About Medical Financial GroupOur role is to maximise the probability of you achieving your financial objectives.
We take this responsibility very seriously and value the trust our clients (and their families) put in us.
This document outlines our investment philosophy and how we manage money. It's important, however, to first put this step in context.
Money means different things to different people and truly understanding what's important to you and your loved ones forms the basis of our advice relationship with you.
In maximising the probability of you achieving your financial objectives it's important we don't make any assumptions about what we need to do to perform this role.
The purpose of our discovery meeting is for us to understand your financial objectives at a deeper level. Our resources and those of our deliverables team can then be harnessed to give you the highest probability of success. We use this information to produce an Advice Road Map, which is your financial life on a page and Terms of Engagement offer which we present at the Engagement meeting.
Based on research, we believe clients are looking for value outcomes rather than products and the following in particular:
At the Engagement meeting we will present your draft Advice Road Map and our proposed scope of advice together with the fees to engage us. We believe this process builds trust, delivers clear expectations with a transparent fee structure and allows you to understand the engagement process and the outcomes we are working toward.
Whilst there are many strategies we use for clients this document is specifically focused on investment.
Effective strategy has the largest impact on your eventual financial outcome. How much to invest, when to start and which structure(s) to use are all important considerations. How to achieve a strong after tax outcome and how leverage could be used will also be considered.
Our Investment Philosophy:
These beliefs form the core of our approach and are important for you to understand.
Belief 1: Educating clients improves investment returns
We believe a big part of investing is simply avoiding the mistakes that the large majority of investors make. There have been many behavioural finance studies showing that without advice investors will consistently make mistakes which cause them to perform poorly. According to the 23rd Annual Quantitative Analysis of Investor Behaviour by Dalbar:
Some of the reasons that Dalbar has identified for this happening and indeed we see with clients are shown in the diagram below:
Belief 2: - Time in the market not timing the market.
Warren Buffet, arguably the most successful investor of all time, has a great quote that sums this up nicely "Our favourite holding period is forever." The diagram below is taken from the JP Morgan Guide to Markets and in simple terms shows the difference between the low point during each calendar year and the ultimate year end return.
You can quite clearly see that in almost all years there is a big difference between the low point for that year and the ultimate return at the end of year. Taken from the same report, the following shows the impact on not having your money fully invested in the market and missing the best days for investment returns. It's quite staggering to think that by missing the best 10 days over 21 years the reduction in performance is 212% per annum or almost 40%.
Belief 3: - A disciplined approach underpins successful investing.
Truly successful investing is not about chasing the highest return in any one year, but taking a strategic and disciplined approach.
At the heart of this is not reacting to short-term performance but, rather, understanding that different market conditions will favour different asset classes, investment styles and strategies resulting in a tail wind for some of your investments and a head wind for others.
Because of this, within a diversified portfolio is quite usual for some investments to be underperforming others and at times even go down.
This in itself is not a reason to change your portfolio and indeed holding these investments is often important so you can benefit from the time when market conditions favour these investment types.
The diagram below shows asset class returns for each of the last 15 years and lists them in order from highest to lowest. You will see there are a number of years where the top performing asset class becomes the bottom performer the following year.
Belief 4: It's less about beating the market than harnessing it
In Vanguard Investments Research Report, "The case for low cost index investing" the xero-sum game theory is explained:
The theory states that, at any given time, the market consists of the cumulative holdings of all investors, and that the aggregate market return is equal to the asset- weighted return of all market participants. Since the market return represents the average return of all investors, for each position that outperforms the market, there must be a position that underperforms the market by the same amount, such that, in aggregate, the excess return of all invested assets equals zero.
Figure 1 illustrates the concept of the zero-sum game. The returns of the holdings in a market form a bell curve, with a distribution of returns around the mean, which is the market return.
Figure 2 shows two different investments compared to the market. The first investment is an investment with low costs, represented by the red line. The second investment is a high-cost investment, represented by the blue line. As the figure shows, although both investments move the return curve to the leftmeaning fewer assets outperformthe high-cost investment moves the return curve much farther to the left, making outperformance relative to both the market and the low-cost investment much less likely. In other words, after accounting for costs, the aggregate performance of investors is less than zero sum, and as costs increase, the performance deficit becomes larger.
And this is borne out in the returns of actively managed funds compared to the index, shown below:
So if it's not about beating the market index, what is it about? We will explain this in our following beliefs:
Belief 5: Asset allocation and diversification are key
We believe a sound investment strategy starts with an asset allocation suitable for the portfolio's objective, built on reasonable expectations for risk and return, and using diversified investments to avoid exposure to unnecessary risks.
There have been a number of studies that show asset allocation is by far the biggest determinant of return, as shown below:
Diversification is a genuine way of reducing uncertainty in your portfolio by spreading your investments across multiple asset classes and multiple securities. We employ a core and satellite investment approach that uses a low cost diversified index fund as a core and then select active managers as the satellites.
It's important to point out that the aim of this approach is not to try and beat the market. The purpose is to improve diversification, reduce volatility and provide some protection in falling markets.
Our asset allocation guidance is taken from Jana who have 30 years of experience in the field. Our fund selection is done using 360 Research, Morningstar and Lonsec research houses.
For all of our portfolios we run a correlation matrix from Morningstar, using historical returns, to see how each investment correlates with the others. Clients often think they have some diversification by holding two different funds, when in fact the historical correlation between the two can show quite the opposite.
All of our portfolios are reviewed quarterly, unless we are provided with advice during the quarter from one of our consultants that a change is required.
As a large number of our clients are starting their investment journey, we usually implement the portfolio in stages, over a period of time, to reduce complexity and implementation cost.
Belief 6: After tax returns are what matter
Who owns an investment and their tax rate will have a big impact on the after tax returns received. In the US publication of after tax returns for all investments is mandatory. Unfortunately in Australia this is not the case, although the more tax aware funds will provide this information.
Let's look at some examples of the impact of tax on a super fund where the top tax rate is 15% and an individual whose tax rate is 47.5%. Both are for a $500,000 investment yielding 6% income and 2% capital growth per annum:
For the super fund:
Taking off tax on the income portion:
Remember tax on capital gains is not paid until realised so it has been ignored in this example. Therefore, after tax on the income has been taken into account, the year- end return is:
And now let's look at the 47.5% tax payer:
Taking off tax on the income portion:
Therefore after tax on the income has been taken into account the year end return is: $25,750 or 5.15%
Thus overall a 1.95% difference!
Tax is only paid on capital gains when the gain is realised and where the asset has been held for more than 12 months the gain is discounted by 50%. Thus a 47.5% tax payer might only pay a tax rate of 23.75% and even be able to choose a year when their income is lower to reduce the liability further.
Fund managers don't always take this into account when buying and selling assets in a fund and Investors are often unaware of the tax impact of high turnover funds.
Fortunately we are aware of this which is why we favour low portfolio turnover funds i.e. buying and holding with a focus on growth and tax effective income for investments where the individual has a top tax rate of 47.5%.
For super funds this is less of a concern as the tax rate is far lower.
Belief 7: Minimising costs can improve returns
When investing there are a lot of things out of our control especially market returns.
Therefore we need to ensure that the things we can control, such as costs and taxes, are managed well.
In respect of costs, high admin and management fees can act as a drag on performance, which is often not represented in better after tax returns for clients.
Morningstar recently studied the fund characteristics which predict future outperformance, a summary of which is shown below:
So does that mean we only use low cost index funds and ETFs? No.
As explained earlier we use an indexed core with selected active fund managers where they are expected to add out performance, diversification or downside protection qualities for our clients. This is, however, only done after carefully considering their relative cost.
|Posted in: Financial planning Investment||0 Comments|
There are only really three factors that contribute to achievement of your financial goals: what you earn, what you spend and what you do with the rest.
If you've completed your training your income should be reasonably stable and if you're getting professional financial advice what happens to "the rest" will be determined by a plan that may focus on investment, debt reduction or a combination of both.
That leaves what you spend.
Having helped doctors with their finances for nearly 15 years, what I too often see is a habit of overspending that starts as incomes increase. This combined with not knowing where all the extra income is going has far reaching consequences.
Firstly, the sooner you start investing, the sooner you get what Albert Einstein called "the most powerful force in the universe" compounding returns on investments. And secondly, if you create a lifestyle that uses all of your income it will be impossible to reach financial independence.
Understanding what your fixed expenses are along with what you are spending on discretionary items is a good place to start. Importantly, this also provides a clear view of how much money will be left over each month that can be put to work through investment.
Exporting online bank statements into a spreadsheet provides a starting point for checking where your money goes. The problem with this method is that it's time intensive and doesn't easily track activity moving forward.
Once you have an idea of what you have spent by category, the next step is to have a plan of what you intend to spend going forward.
Most practices use accounting platforms like Xero to track income, expenditure, assets and liabilities. If you have a good practice manager and the right tools they can easily tell you your practice's financial position in heartbeat. It's the only way to know your practice is running the way it should.
There's no reason why you can't run your personal finances the same way. Very soon Medical Financial will begin offering access to a platform that provides the same kind of insights as Xero, but for personal finances.
It will allow you to track your expenditure, understand where it's going and produce regular personal profit and loss statements. It can even track your change in net wealth via a personal balance sheet. And you will be pleased to know, that once set up, the time taken to keep on top of things will be around an hour a month. Armed with timely, relevant information about your finances you can start taking greater control.
|Posted in: Wealth Creation Financial planning Planning Investment Financial independence||0 Comments|
By now many people will be aware the Federal Government brought in some significant changes to the rules around superannuation. If you missed it you can read about them in some of our recent blog posts.
But for Queensland Government employees - including anyone who works for Queensland Health - there was one more big change at the beginning of the financial year. For the first time it is no longer compulsory for Queensland Health employees to use QSuper as their superannuation fund. Queensland Health staff are now free to use any fund on the market or even a self-managed fund.
The big question of course, is should you switch?
It's an understandable reaction when given a choice for the first time to want to exercise that choice. Many may assume that QSuper's performance might not stack up given they had a completely captive market.
But the reality is that despite tens of thousands of people having no choice but use QSuper, their performance as a super fund has been quite consistent.
In 2017 and 2016 they were named Super Fund of the Year by Choice Magazine. They have had consistently low fees and strong investment performance. For younger medical professionals, they have a good choice of funds that are well suited to the accumulation phase. It's a solid record.
Having said all that, there are some good reasons you might want to move away from QSuper:
The simple - if slightly unromantic - answer for the majority of Queensland Health employees is that there may be good reason to stay with QSuper. That certainly doesn't mean you shouldn't explore your options - especially if you fit into one of the categories mentioned above.
But the absolute worst reason to make a financial change is simply because you can.
|Posted in: Financial planning superannuation Investment Financial independence Diversified portfolio||0 Comments|
Once upon a time, the rules governing superannuation didn't change all that often. Year after year they would stay more or less the same, with maybe a little tinkering at the edges. It made sense. After all, superannuation is the longest held investment most of us will ever have. It's hard to plan for forty years down the track when you're not sure what the rules will be forty weeks from now.
Sadly successive governments have become addicted to pulling and prodding at the superannuation rules and the 2017/18 financial year is no different.
A flat and lower concessional cap
Under the previous structure people over the age of 50 had a concessional contributions cap of $35,000 and those under 50 had a cap of $30,000. Now the cap for everyone is $25,000 regardless of age.
That doesn't mean that it might not still be a smart financial strategy to put more than $25,000 extra into super, but you need to be aware of the extra tax you'll be exposed to.
Div 293 is a tax applied to the concessional contributions of people on high incomes. In simple terms, it levies an additional 15% on concessional contributions up to the cap (which is now $25,000 for everyone).
This threshold used to be triggered once an individual earned $300,000 in any financial year, but now kicks in at $250,000. Again, this isn't to say that making those extra contributions isn't worthwhile, but the additional tax liability needs to be factored in.
The other thing to consider is that it's not just income that contributes to the threshold - investment losses like a negatively geared rental, and salary packaged fringe benefits and super are also included.
The reason it's so important to know how these changes will affect you, is that any contributions in excess of the cap will attract 46.5% tax - the highest marginal rate.
Of course, if you're earning over $250,000 that's already the tax rate for a fair percentage of your income, but if you've been planning with the expectation of a different tax environment, it could significantly impact on the end result.
The other thing to watch out for is salary packaging. Many Queensland Health employees can salary package up to 2% additional super, with the government matching that contribution. If you're already close to your cap that might push you over the edge.
As with any change in financial circumstances whether they're personal or regulatory it's important to sit down with your advisor and find out how they will specifically affect you.
The good news is that these changes will affect the returns that will be lodged next year, so it's the perfect time to seek advice.
And if you happen to find yourself sitting next to the Federal Treasurer at dinner, you might want to politely ask if he can please leave super alone in next year's budget.
|Posted in: News Tax superannuation Planning||0 Comments|
I had a friend at university who always left assignments to the night before they were due. He would literally never start anything until the very last minute. Somehow he would always pass, but I never understood why he would put himself through such a ridiculous amount of stress.
These days I see the same approach from a lot of people to their tax planning. They spend 11 and a half months ignoring their taxes and then two weeks with their hair on fire trying to pull it all together. Like my old uni mate, they usually make it, but it's far from a pleasant experience.
Look, I get it. Tax Accounts are a weird bunch. We actually enjoy poring over people's books and get excited when we zero in on a clever deduction.
Most people (that is, "normal" people) don't get quite as much joy from the process. The thing is, whether we like it or not there's no getting away from our taxes. But there are ways to make the experience a little less painful.
When you're tackling a big assignment it always pays to map out a good structure before you start writing. Same goes for your taxes.
If you set up a good structure for keep track of transactions and reporting you're already halfway there. Organised filing, clear processes and accurate records will save you a heap of angst come tax time.
As my uni mate proved over and over, it is possible to write a whole assignment in one night - it just takes a lot of Red Bull and sleep deprivation, and what you produce at the end is generally rubbish (even if it ends up being passable rubbish).
A better way to go is create a plan to keep on top of things throughout the process. For your taxes, that might mean setting aside a couple of hours each month to accurately reconcile expenses and make notes about questions you need to ask your accountant.
If you're organised and disciplined, by the time June rolls around you'll already be mostly done.
Okay, I know that's not really a thing - but it should be. In a few days it will be 30 June, so if you're not already organised it's far too late to avoid the big tax cram this financial year.
But the day after that is 1 July. Just like on New Year's Day, the new financial year brings new possibilities. And the best time to make a resolution about the year ahead is when you're still suffering from a hangover from the year before!
So if you've spent the last couple of weeks frantically going through faded receipts and wracking your brain to interpret strange scribbles on scraps of paper, make yourself a promise: next financial year I'll get organised. Then make sure you don't break it!
|Posted in: News Tax Budget Planning Risk management||0 Comments|
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