GENC3004 Personal Finance

Introductions

Marina Costas turned 47 years old in June 2020. She separated from her husband of 13 years in 2016 with their divorce and property settlement being finalised in 2017. Marina is enjoying her new “single life” and has no Family To Support Financially. She is also not looking for a serious relationship at this point in her life and wants to set things up to ensure she is financial independent. Although COVID has caused some issues with how she works, Marina’s employment is secure and she currently earns a good salary of $105,000 plus employer superannuation guarantee contributions working as a marketing manager

She owns and lives in a townhouse in Mount Druitt, which was bought when she separated from her husband. She purchased this property in 2016 for $290,000. Marina believes the property is worth approximately $460,000 today as one of the neighbours sold their unit in January for that price. There is currently no mortgage on this property and Marina takes great comfort knowing that in the worst-case scenario she owns her own home and will have a place to live. Marina has her personal contents insured with GIO, with cover in place for $55,000. The building is insured through the strata. She has various other asset in the portfolio.

Based on risk profile analysis, the result was that she is effectively a BALANCED investor. She wants a good return on her investments, but does not want to take a lot of risk. Thus her risk profile is balanced.

Goals

Based on interaction with Marina Costas, the following goals have been identified as under:

• Purchase of new car costing $ 40000 in total;
• Investment of funds;
• Obtaining tax advantage if any through investment;
• Structuring of Superannuation and understanding tax implications.
  
  

Personal Net worth Statement

Net worth statement has been prepared based on discussion and understanding of profile of the client. (Money Crashers, LLC, 2021)For computation of net worth current market value of shares has been obtained from yahoo finance. The computation of share value in the portfolio has been presented as under:

Net worth Statement

Based on above, it may be inferred that Marina Costas has no existing liability as on date and has net worth of AUD 899,340 (approx.) which is a symbol of good financial position and strong resources. The existing Net worth of Ms. Costas has been diversified across fixed asset, securities – domestic, superannuation and cash. Besides above, she is entitled to an annual remuneration of $ 105000 plus employer superannuation guarantee contributions working as a marketing manager. Thus, she has substantial income to cover her expense and grow her investment up till the retirement which is in 18 years approximately from present. In addition, no details regarding expenditure or other travel goals has been chalked out. Thus, one may infer based on Net worth statement that Marina Costas has sufficient wealth to live and has a medium risk profile or a balanced risk profile.

Current Asset Portfolio Allocation

Based on above details, it may be inferred that Ms. Costas has investment portfolio of $ 132303.3 out of which 93% has been invested in shares and 7% in trust. The major investment is in Macquarie Group which accounts for 46% of security investment. Further, 24% approx. of the portfolio of security has been invested in CBA Group. Thus, her current holding is very concentrated and has only few shares included.

Based on current portfolio allocation, it may be observed that 54% of the portfolio is allocated in superannuation, 38.93% in shares and securities and 7% approx. in cash which is not an appropriate allocation. The return from such investment is low and the risk is high as the investment in shares are very concentrated. Also, a substantial portion of income has been invested (as part of compliance) which is not in accordance with the risk profile of Ms. Costas. The above investment diversification does not provide for risk return trade off and is not optimal.

Risk return trade off refers to a situation wherein for every extra risk, extra return is sought by the investor and is a part of modern portfolio theory. Under the current case, the portfolio diversification has been low and more concentrated. (accountingtools.com, 2021)

In addition superannuation funds represents money set aside from work income which shall be used for the purpose of retirement. Return on super depends on the asset class in which the funds has been invested. (cleartax.in, 2021) The rate of return ranges from 1% to 10% depending on the type of fund.  Further, contribution made by the employer and employee are subject to tax at lower rate and the withdrawal from super is tax free provided such withdrawal is made from super once an individual reaches the preservation age and has satisfied the condition of release.

Preservation age in terms of Australian Tax law is 60 years and represents the age at which the benefit of super are locked away. It represents the sum of all the contributions made by the employer and employee along with returns on investment. The condition of release are that an individual must be over the age of preservation and retiring, being 60 or over and ceasing an employment arrangement, being 65 or over or death.

Investment Opportunities

As the risk profile of Ms. Costa is Balanced, she can invest in a range of asset class and thus there are large number of investment opportunities. As the risk profile is balanced, she is able to take higher exposure to growth assets than income asset, the portfolio is expected to have lower short term fluctuation in value than the other growth based investment opportunities. It aims to produce a capital growth in medium to long term time frame. The portfolio should have a balanced exposure to shares and its aim shall be to produce capital growth in medium to long term time frame.  

• Australian Equities: Equity is an asset class and domestic equity is sub asset of the asset class. Under this category, all the equities of the listed entities are generally considered. Further, it represents a diversified portfolio of a number of securities from a range of securities. The return from this type of investment are generally high and range between 6% to 12% and so is the volatility which is a measure of risk. The shares selected in the equity shall be a mix of growth and stable so as to ensure a balanced portfolio;

• Global Equities: Equity is an asset class and Global equity is sub asset of the asset class. Under this category, all the equities of the listed entities are generally considered. Further, it represents a diversified portfolio of a number of securities from a range of securities. The return from this type of investment are generally high and range between 8% to 12% and so is the volatility which is a measure of risk. The shares selected in the equity shall be a mix of growth and stable so as to ensure a balanced portfolio. Further, there is foreign exchange risk under such investment category;

• Australian Property: This refers to real estate investment or investment in funds which invest in real state. This investment provides a periodic return in the form of rent and there is growth of capital in the form of capital appreciation. The growth rate is general slow and may be negative. The liquidity under such investment is low and the risk is also low as the volatility in prices of real estate are low. In addition, there shall be no foreign currency exposure as investment shall be made in domestic currency. Return is in the range 2%-5%;

• Global Property:This refers to real estate investment or investment in funds which invest in real state. This investment provides a periodic return in the form of rent and there is growth of capital in the form of capital appreciation. The growth rate is general slow and may be negative. The liquidity under such investment is low and the risk is also low as the volatility in prices of real estate are low. In addition, there shall be foreign currency exposure as investment shall be made in foreign currency. Return is in the range 4%-7%;

• Listed Infrastructure: This refers to investment in companies which operate in infrastructure and has low return as compared to equity;

• Alternatives: Alternative refers to investment in alternative funds like hedge fund, venture capital where returns are very volatile and high. Investment is this category has low liquidity and high risk;

• Australian Fixed Interest: Fixed Interest or Bonds are asset class and Australian Fixed Interest is a sub asset. The rate of return on such investment is low and so is the risk on such investment. The rate of return ranges from 0% to 2% in this asset category

• Global Fixed Interest: Fixed Interest or Bonds are asset class and Global Fixed Interest is a sub asset. The rate of return on such investment is low and so is the risk on such investment. The rate of return ranges from 0% to 6% in this asset category and there is foreign exchange risk associated with such investments;

• Cash: This investment is actually not an investment but represents emergency funds kept aside to meet any exigencies. This helps to meet the liquidity requirement.
  
  

Asset Allocation

As the risk profile of Ms. Costa is Balanced, she can invest in a range of asset class and thus there are large number of investment opportunities. As the risk profile is balanced, she is able to take higher exposure to growth assets than income asset, the portfolio is expected to have lower short term fluctuation in value than the other growth based investment opportunities. It aims to produce a capital growth in medium to long term time frame. (share.com, 2020) The portfolio should have a balanced exposure to shares and its aim shall be to produce capital growth in medium to long term time frame.  The strategic asset allocation shall be such that 40% of investment shall be in income category and 60% in growth category. Based on such fact the allocation of the inheritance money has been provided as under:

• Australian Equities: Equity is an asset class and domestic equity is sub asset of the asset class. Under this category, all the equities of the listed entities are generally considered. Further, it represents a diversified portfolio of a number of securities from a range of securities. The return from this type of investment are generally high and range between 6% to 12% and so is the volatility which is a measure of risk. The shares selected in the equity shall be a mix of growth and stable so as to ensure a balanced portfolio;

• Global Equities: Equity is an asset class and Global equity is sub asset of the asset class. Under this category, all the equities of the listed entities are generally considered. Further, it represents a diversified portfolio of a number of securities from a range of securities. The return from this type of investment are generally high and range between 8% to 12% and so is the volatility which is a measure of risk. The shares selected in the equity shall be a mix of growth and stable so as to ensure a balanced portfolio. Further, there is foreign exchange risk under such investment category;

• Australian Property: This refers to real estate investment or investment in funds which invest in real state. This investment provides a periodic return in the form of rent and there is growth of capital in the form of capital appreciation. The growth rate is general slow and may be negative. The liquidity under such investment is low and the risk is also low as the volatility in prices of real estate are low. In addition, there shall be no foreign currency exposure as investment shall be made in domestic currency. Return is in the range 2%-5%;

• Global Property:This refers to real estate investment or investment in funds which invest in real state. This investment provides a periodic return in the form of rent and there is growth of capital in the form of capital appreciation. The growth rate is general slow and may be negative. The liquidity under such investment is low and the risk is also low as the volatility in prices of real estate are low. In addition, there shall be foreign currency exposure as investment shall be made in foreign currency. Return is in the range 4%-7%;

• Listed Infrastructure: This refers to investment in companies which operate in infrastructure and has low return as compared to equity;

• Alternatives: Alternative refers to investment in alternative funds like hedge fund, venture capital where returns are very volatile and high. Investment is this category has low liquidity and high risk;

• Australian Fixed Interest: Fixed Interest or Bonds are asset class and Australian Fixed Interest is a sub asset. The rate of return on such investment is low and so is the risk on such investment. The rate of return ranges from 0% to 2% in this asset category

• Global Fixed Interest: Fixed Interest or Bonds are asset class and Global Fixed Interest is a sub asset. The rate of return on such investment is low and so is the risk on such investment. The rate of return ranges from 0% to 6% in this asset category and there is foreign exchange risk associated with such investments;

• Cash: This investment is actually not an investment but represents emergency funds kept aside to meet any exigencies. This helps to meet the liquidity requirement.

Further, exposure to currency risk shall stand at 19% and domestic vs international balance shall be 45% Vs 55%. Further, longer tem objective is cash + 2.4 and minimum investment term is 5 years.

The above portfolio shall help to acheive the goals and shall provide a better risk return trade off.

Other Relevant Discussion

Superannuation funds represents money set aside from work income which shall be used for the purpose of retirement. Return on super depends on the asset class in which the funds has been invested. The rate of return ranges from 1% to 10% depending on the type of fund.  Further, contribution made by the employer and employee are subject to tax at lower rate and the withdrawal from super is tax free provided such withdrawal is made from super once an individual reaches the preservation age and has satisfied the condition of release.

Preservation age in terms of Australian Tax law is 60 years and represents the age at which the benefit of super are locked away. It represents the sum of all the contributions made by the employer and employee along with returns on investment. The condition of release are that an individual must be over the age of preservation and retiring, being 60 or over and ceasing an employment arrangement, being 65 or over or death.

References

accountingtools.com, 2021. Risk-return Trade off definition. [Online]
Available at: https://www.accountingtools.com/articles/2017/5/13/risk-return-trade-off
[Accessed 23 May 2021].

cleartax.in, 2021. Superannuation – How it Works, Types and Tax Benefits. [Online]
Available at: https://cleartax.in/s/superannuation
[Accessed 23 May 2021].

Money Crashers, LLC, 2021. How to Calculate Your Personal Net Worth – Definition & Calculations. [Online]
Available at: https://www.moneycrashers.com/calculate-personal-net-worth/
[Accessed 23 May 2021].

share.com, 2020. Balancing risk and reward. [Online]
Available at: https://www.share.com/a-guide-to-investing/before-you-start/balancing-risk--reward
[Accessed 23 May 2021].

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