Gambling and Investing

Nick Radge of The Chartist fame made a comment on facebook this morning, asking the question; "All trading can be considered gambling... is something I hear on occasion. What do you think?"

Read more

Financial Education

It was given only a fairly quiet launch, but we thought it was worth mentioning the new financial education website released by ASIC this week.

Read more

Tax Planning 101 - Beware Wash Sales

Let's start with an example to make things a little clearer:

An investor (on a 45% tax bracket) has managed a profit of $20,000 for the year buying and selling shares. At this stage (ignoring any discount method claims), the investor owes $9,000 in tax from the $20,000 profit.

Let’s say that the investor is also holding 3 shares with an unrealised loss of $5,000 between them.  In order to save tax, the investor sells off these shares and crystalises the loss. Assuming $29.95 brokerage per sale, the investor’s new profit is $14,910.15. The tax liability on this new profit is $6,709.57, which is a saving of $2,290.43 worth of tax.

Now if that investor were to buy back their stocks (assuming at sale price for this example) they would be liable to another $89.85 in brokerage. This takes the net benefit to $2110.73. This method is known as a wash sale, and strictly from a tax point of view, would appear to be a favourable option as you've saved tax and kept your assets. Unfortunately the ATO are all too aware of wash sales and consider them illegal. For more info, visit the ATO website.

If you have undertaken what you think is a wash sale it is better to treat it as if you never sold the asset. There is no problem, however, to selling a share for a loss at market value, provided the dominant purpose is not for a tax benefit. Note that you shouldn’t base a sale purely on the tax benefits anyway as you should have your investment strategy in place for a reason. But if you were thinking about offloading some underperforming assets to reinvest into something with more potential, then it may work out better to do so on this side of the EOFY.

Using a trust to invest in shares

As I’m sure we’re all aware, a great method for investing in property can be to purchase it through a trust. There are a number of benefits to property investing in a trust, such as asset protection, tax advantages and estate planning. So does share investing using a trust carry any benefits?

In my opinion, I would say... well, it depends.

On asset protection; you are not generally vulnerable from a legal perspective if a company is being sued and you are a shareholder, so there is no real need for protection from that perspective. However if, for example, you run a business - or may do in the future - then keeping your assets safe may be a priority.

The trust does give you the power to distribute profits to different beneficiaries to minimise tax payable, although if we’re talking long term share investments a lot of that income will be coming from franked dividends, so a lot or all of the tax payable (depending on your tax bracket) will have been paid for you. The benefit though comes from being able to distribute those franked dividends to beneficiaries on lower tax brackets (such as children, or a non-working spouse) to get the credits refunded in part or even in full.

On top of that the capital gains that do arise are likely to be eligible for a 50% discount (if held for more than 1 year), regardless of whether you hold in your own name or in a trust.

Trusts also cost a little to set up and maintain, which is no issue if you expect the benefit to exceed or justify the cost. Whether or not you do decide to use a trust for share investments often comes down to personal preference and priorities, and the more complicated your finances become the more likely it is that a trust could become useful. 'Small' investors may have no real need for such a structure, while larger players may find that the potential advantages really start to add up as their portfolio grows. As always, it's important to start with the end in mind, so it might be worth looking at where you plan to be as well as where you're starting from.

Margin Loan Calculator

Margin lending can be a very effective way of boosting your investment portfolio if you have a limited amount of capital.  It allows you to boost your investment power, giving you the potential for higher gains. The flip side of that though is it can increase your losses as well as hitting you with interest and other fees.

In order to obtain a margin loan, you need to provide security, as you do when obtaining a home loan. This security can be in the form of cash, securities or some managed funds. A lender will apply a loan to value ratio (LVR) to each security, allowing you to only borrow as much as the market value of that share times the LVR.  E.g. if BHP had a LVR of 75%, and you had $10,000 worth of BHP shares, then you could borrow $7,500 against that.

The other main issue with margin loans is the danger of getting a margin call. If the price of your share goes down, bringing your LVR above the approved threshold, then the lender will insist that you either sell some shares or pay down part of the loan immediately to bring it back into line.

To assist with analysing the benefits of margin lending and how it could affect you, I have posted a spreadsheet on our site which will compare a portfolio with a loan with a portfolio without a loan, so feel free to check it out.

Note that this spreadsheet is a guide only, and there are various other things to consider when obtaining a margin loan, so if your keen on the idea of increasing your investment power, make sure you do your research first!


In my last post I mentioned using diversification to manage risk in the share market. A simple way of broadening investments is by using ETFs & ETCs. These are Exchange Traded Funds and Exchange Traded Commodities. Both ETFs & ETCs trade on the ASX so are very simple to acquire. Using ETFs you can gain access to a portfolio of the top Australian shares,  different sectors, and international markets.

ETCs work in much the same way, but let you track the performance of the major commodities.

Like with any investment there are risks in investing in these funds, and if you want to get the feel of how they perform and how you can best use them to in your own investment strategies; why not join our share game, in which you can now trade both ETCs & ETFs as well as ordinary shares.

Good luck and happy trading!

Managing risk in the sharemarket

Last post I talked about finding value in the share market, using indicators such as EPS & P/E ratio. This week I’d like to have a quick look at managing your risk.

If you are looking at investing for the longer term it’s important to do the research. It can be very tempting sometimes to be drawn in by a share with an extremely volatile graph that looks like it could make a big profit in a short time. However a graph is not enough for me to make a decision.  Generally when I am buying a share in a company I like to be able to write a written response to the question ‘Why am I buying this share?’

If I can’t come up with a response, with statements and evidence on why I think a share is a good buy then I won’t proceed with the transaction. Basic things I look for are:

  • Is the company actually turning over profits?
  • Is the share worth the price I’m paying?
  • Does it have consistent EPS & profit growth?
  • Does it have a decent amount of cash to support it?

Other things I keep in mind are diversifying within my portfolio and making sure I keep my profits and losses consistent, using a stop loss.

Once again, these principles are only a guide and are no guarantee, but they are principles that I myself find fairly reliable.

The sharemarket game is back!

Yep, the House of Wealth Share Trading Game is back. Yay! It will be commencing on Thursday the 11th of March, just after the long weekend. So come on guys, take the challenge and play against us and other clients, there is a prize for the winner!

If you’re interested in participating please email me here and I’ll give you the Rules and Registration handout to get you started. It’s great fun and helps build your share trading skills. Last time, our very own Dave won with a total networth of $25,243, a great effort after starting the game with $20,000, over 25% return in just ten weeks.

The average score for all players was about $22,000 – making an annualised return of 64% across the board. Think you can do better than that? Or you're really not sure, but think it could be fun to try? Come and play - you know you want to!

Finding value in the share market

Most investors are always looking to find value in the share market, and though every investor has their own way of picking “hot stocks”, I’m going to have a quick look into a couple of simple and popular ways of looking for value in companies.

These are the Earnings Per Share (EPS) figure and the Price to Earnings Ratio (PER or P/E ratio). As the P/E ratio of a share is dependent on the EPS I will start by explaining the EPS.

In theory this is how much share of a company’s profits you have. It is calculated by taking the after tax profit for a company and dividing it by the number of shares on issue.  Another good measure of how a company is performing is to analyse the EPS growth from year to year.

The P/E ratio often then used to determine how “cheap” a share is. This is calculated by dividing the share price by the EPS. This, in theory, gives the earning power of a share relative to its share price. Shares with extraordinarily low P/E ratios are often considered to be undervalued (or in trouble!) and shares with extraordinary high P/E ratios are often considered to be overpriced. Usually, you would compare the P/E ratio for a company to other similarly-sized companies in the same industry.

Note these figures are theoretical measures only and they do not necessarily determine how a share will perform. This is a site that can be quite useful for company analysis if you are looking for one, but there are many more out there.

Options and futures trading in SMSF

A common strategy that we're seeing with a few SMSFs lately is to hold options over long-term share portfolios as part of a hedging strategy. Some investors take this a step further and trade with some sort of regularity; to the point where as an individual, trust or company, we would expect their activities to be considered business-like and taxed as ordinary revenue instead of capital gains.

However, as we know, a SMSF is not allowed to run a business. The tax office also have provisions that exclude these activities from the usual trading vs investing rules, and declare all such things to be on capital account instead.

The tax office have released a few rulings to show their line of thinking, which you can read here, here, and here.

The key point, though, is featured in all three rulings and looks something like this:

The provisions relating to the taxation of complying superannuation funds (including SMSFs) are contained in Division 295 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 295-85 of the ITAA 1997 makes the CGT rules the primary code for determining the tax treatment of the gains or losses generated on the disposal of an asset by a complying superannuation fund.

Paragraph 295-85(2)(a) of the ITAA 1997 modifies the normal CGT rules so that a CGT event happening to a CGT asset of the Fund is not affected by the following provisions:

  • section 6-5 of the ITAA 1997 (ordinary income),
  • section 8-1 of the ITAA 1997 (amounts you can deduct), and
  • sections 15-15 and 25-40 of the ITAA 1997 (profit-making undertakings or plans)

Remember though, that anything that a SMSF chooses to invest funds into must comply with the current investment strategy. So, trading complex financial instruments will need to be clearly defined and shown to meet the sole purpose of  providing for the Members' retirement benefits, without undue risk; otherwise, the SMSF could still be caught out and penalised severely. As always, talk to your accountant and financial advisor before taking too many steps in that direction.