Dollar cost averaging

There may be times when you are trading where things go sour and you are forced to make a decision. I wrote a little while ago about one of the options available at this point; to sell and move the cash into a better trade.

Other than simply holding on the share and waiting for it to recover, the third option is dollar cost averaging. This is an aggressive strategy that, when used effectively, can turn a bad trade into an good one. Dollar cost averaging (or DCA), in simple terms, is just buying more of the same share that you already hold, but at a lower price. This then lowers your average cost per share, meaning that even if you make a loss on some of that parcel, you can still make an overall profit because of the second purchase.

Another advantage of DCA (particularly in small volume trades) is that you only have to pay one extra lot of brokerage when buying at a lower price, as you can all your shares together and only pay one lot of brokerage on the sale. It all adds up.

The following example is a previous trade I executed some time ago in the share Rio Tinto. I bought 44 RIO shares at the price of $62. Unfortunately for me they then dropped quite a bit. I wasn’t too worried at the time as I was happy to keep my money in RIO for a time; it's a quality stock. So I purchased another 44 shares at the price of $56.49. This made my total outlay including brokerage $5303.41 and an average gross purchase price of $60.26 (incl brokerage cost). Luckily RIO rebounded and I decided to sell them at $62 to get into another trade instead. Even though I sold at the same price I bought the first 44 shares at, I still managed to make a profit of $152.59, or 2.88%. Not a bad result in the end.

Useful as this strategy is, it’s important to remember that this is a risky move and it shouldn’t be made emotionally - if RIO had fallen further then it could have cost me much more instead. But for me, it made sense at the time because RIO seemed to be good value, and it worked out well.

Subject to pest and building inspections

We're seeing quite a few contracts for purchase recently, as many of you move back into the market again (while many of you, of course, never left!). Many of these are unconditional, particular in so-called real estate hotspots such as the outer Melbourne suburbs, WA mining towns and lower-priced Sydney properties. However, we do still see a few with the standard pest and building inspection clauses, and worse, clauses with similar intentions drafted by real estate agents or the investor themselves.

The problem?

The whole idea of these clauses, in my mind, is to give you two additional options that you might not have otherwise;

  • getting out of the contract if something scary comes up, or,
  • using the reports to your advantage to renegotiate the price, if the results aren't too scary after all.

The standard clauses provided by most of the Real Estate Institutes make mention of being subject to 'major structural defects' or 'major pest infestations'. The issue with this should be obvious; what defines major? And even then, you should probably be able to see anything 'major' before making an offer, without needing a thorough inspection (particularly if you've got a builder or other tradie amongst your mates).

So in most cases, these clauses become almost worthless.

Self-drafted clauses are even more dangerous. While the intention may be there, the wording and meaning of the clause may render it effectively useless - even if something major comes up in the report that the REI clauses would usually cover you for. This includes the commonly used 'subject to building / pest inspection being to the satisfaction of the purchaser'.

The solution? Talk to your solicitor. They should be able to draft something for you that achieves what you want it to; namely, the ability to pull out of the contract (or at least threaten to do so) if you don't like the outcome from those inspections.

Otherwise, should the proverbial hit the fan... you may not be quite so well covered as you had thought.

How to test the waters with share trading

As you may have read previously, we have been running ASX share games to increase exposure to the share market and allow ourselves and other investors to try out new trading techniques. Our most recent game finished last Friday, after an interesting 10 weeks in the market.

I know for me at least it was nice to have a place like the share game to “test the waters” and try to adapt my trading to suit the recently shaky market. For me it’s so much easier to trade in trading simulators as one of the most influential emotions that is experienced in trading is removed: Fear of loss.

I generally prefer to trade in a select few shares that I get to know personally, tracking their movements and trading in and out of them in different situations to get used to their behaviours. I found this to be the most successful strategy for me in trading in the share game. I still look for signs such as changes in trend lines, influential extraneous factors and altered volume activity or volatility; but when there are only a select few shares to monitor it makes it much more manageable more me to keep up to date with the behaviour of my shares.

Discount to SVR

Just a quick tip this week, in the lead-up to Christmas.

The media gave Westpac a good hammering over their interest rate rise a couple of weeks ago; 0.45 points higher instead of the 0.25 points dictated by the RBA. Whilst many of the other lenders also lifted rates by higher than the minimum, none of the other majors were quite as ambitious.

Now, the good news!

We've found that since then, Westpac have been a little more open to negotiation than they might usually be. So, it may be worth your while to give them a call (132 558, I think) if you are an existing customer. Almost every investor that we've spoken to in the last two weeks with a loan at Westpac has been able to get at least 0.2 points knocked off their variable rate - on top of any existing discounts. Some are now as much as 1.15% under the standard variable rate. Gotta love that!

And hey, it's probably worth asking every bank that you've got loans with, just in case. What've you got to lose?

Share trading results

Hi! The share trading game has come to an end - and David has held on to be the winner of this round. All his knowledge and research has really paid off, well done David! He finished 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. Go team!

Also, just letting you know that we will be taking a short break from the Share Trading game early next year. We'll gauge interest again after that short break and get back into it again, but of course we will notify you all when it will commence again.

Also, just because we're all going on holidays doesn't mean we're going to abandon this blog for nearly three weeks! We have written some more articles that will be posted during the holidays, with more blogs about property and shares and other interesting details that you may like to know. So please keep coming back to check those out if you get a moment during the madness over Christmas and New Years.

Property analysis #3 - student accommodation

I’ve gotta admit, this one was a little fun...

I’m looking at a 12 bedroom house at 44 Arthur Street, in Bundoora VIC. Who could possibly need 12 bedrooms, you ask? Students, of course! What I love is that we can expect fairly constant demand for student accommodation, particularly in this area, which is home to 2 large universities.

Like many properties going to auction lately, this one has no price attached. But after a bit of research, I’ve found out that the agent's expected range for the auction is $670k - $720k, and if Melbourne’s recent auctions are any indication, the property will probably go for a little higher than that.

So with this one, we're going to work out the max price where the deal still makes sense from a cashflow perspective. Using the same assumptions for our hypothetical investor that we always do (with one or two twists that we'll get to in a moment), how high can we bid before it's no longer positively geared?

With impressive rental income of $4441 pcm (gross yield of 7.4% on $720k purchase), and after all your average deductions (depreciation, council rates, etc.), the property is likely to return a decent amount before interest.  Do note I’ve assumed a higher amount than usual for maintenance, and a higher vacancy rate for empty rooms over the summer. Leaves a little bit of room for error.

Also, in my workings, I haven’t included property management fees. This is because, in my opinion, self-management is probably a better strategy when it comes to student accommodation. This DIY approach also seems to be favoured amongst our clients who rent to students, as property managers can get quite expensive in these scenarios and tenants are easily found with the universities just around the corner. Being a little more hands on does require more effort, of course, but also offers more control, which is helpful when dealing with your average bunch of rowdy students... Like me!

There are many risks with student accommodation, but that’s not to say that the risk necessarily outweighs the potential for profit in this situation. I’ve seen quite a few of our clients using variations of the ‘student accommodation’ strategy, and the one thing they all have in common is a fairly healthy profit.

So anyway, what I’ve done here is analysed the likely expenses and current rental income, and if our hypothetical investor was looking for positive cashflow from day one, I wouldn’t recommend going over $790,000 on auction day. This price will have him sitting at a relatively cashflow neutral position, so the further below that figure he is, the better off he’ll be. The cashflow analysis shouldn't ever be the only factor in nominating a bidding limit, but still, that $790,000 benchmark is not so unrealistic.

So what do you reckon? A viable deal? Click that comment button just below and let me know your thoughts.

Early xmas present!

Hey! Completely unscheduled blog, but thought this might be worth breaking rank for. I was talking to my old man last night, and convinced him that it would be a good idea to offer you all an early Christmas present.

'Wealth Sabotage!' is a product that I co-wrote and helped Dale Gatherum-Goss to create, which focuses on how to overcome mental obstacles between you and your goals. There is a pdf booklet included along with a series of spreadsheets to help demonstrate the concepts discussed.

Dale usually sells the cd's for $49 and the digital download for $27 - but if you ask nicely before Christmas, you can have a copy, free. Just contact Dannielle and she'll arrange that for you right away.

Merry Christmas! :-)

Overseas investment properties

Recently, all tax accountants will have received information from the tax office about a new initiative around overseas income. The tax office are a little concerned that some people are hiding foreign investments and want to bring those to account asap. So, they have introduced a new Offshore Voluntary Disclosure Initiative (OVDI) wherein you can approach them - anonymously - to ask what the implications would be if you were to come forward.

In cases where admitting to foreign income results in a tax bill of under $20,000 per year, the tax office will waive the usual penalties. For larger tax bills, the penalty would be reduced to just 10% - in audit circumstances, that could otherwise be as high as 90%. Ouch!

So, if you've got an overseas investment property and haven't been reporting it... you probably should look at taking up the offer. The tax office have connections with many overseas banks and tax departments, so the odds of being caught are only increasing, especially if you bring that money back into Australia.

Now, the better news;

Many investors that we speak to have property overseas, and many of those investors currently have them running at a loss (after depreciation). That loss, even though it's incurred overseas, can still be negatively geared against other Australian income for most investors. And if you've paid any tax in that property already, you may also be able to claim a foreign tax credit for that income as well.

Not quite sure where this places you? Drop us a line.

Tax office upgrades

Just one week to go in the sharemarket game now. I'm sounding like a broken record but Dave is still in front with $24,651. Last time David R managed to overtake James in the last week of trading - can someone storm from behind to beat Dave before Christmas?

In other news... we let you all know recently about the tax office updates happening in January that will play havoc with their systems for a little while. Well now they're telling us that some processing will be suspended in the weeks leading up to the upgrades and may continue right through February 2010, just until the new system gradually returns to full processing.

Both business and individual taxpayers are encouraged to have their tax returns and activity statements lodged as early as possible to reduce any delays, and they tell us that January 11th 2010 is a date worth aiming for if you're expecting a refund.

The usual due dates don't change at all because of all this, just the time that the tax office will need to process things, so don't stress too much and have a great weekend everyone!

CFDs and paper trading

Many professional traders know how to trade through many different markets, using a range of methods. One such tool, which seems to be becoming  more popular recently, is CFDs, or Contracts For Difference.

For the uninitiated, basically you are entering a contract in which you only pay a small margin to be able to control a large amount of shares. CFDs are popular because you don’t need a huge amount of capital to make real money out of them. The problem with that though is you can lose lots of money as well, even if you didn’t have a huge amount of capital to start with.

This means that it becomes so much more important to have knowledge and experience with CFDs before jumping into the market.

Unfortunately, other than ordinary shares and scarce information available on the internet, there isn’t a huge amount of resources available to help with this. Luckily, the ASX has come up with a solution for us. Similar to the share trading game we run that uses a hypothetical $20,000 to purchase shares with; this CFD simulator gives you a hypothetical $100,000 to play with.

If you are considering trading in CFDs in the near future I strongly suggest checking this out. You could be amazed at how quickly you can boost your balance, and also how quickly you can reduce it!  This simulator uses a margin of 5% so considering the $100,000 you start with, that gives you enormous purchasing power. So, good luck and happy trading.