many retailers is struggling to pay his overheads let alone make profits.
There is a reason for that, is that you have to have proof, and the only proof comes when the the companies fail. But the regulators and trusts also didn't warn anyone.
I do recall some commentators warning about finance companies before the bubble burst, and I got all my money out apart from a very small amount, before it happened.
Or the other thing kiwis do, is borrow as much as they can for a particular house, paying far more than the RV on the property. This is the problem with cheap credit, they don't try to beat the price down, as why bother when you can borrow and pay back later. This in turn causes a property bubble, as so many people do this. Houses at the end of the day are really only worth the RV, as has been shown in chch.
No, properties are only worth what someone is prepared to pay for it on a willing buyer / seller basis (bearing in mind in a mortgagee sale the bank is the seller).
In this case (Christchurch) the Govt has used RV as a baseline amount. A number of the sellers (property owners) may be very wllling to unwilling sellers.
Given RV are a methodical valuation based on sales over the period (normally 3 years) prior to say RV is the max someone should pay for a property, throughtout NZ, on any property type in incorrect.
One needs to look at sales trends relative to RV as the RV may be over or understated relative to market value (and Market value is what willing buyers or sellers is prepared to sell property for and what a buyer is prepared to buy it for)
I'd suggest a 'willing seller' is immaterial, Money Man. If you don't have a willing buyer, whatever brand of seller you are - no sale will take place. That's why bank sponsored mortgagee sales are just a valid a price point as any other - there has to be a buyer to make the transaction take place - that's called 'market price.'
A wiiling seller simply means he or she can choice to accept price or not.
To use your words if you don't have a willing seller the sale won't go through despite the price. Sellers don't need to sell just as much as buyers don't need to buy.
To have a sale in any market you ned and offer and acceptance., the differance being each party have different drives and factors to consider when
In regards to mortgagee sales the price struck in the market for a house is the price for a house sold under powers of mortgagee.
In that regards you normally have a willing seller (Bank) who will acept a price based on different parameters than that of the owner. (the bank is not owner but has legal powers to sell property).
As well the buyer will offer a lower price that if it was on open market (negotiation direct with owner) as the buyer has different risks (like chattels are not subject to banks mortgage, nor does bank warrenty the condition or other aspects of property).
As such the price of properties sold under mortgagee sale can not be used as a direct comparaions as those on open market: is being reason why banks have lending margins as they know a mortgagee sale will see a discount.
As well ever tried to buy a property today on open market and then rock up to a bank a day later and present the bank with a registered valuation saying its worth 20% more.
The first question any decent banker will say is where is the person today who will pay 20% more than you yesterday.
In this regards the market price is what it sold for yesterday as this is price willing seller / buyer has struck price at.
So a vendor that is up against crippling mortgage payments, but not in default, is a willing seller? They are just...a seller. Circumstances are irrelevant. And the risk of buying at mortgagee sale is significantly higher, in my opnion, than a straight sale. Ever looked at the clauses on a bank mortgagee sale? They're pretty much non existant! All deleted except 'here's what's for sale - as is, where is ( grummpy resident included!) So a mortgagee sale is just like any other sale. There are buyer and seller. Willingness has nothing to do with striking the market price. Some will always get a 'bargian'; some always pay too much. That's part of the sale process; ultimately all of which are dependent upon one thing, and one thing only - the buyers capacity to pay.
I know all about mortgagee sale and other collection methods as I have these for a Bank in a previous life so not quite the right person to lecture.
And a person up to their armpits in debt in debt with the bank breathing down their neck and no money to pay for food is not a willing seller, He is forced into that situation by his circumstances: accept an offer in open market or bank will sell it and there will be an erosion of loss of equity. Correct, he is not in default of his mortgage but wil have massive drivvers to sell. His wiilingness to sell is different to that where someone has rocked up to a house the like the look of, knocked on the door and asked the person if they want to sell. That sells willingness is different to the indebted man next door.
To say circmstances or wllingness have no influence on price is rubbish. What do you think influences the effects of supply and demand?
PS what detrimines a "bargin"or paid too much? Only time will detrimine that some point in the future.
Supply and demand are effected by one thing only - the ability to pay for whatever is offered or needed. It doesn't matter how much is or isn't for sale, if the means to buy it are not avaliable. If people can pay for something ( houses ,say), more will be made; less if they can't. That's why supply and demand are a function of savings, earning and debt availability. Not how much product is on offer.
ambrose_evans_pritchard
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http://www.telegraph.co.uk/finance/economics/8624143/ECB-tightens-noose…
I had some private matters to sort out. The Telegraph kindly gave me a sabbatical.
The underlying cause -- as the BIS warned -- has been 20 years of ever lower real interest rates by the the world's major central banks. Ultimately real rates turned negative. This led to a secular rise in extreme debts levels.
The creation of EMU added a further "risk free illusion" in Southern Europe and Ireland, causing everybody to loose their heads and their judgement.
The policy-makers are responsible. I split the blame between Greenspan (and everything he stood for in the Anglo-Sphere), and the Maastricht Treaty in Europe; with some help from Japan's zero-interest carry trade in the noughties (worth a trillion dollars of extra liquidty for the global bubble.)
Put it all together and you have a disaster.
It is actually quite simple. Plenty of people saw it coming, contrary to claims that it was impossible to forsee
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