Volatile finances: unpacking investment misconceptions

Posted by Neal Durling on 9 August 2016
Volatile finances: unpacking investment misconceptions

In this piece, I'd like to unpack a couple of common financial misconceptions.

Firstly, the difference between an investor return and volatility is commonly misunderstood.

In finance, average returns and volatility are different things and affect investors differently. However, measures of volatility steal the limelight, often as the main focus of financial reporting.

To quote Investopedia, a return is "the gain or loss of a security in a particular period. The return consists of the income and the capital gains relative on an investment." A return is what you can realistically expect from a set of given assets over a period of time.

Volatility is how that return is likely to oscillate over short time periods. Investopedia states that "volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility is measured by using the standard deviation or variance between returns from that same security or market index."

Volatility means a security or market index can swing up or down on an hourly or daily basis, whereas a return is what you can reasonably expect over a given period.

Financial markets have been more volatile over the past year and this is likely to continue. But how it affects investors is perhaps not how you might expect.

This leads me to the second misconception I'd like to address: that a volatile financial market is bad for investors.

Every day, we hear news reports of stock market swings. I see firsthand how these swings affect many people's perception of financial market investment opportunities. They view these investments as risky. The constant, daily news commentary on the share market is about its volatility.

At the same time, the property industry is vocal about profitable returns, but I view a lot of this commentary as misleading. More often than not, these commentators are quoting gross returns not net returns and frequently neglect to provide a credible index or detail of what's included in the cost base, such as capital gains tax or costs associated with acquiring, holding and disposing of the property.

The key takeaway here is that financial market volatility should not worry you if you are looking to build medium - to long-term growth. The stock market is like a constant live auction, with assets marketable (at the push of a button) at any given time.

It's more important to keep in mind that volatility's effect on someone who is trying to maintain an established investment base is fundamentally different to its effect on a high-income earner without established capital.

The current financial market climate tilts the balance in favour of high-income earners who don't yet have a large capital base, rather than those who have already built their investment base.

  • If you have a lot of capital and not much income, then protecting your capital base is important and more challenging under these conditions.
  • If, on the other hand, you have a high income and not a lot in assets, it's a wonderful opportunity to build wealth.

When it comes to financial planning, I recommend the following to clients who wish to capitalise on their situation and build wealth:

  • Now is a good time to sensibly and methodically consider available investment opportunities.
  • Develop an investment plan informed by accurate and unbiased analysis, with a clear understanding of investments' likely returns (versus volatility) over an extended period of time.
  • Be selective when seeking advice; consider the credibility and integrity of the information source and take care not to confuse expertise with share of voice.

If you are interested in reading more on this topic, why not download our 'Planning your journey to financial independence' white paper, written for medical specialists on making good decisions in order to build wealth.

Or for specialist financial planning, accounting and tax advice for medical professionals, please get in touch with our team.
Posted in: Wealth Creation Planning Investment Stock market Volatility Return   0 Comments

Is your medical practice at risk of subsidising its associates?

Posted by Matt Connor on 12 July 2016
Is your medical practice at risk of subsidising its associates?

Owning and operating a medical surgery is a financial balancing act.

Practice owners must juggle overhead costs, ensure the practice runs efficiently and provide a viable offer in order to attract and retain skilled associates (other medical professionals working in the practice).

A key component of managing a profitable practice involves striking a fair deal with associates who pay service fees and ensuring a win-win situation for both the business owner and its associates. It's important that associates benefit financially while also paying the market rate so the practice is able to operate efficiently with the practice owner deriving an ongoing return on their investment.

As a financial services organisation that specialises in providing accounting and tax advice to medical professionals, we do come across situations where this is an issue and, as a consequence, profits in a medical or dental practice slide downwards. If not managed, this can lead to a reduced return for the business owner at year-end. In some instances, the net effect is a situation where the practice is effectively subsidising its associate medical professionals.

In this post I'd like to touch on strategies to manage this potential issue. Indeed, there are two main options for medical practice owners to increase practice income. But keep in mind these are not without their drawbacks.

1) Increasing medical billing rates

Firstly practice owners may look to increase their medical billing rates.

As a business owner, it's important to look at your competition and understand what they're charging and decide if you have scope to charge more.

That said, this is a tricky area and one open to increasing scrutiny. My colleague Neal spoke in a recent post about the push by the health insurance industry to reduce claims and manage profits as health system costs increase.

As you can see from this link, Bupa is planning to publish price information to put pressure on surgeons charging above-average fees.

The Australian Medical Association (AMA) price lists provide a reliable source to help gauge appropriate pricing.

2) Charging associates more in service fees

Increasing surgery administration fees is an option, but attracting new medical professionals and retaining good practitioners is key to a successful practice. So pricing yourself out of the market by charging too high a fee could be an issue. If an associate is made to pay too much in service fees, independent of the succession plan, they will take their business elsewhere.

Keep in mind also that when a newly qualified medical professional commences in a private practice, it is fairly standard for a practice to provide concessional treatment (discounted service fees), in addition to mentoring by more senior associates. It's important to have a clear understanding about when the service fees will be increased commensurate with the billings of the junior associate. In our experience, these negotiations vary from practice to practice depending on circumstance.

In addition to increasing income generation, practice owners may also look at ways to more effectively manage cash flow.

In a medical practice, administrative staff are responsible for scheduling, meeting patients, collecting payments, etc. A large part of their time should also be spent on administering billings. Most of the practice income comes from third party government agencies or health funds. Time is required to prepare a bill claim correctly, then submit it and chase up third parties when things aren't paid. Problems arise with requests for payment not being submitted or processed properly.

While this can be very time consuming, if the administrative staff are not managing this well, outstanding billings can accumulate, which affects cash flow. It's important to factor this as a vital component of managing a profitable and successful practice. The level of outstanding debt is a red flag. We sometimes see medical practices that are not working efficiently and failing to successfully recover monies owed.

In conclusion

Strong practice management to anticipate and address financial problems as they arise and good external advice are vital to keep practice owners in the loop and on top of their game. Your external accountant should be aware of potential red flags and raise these. They should act as a Chief Financial Officer, review profit and costs closely, and be a sounding board for key business decisions, in addition to providing general accounting and tax advice.

If you'd like to find out more information about ways to enable your medical practice grow, our team of Brisbane-based financial services professionals is here to offer expert advice.

Posted in: Owning a medical surgery Profitable practice Practice income   0 Comments

Post card from Europe....Brexit

Posted by Neal Durling on 24 June 2016
Post card from Europe....Brexit

What a day to be holidaying in the UK with a planned trip to Spain, France and Italy over the next 10 days!

This morning Europe awakes to the unexpected news that the UK has voted to leave the EU with the reaction in currency and stock markets being both predictable and logical.

The value of Stirling in currency markets has reduced quite significantly and as global funds flow back to the traditional safe haven of the US dollar, other currencies like the Australian Dollar will also experience some movement.

Local and Global Stock markets have also moved sharply lower as the market reprices a decision it "called wrong" and digests what this might mean and a lengthy period of uncertainty in Europe.

Naturally the usual colourful media commentary will add spice to the occasion and in turn heighten fear and volatility but what can we expect in Australia and why as a client of Medical Financial should you not be overly concerned?

The Australian Dollar will likely weaken which should be good for exports and the Reserve bank may bring forward an interest rate cut if it feels it necessary to stimulate confidence. Stock markets will be volatile and will likely undershoot fair value over the next few days as some investors who are over leveraged are forced to reconsider their positions and others who are poorly informed panic.

At Medical Financial we are conservative by nature when considering investment strategy and portfolio construction so our clients should not fall into either of these camps and those following a disciplined regular investment strategy will benefit from the pricing movements.

As things become a little clearer and we start to look more objectively at how things might look going forward common sense will return but it may take a few days or weeks to occur.

In other news the Maroons have taken out origin, again, England are runners up to Wales in the group stages of Europe and the weather in England is still colder than a Queensland winter.

It will be nice to head south tomorrow.

Posted in: News   0 Comments

Has the rising tide that lifted all ships turned? Issues getting in the way of wealth creation.

Posted by Neal Durling on 13 June 2016
Has the rising tide that lifted all ships turned? Issues getting in the way of wealth creation.

No one wants to wait for anything anymore, or is that just me! We all expect lovely houses, smart cars, foreign holidays and the latest lifestyle accessories.

What's led to this? Over a period of time (the last 20 years), increasing incomes in real terms combined with an environment of high growth and increased asset prices, has made us all feel rich.

As a financial planning specialist, I believe there is a shift underway that we're moving away from an environment of high growth where market returns did most of the 'heavy lifting' for us. 

Over the past twenty years, we could rely on rising housing prices and investment returns to grow our wealth. During this time, "he who borrowed the most made the most". There are a lot of people who made a lot of money simply by borrowing money and "investing". It didn't really matter where!

Yet, in spite of lessons learned from the GFC, banks are still prepared to lend us lots of money. This makes it easy to spend more and, overtime, cultivate the wrong behaviours. When it comes to your own financial life, beware of this.

In today's environment, we see a number of issues getting in the way of wealth creation.

Debt is currently cheap due to low interest rates. However, because of this, there's a danger of overcommitting to lifestyle assets (such as cars, houses, etc.), limiting the opportunity to invest profits until a lot later and thereby losing the benefit of time.

It's very easy for overspending to become a wealth-destroying habit. This can be especially damaging when you consider the other financial demands facing medical specialists today, such as:

  • Having children later - this means high costs later in life
  • Higher schooling and university costs compared to the last generation
  • Higher housing costs and mortgages
  • The time it takes qualifying to be a doctor and the cost of this.

As discussed by my colleague Sean in the last post:

All the major economies are struggling with a lack of inflation and lower growth rates. And in a low-growth environment, people have to invest more to get the same results or invest for a longer period of time.

Keep in mind that our current historically low interest rates are set at levels by the Reserve Bank of Australia to stimulate demand. Interest rates are low because we are in a low-growth environment so it's not all good news.

The consequences of this are:  

  • Incomes are not likely to grow as they have in the past.
  • Debt is unlikely to be discounted by inflation as it has in the past.

Against this backdrop, can house prices really buck the trend and keep going up? I, for one, don't think so. And I would be cautious of excessive leverage with this.

What strategies are needed to achieve financial independence?

The upshot is if you are building wealth now you will likely need to do more of the 'heavy lifting' earlier on, by saving more, for longer, and you'll also need to have a strategy to repay debt rather than relying on inflation to discount it.

You will also need to be more selective about what you invest in, as the "rising tide that previously lifted all ships" may have turned, or become decidedly "choppy."

In this low-growth environment, in order to build wealth, you need to take a more methodical, considered approach to investment and debt.

With this in mind, in order to help you enhance your financial future for the long term, we advise you to:

1. Understand what your goals are and what they will cost.
2. Model different financial scenarios with realistic returns to see the bigger picture and assist with decision making.
3. Develop a financial strategy to get you where you want to be over time.


If you are interested in reading more on this topic, why not download our white paper for medical specialists on helping people to make good decisions in order to build wealth.

Or for specialist financial planning, accounting and tax advice for medical professionals, please get in touch with our team by calling 07 3363 5800.

Posted in: Wealth Creation Financial planning Planning Financial independence   0 Comments

Chasing financial independence in a low-growth environment

Posted by Sean O'Kane on 24 May 2016
Chasing financial independence in a low-growth environment

Superannuation is a major focus of this year's budget, with the biggest changes announced to superannuation in a decade.

Changes affecting higher-income individuals, such as medical specialists, include:

  • Lowering of the concessional contributions cap to $25,000
  • Limiting of the non-concessional contributions through a lifetime cap for non-concessional contributions of $500,000
  • A reduction in the threshold from which an extra 15% tax applies on contribution to super, from $300,000 to $250,000.
  • $1.6 million superannuation transfer balance cap, limiting the amount that can be transferred to tax free retirement phase

So what does this mean for medical specialists? And how can effective financial planning help you make the most of your income?

These changes mean medical specialists will need to consider and seek out alternative investment strategies that generate effective returns as part of their financial planning.

What's more, they also need to consider how to do this and start preparing at an earlier point in their career.

There is also a broader issue at play here. All the major economies are struggling with lack of inflation and lower growth rates. And I, for one, don't think this is likely to change in the near future.

Lack of inflation is a real concern in Australia, as elsewhere in the world. Earlier this month the Reserve Bank of Australia dropped interest rates in an effort to stimulate growth.

So if the world economies are struggling with lack of inflation, why does this matter to individuals?

Simply put, in a low-growth environment, people have to invest more to get the same results or invest for a longer time period.

Let's consider three scenarios, where $100,000 is invested and achieves growth rates of 3%, 6% and 9%. If this money was invested for 20 years, the results would be $155,797, $239,656 and $364,248 respectively. I extrapolated the 3% growth figures to see when it would reach $364,248 to be equivalent to the 9% growth rate and it was year 44!

So what should you do?

Firstly, don't rush into any rash decisions. Often people think buying an investment property is the answer, particularly as negative gearing seems to be the sacred cow that won't be touched. However, even if there is meaningful capital growth in residential property, this can only form part of the solution.

The good news is medical specialists should have the incomes to be able to set more aside to invest in order to create financial independence. However, my experience in providing advice to doctors for many years is there's always a lot of competing interests for that income and they're often a lot more attractive than saving!

So it's important to have a plan, and to understand what your financial future looks like if you stick to it. And if you have a plan, now would be a good time to review it to make the necessary changes to ensure you are still on track to reach financial independence at the age that you want.

In our next blog post, we'll look at these competing interests for income and discuss strategies to manage them in order to achieve financial independence.

If you are interested in reading more on this topic, why not download our white paper for medical specialists on helping people to make good decisions in order to build wealth.

Or for specialist financial planning, accounting and tax advice for medical professionals, please get in touch with our team.

Posted in: News Wealth Creation Financial planning superannuation   0 Comments

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