Archive for the ‘Personal Finance’ Category
Thursday, December 16th, 2010
At the height of the boom, the international ratings agencies were happy to give “AAA” credit ratings to IOU paper which turned out to be rubbish.
Now it seems they can’t be too conservative.
However, Standard & Poor’s move last week to lower Broadlands Finance’s credit rating looked very much like putting the boot in.
S&P first rated Broadlands “BB-” in February this year with a negative outlook, based on its accounts for the six months ended September 2009.
They showed Broadlands’ sole shareholder, Tony Radisich, had $17.82 million in equity in the company or 43.7% of total assets. Soon after, Broadlands reported its results for the year ended March showing Radisich’s equity falling to 39.9% because of a blowout in the allowance for impaired loans to $11.84 million at March 31 from $8.23 million six months earlier, Radisich’s equity fell to 39.9%.
However, S&P didn’t move to change its rating until December 9 when it lowered it to “B,” still with a negative outlook.
By that time, S&P had Broadlands’ draft accounts for the six months ended September this year.
These show a dramatic improvement in Broadlands’ financial position, largely as a result of Broadlands getting a new auditor, Grant Thornton, to replace BDO. That followed Broadlands seeking a second opinion from KPMG on how BDO had been valuing its impaired loans.
Grant Thornton cut this valuation to just $5.17 million at September 30, boosting Radisich’s equity to 47.8%.
This is extraordinarily high for a finance company and in more normal times I’d probably be complaining about Broadlands’ lazy balance sheet.
S&P complained about Broadlands’ cash
at September 30 falling to $40,000 compared with its $13.3 million debenture book. However, Radisich owns about half this with external “mums and dads” holding just $6.9 million.
S&P also acknowledged by November 25, the company’s liquidity had risen to $467,000, yet another demonstration of Radisich’s willingness to continue supporting Broadlands. S&P questions how long he will remain so willing.
Showing it is wearing the opposite of rose-tinted glasses, S&P highlighted Broadland’s reinvestment rate in September of just 6.8% “although this has increased more recently.”
In fact, its reinvestment rate for November was 68% – the company acknowledges the reinvestment rate is very volatile, reflecting how small its external investor base has become.
Radisich says he was “a little disappointed” by S&P’s downgrade. “We’re better off at the present moment.” His view is that BDO became ultra conservative after a number of the finance companies it audited, including Dominion Finance, Capital + Merchant Finance and Five Star Finance, collapsed.
Mind you, given the number of finance companies which have collapsed, few accounting firms would have escaped unscathed. KPMG, for example, was Lombard’s auditor.
Broadlands’ managing director Rudi Kats says S&P may have been spooked by the South Canterbury Finance and Equitable Finance receiverships – like Broadlands, both had been dependent on a single shareholder, Allan Hubbard and the Spencer family respectively.
Kats says his company will be writing to the Reserve Bank about the situation. Given finance companies are now required to obtain credit ratings, the central bank should be ensuring the ratings agencies “behave in a responsible manner,” he says.
Tuesday, October 19th, 2010
Commerce Minister Simon Power is seeking feedback on proposed new regulations governing corporate trustees who are supposed to protect the interests of investors in unit trusts and various debt issues.
Power’s Securities Trustees and Statutory Supervisors Bill aims to tighten up the rules by requiring all trustees to be licensed by the Securities Commission (and later by its replacement Financial Markets Authority).
Under the licensing regime, trustees would need to demonstrate adequate monitoring systems and processes, experience and infrastructure and financial strength. Trustees would also have to report regularly to the Securities Commission on their compliance with the licensing regime.
Power’s discussion document notes: “As far back as 2004 the
Financial Sector Assessment Program concluded that New Zealand places heavy reliance on private supervisors like trustees without requiring sufficient accountability for such supervisors.
It goes on: “The Registrar of Companies also noted specific problems with trustees following the finance company failures of 2006 to 2008, including a lack of capability, poor compliance with reporting requirements and weak trust deeds.”
In my view, Power is asking the wrong question. Instead of asking how to make trustees more accountable, he should be asking whether we should have trustees at all.
More than $5 billion of investors’ funds in finance companies, not including the South Canterbury Finance collapse, went down the toilet under the watchful eyes of trustees. All they seem good for is ticking boxes and, when all hope is lost, acting as undertakers by calling in the receivers.
Can anybody name a single instance of a trustee preventing investors’ money from being lost? Perpetual Trust, New Zealand Guardian Trust, Trustees Executors, Covenant Trustee Co.? I don’t think so.
All they have succeeded in doing is providing investors with an utterly false sense of protection.
The National Property Trust debacle earlier this year demonstrated trustees are more likely to act as roadblocks to investors’ wishes. Guardian Trust was intent of ignoring investors’ demands that National’s manager should be sacked after its parent company St Laurence Group went into receivership.
It was investor agitation amid complete inaction from Guardian Trust which resulted in the deal which internalised National’s management, cutting it loose from St Laurence.
Power’s proposed new regime will add further costs, which inevitably investors will pay, on top of existing trustee fees, generally a percentage of total assets and typically about 0.15%. The discussion document proposes a flat $1,242 annual fee per debt issue or unit trust, payable by the trustee.
But while investors’ money will pay the bills, effectively the new rules will still leave the debt issuer or unit trust manager in charge. In the case of unscrupulous issuers, the foxes will still be in charge of the hen house.
Would investors be any less protected without a trustee?
Monday, September 20th, 2010
It’s been something of a rollercoaster for Nuplex over the last couple of years. At times, the board and senior management seem to have been out of touch with reality.
In May 2009 the NZSA wrote to 20 companies with an analysis showing they were carrying excessive debt based on their published 2008 annual reports. The market was outraged that we could be so “reckless” with our claims.
Provenco Cadmus (now in liquidation) came out bottom of the heap; Allied Farmers was not much better and almost all of the companies on the list subsequently went to the market to strengthen their balance sheets. So who was fooling who?
Nuplex was also on this list. Chairman Rob Aitken claimed our study was flawed. It is hard to see how he justified that position as just weeks earlier the company had been forced to ask shareholders for a bailout of biblical proportions. The reason – a huge debt to equity blowout!
Our study showed that even in June 2008 Nuplex may have been in breach of one bank covenant. Again, there was denial based on the company’s capital notes being equity rather than debt. This subtlety was probably lost on the capital note investors.
When debt covenants were officially breached due to the GFC a few months later, the company saw no reason to inform its owner shareholders, despite the situation being critical. In the latest annual report Aitken claims that “shareholder interests were preserved”. Try telling that to anyone unable to afford to take up the seven for one rights offer!
In April 2010 the Securities Commission announced action against Aitken and the company for breaching continuous disclosure rules. Aitken continues to protest that covenants are only a guide. Until the bank actually enforces its rights, he seems to hold the view that the shareholders don’t need to know, despite the fact that at that stage their investment is probably heading down the toilet.
Now the Nuplex board seems to have agreed that moving the company domicile to Australia is the next smart move. There are three reasons given.
Firstly, New Zealand dividends could be partially imputed. The company tells us that at present all corporate overheads are carried in New Zealand meaning there are no New Zealand profits to impute against. The usual situation is to recover overheads from subsidiaries and remit these, thus alleviating this burden. Quite why Nuplex cannot do this is something we are querying with them. In any event, it does not matter whether dividends are imputed or not. Either the company pays the tax and declares a lower dividend or the investor does so from a proportionately higher payout. The outcome is
the same. Only the process differs.
Secondly, Aitken claims greater liquidity in the larger Australian market. Nuplex might end up around 172 on the ASX200 if they can meet the appropriate liquidity hurdle which would not be the case at the moment. This hardly positions them in the headlights. In New Zealand, they would drop to 46 on the NZX50. So, coverage would diminish and arguably reweighting by passive funds could depress the share price. On Friday 17 September, 54,750 NPX shares traded on the ASX and 321,848 on the NZX. NPX’s argument is not supported by the facts. The reality is a lose/lose situation.
The final reason is a re-rating of NPX shares over time. In our view, this will be influenced by the company’s performance rather than where it is domiciled. Off the radar and with modest liquidity at best, the shares may indeed be re-rated, but not necessarily in the direction Aitken expects.
It has been said that capital is easier to find in Australia. This is undoubtedly true, but NPX have plenty of headroom to grow. Debt to NTA is a modest 15%. Until such time as it is demonstrated that additional equity is unavailable, this is a non-reason.
There are compelling arguments for staying put. New Zealand has a free trade agreement with China, a large and growing market for NPX. Australia does not. This is a global company. It could be based anywhere from an operational perspective. Moving to Australia is no panacea. Look at Nufarm.
So what are the reasons? Could it be related to the majority of the board and many executives being Australian based? A fear of flying? Or perhaps the New Zealand directors fancy all that international travel? All the personnel took the job knowing the present situation. It is a bit rich to now find fault with it.
Certainly, the company has become staggeringly generous towards its top people since the gradual shift to Australia gained momentum and business picked up. Retired CEO John Hirst collected $4.2 million for his last 9.5 months including $1.4 million bonus and $1.9 million termination, not forgetting the $370,000 that he escaped paying when the executive share scheme was cancelled in 2009. New CEO Emery Severin has pocketed $415,000 in his first 2.5 months. The NZSA is not averse to rewarding good performance, but this is getting out of hand.
NPX is an iconic New Zealand company. A real “garage to global” success story. 81.6% of shares are held in NZ. NPX has been incredibly well supported by NZ investors. The NZ capital markets can ill afford to lose another primary listing.
There is no advantage to the majority of shareholders in moving the domicile.
Aitken could do well to reflect that ultimately shareholders will decide whether such a move is wise, and indeed whether he retains the confidence of the NZ majority owners.
To find out more and support the NZSA, join up online at www.nzshareholders.co.nz The best 30c per day you will ever invest!
Contributed by John Hawkins, NZSA Chairman.
Tuesday, August 24th, 2010
Now, the government has an economic story to tell.
By reframing as a national savings issue the sterile debates about superannuation, privatisation, private foreign debt levels and the sale of farmland to foreigners, the potential is there to de-fang several political bugbears at once.
There is a compelling simplicity, too, to the idea of talking about how we save more, rather than what we spend the savings on; this being the point at which the debate so often goes off-track.
With the current national pension system off-limits for consideration by the new Savings Working Group (SWG), there’s an opening for a process that isn’t tinged with outrage and fear of a Trojan Horse attack on the elderly.
By taking the heat off the question of compulsion and allowing the SWG – surely not the best acronym in the context of this week’s alcohol reforms – to look also at the tax system, Finance Minister Bill English rightly identifies that any serious look at savings culture will also need to consider taxing culture.
The notion of taxing savings differently from labour is intriguing. Watch this space on that one, but the Australian tax review suggested certain approved savings should be taxed at a discount to income tax.
Whether a government would ever be bold enough to index tax rates on savings against inflation remains to be seen. English has put it on the table, but not with great enthusiasm.
By applying indexation only to savings, he would avoid robbing future Treasurers of their trustiest weapons of mass tax-gathering: fiscal drag. Perhaps there’s a half-way house available on that one.
Already usefully established is the rejection of capital gains and land taxes, both of which were ruled out by the Tax Working Group, whose year-long deliberations produced a benign atmosphere for a GST increase and wide public support for the personal income tax cuts that will kick in on October 1.
Granted, the SWG doesn’t have a year to create consensus. It has until December, in fact, which could be said to be a bit of a rush. Its report will be published in January, setting the political agenda for the start of election year, and condemning a lot of officials to a busy Christmas.
Nor is it all plain political sailing. If, as English hinted today, a softer tax treatment for savings were offset by axing the $1 billion in government subsidies going to KiwiSaver accounts annually, he could well have a fight on his hands with the higher income parts of middle New Zealand whom he needs to vote National.
However, the timing looks right, though, if Prime Minister John Key wants a coherent savings platform to campaign on next year, and results he could turn into initiatives for the May 2011 Budget. On top of that, much of the work has already been done.
The enormous volume of research produced for the Capital Markets Development Taskforce would be as good a place as any for the savings group to start for recent work on New Zealand’s savings options and deficiencies.
In no time at all, the group will conclude that one of the biggest savings deficits in New Zealand is the lack of good businesses to invest in at home.
While there’s plenty of private wealth and private equity at work, the public capital markets are anemic, the dairy industry’s tied up in cooperative ownership, the banks are Australian-owned, and just about everything else of scale is owned by the government, both central and local.
The CMDT report strongly recommended partially privatised state-owned businesses, especially if the local control can be demonstrably entrenched to deal with the national economic sovereignty issues that the P word arouses.
If at least a chunk of the savings to make such investments in New Zealand businesses comes from the investment of compulsory retirement savings plans, then there may not be much public opposition to compulsion either.
Expect to hear a lot about the middle-aged cafeteria worker from Sydney who just loves her compulsory super savings.
From there, a new, more confident platform starts to emerge for New Zealanders nervous about the seemingly unstoppable “loss” of New Zealand assets to foreign owners. Instead of cringing defiance, we get organised about our money and start building ourselves back up.
That, in the end, is the only way New Zealand will maintain the degree of independence that the founders of the SaveTheFarms and other anti-foreign direct investment lobbies seek.
Petitions and protest might slow things down, but for as long as the outsiders have the money to buy what we at home can’t afford, the rot – if it’s really that – will only get worse.
The slightly cynical appeal of this platform for re-election is the way it marries both economic nationalism – a protectionist, anti-globalisation instinct – and economic rationalism, which the pursuit of coherent savings incentives would foster without closing the door to foreign capital.
It should be a platform that can be pitched simply to the right of centre in New Zealand politics, where National still seeks to be, and in campaigning, simplicity is everything.
It may not look it now and it may not come to pass, but today’s announcements create the bones of the most significant shift in economic orientation in a generation.
Here’s hoping something good comes of it.
Monday, July 26th, 2010
Share prices can be quite volatile and regularly rise and fall. Investors who hold profitable share portfolios inevitably want to protect their profits. Hedging is a popular way to do this.
For example, as a trader you may have an optimistic long-term view on a stock in your portfolio, however in the short term, you may think the share price will track sideways or even fall. When faced with this situation, instead of selling the stock where you may incur a loss, or CGT event, you might choose to protect your position by hedging.
Hedging is a trading technique that enables you to protect your stock portfolio against sudden and unexpected losses. Hedging also affords you increased flexibility to remain in investments when you may otherwise have been forced to exit at a substantial loss. It is up to the individual how many trades they choose to hedge.
A Contract for Difference, or CFD, is an effective instrument to use as part of your hedging strategy. They can be used to help shield an existing share, CFD position or your total portfolio. CFDs are financial derivative instruments that allow you to profit from both rising and falling markets. Since a CFD is a margined product, you can use its leverage to protect the total value of a position whilst only having to outlay from as little as 5% capital.
Why hedge with CFDs
CFDs are an effective hedging tool for the following reasons:
• Low costs
The low margin/deposit requirements and transaction costs associated with CFDs allow you to hedge your share portfolio at a fraction of the cost.
• Most CFDs have no set expiry date
The majority of CFDs have no set expiry so you are not committed to hedge for a fixed term.
• CFDs have low minimum deal sizes
You can open a share CFD position from as little as 1 contract, enabling you to tailor the hedge to your portfolio.
• CFD availability
A huge range of local and international share CFDs are available, plus you can also access indices, forex, commodities and much more.
• Short CFD positions generally earn interest
Most CFD providers will pay you interest on the full value of the short CFD position while it is in place.
How does hedging with CFDs work?
So how does it work? It’s 3 June and you believe the price BHP will fall. To protect your long-term position from a potential loss, you decide to go short by selling 1000 BHP shares as a CFD at $38.00.
On 7 June, you believe the price of your BHP shares are about to resume their recovery. Based on this, you choose to close your CFD position by buying back the CFD at $36.85, giving you a profit of $1.15 per share or $1,150^.
In this example, you have used CFDs to protect your physical position during the fall period (and made a profit), but in the long-term your shares have remained in your portfolio and you can continue to capture any further potential gains.
To learn more about the benefits of CFD trading (Link to: www.igmarkets.co.nz) visit IG Markets, the world’s No.1 CFD provider*.
Trading CFDs may not be suitable for everyone so please make sure you fully understand the risks involved. The Product Disclosure Statement for this product is available from IG Markets – you should consider it before you enter into any transaction with us.
^ This example does not take into account interest, dividends, commission, variation margin and other fees and charges which may apply.
* Largest retail CFD provider by revenue (excluding FX). Source: Published financial statements. As at November 2009.
Friday, July 23rd, 2010
What planet is Gareth Morgan on? His rant, I mean article, in the NZ Herald this week attacking advisers is an odious, boring piece of copy which is best used to wrap up fish and chips.
I wonder if it was timed to coincide with the Institute of Financial Advisers conference which I have been at this week. As it turned out it was published on the day the Code Committee and Commissioner of Financial Advisers, David Mayhew, addressed the conference.
Morgan’s piece was a talking point of the conference. A common theme being here he goes again.
One highly placed man in adviserland described it to me like this: “My eyes glazed over after the first couple of paragraphs.”
“Gareth’s an unhappy man.”
Sure some of Morgan’s points maybe valid, but not all of them. His claim that the Code Committee is subject to “industry capture” is plain wrong. This group has worked diligently to deal with some difficult and complex issues and it has listened to submissions from a wide range of people and organisations.
The Code has to be approved by the Commissioner and also the Minister of Commerce. They won’t be signing it off it it doesn’t meet the requirements of the Act.
A huge amount of time and effort has been put into creating a set of minimum standards for advisers. Thousands of advisers have been working hard on meeting these new requirements which come into force next year.
Why oh why do people like Morgan and Consumer go out of their way to build up this public perception that all financial advisers are bad. There are plenty of excellent and professional advisers helping New Zealanders.
Using the Consumer Institute mystery shop of advisers as proof the sector is flawed is in itself flawed logic.
The mystery shop has been discredited by Auckland University Director of Research and Policy Solutions Dr Michael Mintrom.
The survey is like Morgan’s book he talked about, After the Panic. Full of errors. In fact his book was so inaccurate it had to be pulled off the shop shelves and fixed.
If there is a problem, then it rests with product providers and investors themselves. There have been plenty of investments allowed into the market that have been duds and failed to deliver promised returns.
Secondly, as I have said countless times, the majority of people who lost money in finance companies chose to make the investment themselves. They did not use intermediaries such as advisers.
The main issue is here we have someone who is both and adviser and a fund manager criticising the adviser reforms. It seems there is only one good adviser in New Zealand – Gareth Morgan.
The good thing is that once the Code is implemented Gareth will have to become an AFA. One of the items in the code is about good behaviour. Will it make Gareth shut up?
Wednesday, July 14th, 2010
After contributing to a famous victory against the forces of financial bigness you’d think the Frozen Funds Group (FFG) would want to chill out a little.
But, no, the group that ran a truly brilliant consumer campaign against the ANZ/ING conglomerate and its imploded CDO funds, wants more; it wants blood on the floor.
The FFG has just embarked on a campaign to have ING (now, of course, wholly-owned by ANZ) struck off as a default KiwiSaver provider.
In a message sent out this week the FFG notes: “More than 14,000 elderly New Zealanders have seen the financial security under their retirement jeopardised by the behaviour of ANZ/ING… We believe the 300,000 New Zealanders who are currently saving for their retirement via ANZ/ING – as one of the nation’s default KiwiSaver providers – are facing exactly the same future.”
This is the point, I believe, that the FFG has, in sitcom terms, ‘jumped the shark’.
The group lists four arguments why ING should be relieved of its default KiwiSaver status – all of which can be distilled down to a single point: revenge.
This is about payback, not fair compensation or just punishment.
Commerce Minister Simon Power has reportedly dismissed the FFG’s demand – if so, that’s the right call.
The six default schemes are by law conservatively invested and the most closely monitored of all KiwiSaver products. These strict controls make them behave almost identically.
And if association with a loss-making fund was criteria for the removal of default status not one of the six providers – AXA, AMP, ING, Mercer, Tower and ASB – would be immune.
The CDO debacle has cost ANZ/ING a fair whack both in monetary terms and reputation. It’s probably true that the bank paid out the quoted amount of about $550 million to investors as a business decision rather than a moral one – but so what?
Because the bank wants to remain in business, those frozen fund investors received pretty reasonable compensation in the circumstances and it was ANZ/ING shareholders wearing the costs.
As the FFG looks to twist the knife still further into the hated big Aussie bank perhaps it could spare a thought for the many thousands of other investors who have either lost almost everything in finance firms less committed to longevity or passed their contingent liabilities onto taxpayers who, according to the latest government accounts, could be up for almost $1 billion.
Monday, July 12th, 2010
The last week has seen a large number of writers and economists address the austerity/stimulus dilemma I talked about last week – many are merely repeating what they have said many times before, and I place myself in that category also.
I’m getting fairly bored with the topic of what’s wrong with the global economy as I have been writing about the looming global debt overhang for more than five years now and it only seems to get bigger and more dangerous as time marches on.
Today I have seen a fresh and candid response from Angel Gurria, the Secretary-General of the OECD, and so I’ll willingly join him in looking for restructuring ideas that stand a chance of working towards a positive solution to the present global situation. For as I said in the final line last time – “global systemic collapse will bring with it challenges that no-one is remotely ready for”.
I know too much about history to not be fundamentally scared about what total collapse may mean, and so it’s time to put my energy into whatever contribution I can make towards avoiding this happening.
This doesn’t mean I won’t be commenting on situations that demand it, as there are no quick fixes left; those that have been attempted have largely failed and haven’t improved our possibilities of survival. It’s not that stimulus is essentially pointless, it’s more that the direction it was sent was akin to rewarding the evil-doer for their efforts in destroying the lives of the majority, without solving the structural deficiencies that demanded attention. What was too big to fail before is still too big to fail now, but in a somewhat stronger position of knowing they qualify for such a sobriquet almost regardless of their behaviour.
However what encourages me is at last someone in a position of real economic influence has conceeded the major premise of my last posting – Angel Gurria had this to say: “Today’s numbers are absolutely unsustainable, not only are they going to spook the market, they are simply not financeable. Whether the market is spooked or not it is almost secondary, you just can not hold it up for too long because you won’t be able to finance these deficits, and they are creating a confidence crisis also.” (Does hold it up for too long suggest manipulation has been occurring?)
This was essentially my conclusion when discussing the question of austerity or stimulus – neither by themselves will work – we began the corrective process too late, and exaccerbated a dire situation by seeking to turn back the inevitable decline in economic activity that we were DUE to have. It was time, our profligate ways of the previous 30 years guaranteed that we couldn’t continue the party any longer – it was time for the hangover scene! And after that the clean up scene, which we all need to turn up for.
Gurria considers the choice between austerity and stimulus is a false dilemma, suggesting we need to look at one and the other and not as mutually exclusive choices. My analysis from last time looking at the impact of economic multipliers (3 for taxation and less than 1 for expenditure) forces me to agree with him. With that in mind our own government’s choice to begin reducing direct taxation and the size of government is clearly the right one, and in my view the only direction that provides hope. The image of more people pulling the cart and less people in the cart has been commented on favourably by many, but let’s hope NZ maintains a sense of fairness and gratitude in our reconstruction of a sustainable society – life is far more than just an economic system where accumulating wealth counts for everything – “Gerry, get away from the fridge!”
However we need first to comprehend that life as it was in the past 30 years is not among those possibilities – things are going to change, and for many these changes will be uncomfortable, and for others, painful. Debt has been the method that we have all used to consume now what we couldn’t manage from earnings or savings, and to a large extent this must change. Shifting the debt excesses from the private to the public sector, (and therefore effectively back onto the private sector as taxpayers), will only benefit a very small number of people, and is certainly not sustainable.
So let’s look at one sacred cow with a different vision and that is health – New Zealanders on average take very poor care of themselves. We are fat, unfit, eat poorly, drink and smoke too much – to name five issues of note; and it’s worse with the next generation than the last. (We also drive too fast and that ends up as a health problem too).
The health budget of this and most other western countries is being held to ransom by the first – about 60% of the population needs to shed weight and yet we increase the health budget year by year almost without comment.
In our push for export earnings we miss the opportunity that our fish stocks could provide in the improvement of our general health, and apparently our brain power as well.
Just imagine if fish was as cheap as sausages – how long would it take before the health benefits show up were we to eat our own fish and not send them to the highest paying market.
It is recommended that we eat fish three times a week, but how many can afford that?
And if that means buying back the quota on behalf of the health and tourism budget, then do it!
The benefits would be enormous, and the flowover into tourism in a world of sharply declining global supplies would have unlimited potential. Presently we catch more than we should, throw the undesired species back over the side, sell the rest offshore and tootle off to the fast food outlet to eat something unhealthy.
How about making the healthy things cheap and the unhealthy things dear and make no apoligies for doing so – stand up to the lobbies that demand that their interests are served – we know the science of good health so lets deal with the problem.
Let’s get our health budget to the top of the cliff where possible and stop scraping our kinfolk off the rocks of chronic ill-health as we seem to be doing now. If we have to do this by penalising our bad choices by price then let’s do exactly that – if in turn this means some of our own unsavoury food production methods fall on the wrong side of the regulations then even better.
Let’s face it we can’t continue to claim we are clean and green and all that suggests unless we really mean it – and actually we’re not, we’re just pretending.
As a final note the new UK government has just announced the creation of a new website inviting its citizens to nominate ‘old laws’ they wish to abolish.
The public is being invited to nominate laws they want to abolish in what deputy prime minister Nick Clegg called a move away from ‘the old way of doing things’. The idea is to have the public tell parliament what they don’t want rather than the other way around!
Now wouldn’t that be a great place to start in New Zealand as well.
Friday, July 9th, 2010
Why, all my friends and family ask me, are insurance advisers getting all worked up over a form?
Alright, you got me – my friends and family have never requested any information from me about insurance advisers; ever.
Except for today. This afternoon, or maybe it was the morning, a family member – whom I cannot name for legal reasons – explained how her insurance adviser switched her life policy to another company.
This, I immediately thought thanks to my conditioning in the trade, sounds like a clear case of ‘churn’.
Churn, in the insurance business, occurs when advisers switch their clients to different providers merely to generate a new lump of commission.
Typically, life insurance advisers receive a large upfront commission at the time of initial sale – over 200% of the first year’s premium in some cases, which is high by world standards – and a much lower ongoing payment, also known as a trail, as long as the policy remains in force.
Insurers pay a high upfront commission to advisers to get the business but need to keep the client on their books for a number of years to make a profit.
Life companies, then, are worried about the ‘churn’ effect. The irony, of course, is that it is the insurers themselves who, for competitive reasons, create the temptation to churn by offering higher commissions.
A number of high-profile cases have revealed examples where ‘churn’ has left clients with a lesser degree of life cover after the change of insurers.
And this is the problem the Investment Savings and Insurance Association (ISI) has tried to counter with its new Business Replacement Rules – the form that has so enraged the advisory industry.
Advisers are angry because the proposed ISI policy would allow insurance companies to contact clients who have been switched to new firms – in effect allowing insurers to question the quality of their advice.
But there are many good reasons why advisers will switch clients to new companies – and good advisers will clearly explain the change and how that affects their clients’ cover.
It’s also up to clients to ask those questions of their advisers.
So I asked my family member, XXX XXXXXX, why her adviser had recommended the change.
“Oh God no,” she said. “I asked him to find something cheaper – with the same cover. I was paying way too much.”
Tuesday, July 6th, 2010
Before you enter a trade, the most important decision you will make is determining how much money to risk on the position. The 2% Rule represents the actual percentage of a trader’s capital that he or she is willing to risk on a single trade should it go against them. So a trader with $100,000 capital will risk $2,000 per trade.
The 2% Rule is a concept many traders use, however the exact percentage you choose will be determined by your own trading capital. Traders with $100,000 or greater may use a 1% or 2% Rule, while those with smaller accounts may use a 3% or 4% Rule. Either way, the only way to be successful in the market is to reduce losses when they do occur.
Managing your risk is a key element to being a successful trader. Novice traders are quick to look at how much money they could make, however many have no plan for when to cut a losing trade. Successful traders will have a trading plan that will include a predetermined figure on how much they are willing to risk on each trade such as 2%. Having a set figure will also take the emotion out. Disciplined traders that stick to the 2% Rule will have the benefit of being able to make clear decisive trading decisions. If the trade moves against them by 2% of their trading capital, the position is exited. This is one area novice traders struggle with and end up losing more money than they should.
The level of risk per trade, 1 or 2% of your trading capital, is kept at a small amount to avoid a string of losses that could wipe out your entire trading pot. Losses are always going to occur, but limiting the losses and preserving your trading capital are vital for staying in the game.
Using the 2% Rule, with $100,000 trading capital, it would take 50 straight losses to wipe out your entire trading capital. You might get a few trades wrong in a row, but you would have to be very unlucky to have 50 bad trades in a row straight-up. On the other hand, if you risked 25% of your capital per trade, it would only take 4 wrong trades to wipe you out. Even successful traders will have 4 losing trades on occasions.
An example of the 2% Rule: A trader with $100,000 trading capital decides to buy stock XYZ. The trader decides that he wishes to risk 2% – or $2000 – on the trade.
Now that he has determined how much he is risking, he will now need to work out the position size. He could buy $20,000 worth of stock and have it fall 10% before getting out, or he could buy $10,000 worth of stock and have it fall 20%. In each case, he is still only willing to risk $2,000 on the trade.
Should XYZ fall and the position is closed out with a $2,000 loss, the trader will still have $98,000 of trading capital.
To practise the 2% Rule, why not open up a demo account with IG Markets, the world’s No. 1 CFD provider.* www.igmarkets.co.nz
* Largest retail CFD provider by revenue (excluding FX). Source: Published financial statements. As at November 2009.
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