With $100,000 Comes Variety Of Investment Options
The Age
Sunday June 25, 1995
Q: I AM 52 years old and have $100,000 in fixed-term deposits in the bank. Is this the best sort of investment for me?
A: THERE are a number of options available to you. You can stick with term deposits or other fixed-interest investments like Telecom bonds, Government bonds, Northern Territory bonds or PTRA bonds just to name a few. But of course you will pay tax on the interest as you well know.
Another option would be to reduce your fixed-interest investments as they mature and invest some of this money in a range of quality shares especially those that pay fully franked dividends. Shares to look at and discuss would include Advance Bank, Amcor, ANZ Bank, BHP, Coles Myer, Commonwealth Bank, National Australia Bank, St George Bank, Westpac and Woolworths.
Many of these companies have dividend reinvestment plans and share top-up plans which allow you to buy extra shares in the company at a discount. These discounts range normally from 2.5 per cent to 10 per cent with the average being 5 per cent. Subject to your personal tax rate, most, if not all, the dividends received are tax paid. The Advance Bank, for example, is expected to return 10 per cent plus.
You could also look at starting your own superannuation fund where the tax benefits could be even greater. You must at all times be comfortable with the options you choose.
Q: THE question is, with a share portfolio of roughly $80,000, no trading, no profit taking and being aged 75, should I continue to hold my share certificates or should I be registered on Chess (the clearing house electronic sub-register system)?
A: IF YOU are happy about the present situation then I would certainly stay with the shares. However, without ignoring capital gains tax implications you might consider taking some profits when appropriate.
This might add a little spice to the portfolio and provide an added interest.
With regard to Chess let me pass on the feedback from a number of investors. Let me say that the concept is an excellent one and one day, even if it's many years from now, that will be normal practice.
However, there have been a few teething problems.
The main negative, and I again stress that this is based on investor feedback, is that people, especially older investors, are reluctant to hand over their share certificates. Apart from that I suggest you wait and see what happens to company sponsorship, which I believe is just around the corner.
Q: I WILL be retiring in August 1995 at age 62. My superannuation payout for rolling over will be about $130,000. My house is paid off and we will have about $25,000 from savings and accumulated leave.
Until age 65, should I engage an investment advisor to handle the rollover investment or should I do it myself?
A: INITIALLY I would certainly seek the help of an adviser, so call or write to the Australian Stock Exchange, Melbourne, to arrange an introduction. If you are comfortable with the thought, you might start your own superannuation fund with some professional help.
I should emphasise that do-it-yourself super will not suit everyone, but if you understand your obligations and can adopt a disciplined approach it has its attractions, not the least being the tax benefits.
While opinions vary, you could start your own fund with a sum of $50,000; but $100,000 would be better.
It is important to note that I cannot assess all questions in detail so it is essential to seek a second opinion to ensure that the advice given is appropriate to individual needs and circumstances.
Negative gearing.
HAVING received dozens of letters about negative gearing, it would seem best to give some general comments on its plusses and minuses, which would include the following check list.
Until a few years ago, most investors associated negative gearing with the purchase of real estate and that still applies. However, as more and more people enter the sharemarket, negative gearing has gained a new importance when combined with fully franked tax-paid dividends.
The golden rules of negative gearing are: 1. Invest for the long term. 2. Make sure there is a reasonable cash flow from the portfolio. 3. Tax-free income helps. 4. Be careful not to over- commit. 5. Minimise margin calls.
6. Maximise flexibility. 7. Be conservative. 8. Stability of income is important. 9. Seek professional advice. 10. Be comfortable.
While many investors are attracted to the concept of using the equity value provided by their own home, this is not essential. You can use existing shares as security for a loan or you can arrange for a loan which can then be used to purchase a quality share portfolio.
Many investors borrow money to negative gear a property or shares.
Little thought is given to the tax positions of each.
If, for example, one partner is not a taxpayer, it will be a wasted exercise to buy the property in joint names as many people still do.
Even if it's a two-income family, you buy the investment in the name of the higher taxpayer to maximise the tax benefits. But there can always be exceptions.
Readers will be interested in an excellent guide to negative gearing by the Brisbane-based broker Burrell & Co. Free copies can be obtained by writing to GPO Box 1398, Brisbane, Queensland 4001.
Bruce Bond's opinions and comments are given sincerely and in good faith, but it is essential to seek another opinion before making any decisions.
Money Extra readers may phone in their questions to Bruce Bond on (03) 601 2450.
© 1995 The Age