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Your Questions Answered

By far the most common reason that readers of the Wentworth Courier have been coming in to meet with me, is because of their displeasure that the interest rate on seven figure bank deposits has now incredibly dropped to less than 0.5% per annum. I have found that the majority of Wentworth residents are not greedy in wanting a high interest rate, and would be happy with a 4% to 6% return, provided their money is safe. Unfortunately, many investors have been forced to use high yielding investments to earn at least the inflation rate.
Many regular readers of my articles now understand the risks involved with searching for a higher yield. In last week’s article Your solution to low interest rates, I detailed many high yielding investments from some of Australia’s largest institutions that have been frozen or gone into liquidation. With inflation on the horizon, the risks are rising. I will provide details of my simple solution to investing surplus funds in bank accounts, later in this article, but first I will answer another reader’s question, as it is a useful backdrop to the low interest rate dilemma.

It’s all about profit

The economic fallout from COVID really has impacted bank profits over the last 12 months, prompting one reader to point out, “there is no use holding bank shares if the share price is going down by more than the dividend we receive’.
Many bank investors may again feel comfortable with their bank and high dividend paying shares at the moment as the share price has bounced back in recent months. The share market appears to have decided that the risk of the mutations of COVID that I talked about in my article Beware of the Risks (27 January 2021), are unlikely to materially impact the world economy. In the financial year 2015 the four major banks made a combined net after tax profit of $31 billion. Bank profits took a massive hit during the 2020 pandemic and fell to a combined $17 billion for the
financial year 2020.
The banks and the market are optimistic that we are on the road to recovery and that in financial year 2021 their projected combined profits will be $25 billion. However, their earnings will flatten again and only be $26 billion in financial year 2022.
This is a real concern as bank shares may again be growing by only 1% per annum, which will lead to disappointing share price growth. At that growth rate it may take until 2030 to get back to the 2015 combined profit of $31 billion. Investing in high dividend paying bank shares has been a smart place to invest for retirees over recent decades, but since 2015 their earnings (profit) growth has been challenged by structural, legislative changes, and more recently the COVID pandemic.

The key is earnings growth

In my article It’s all about company earnings (14 October 2020) I followed the earnings growth (net profit) and share price from one of the top four banks over the last 15 years. The graph above right shows the results. As you can see, from 2005 to 2015, the bank increased it’s earnings by an average of 19% per annum, but from 2015 to 2019 the bank’s earnings averaged growth of -1.6% per annum, and this was before COVID dropped their profit by 56% in 2020.
The earnings outlook and share price of this bank has bounced back since November 2020, but their projected 2022 earnings are still 25% below their peak, while their share price is still down 28% at the moment. The key point is that the share price of the bank has closely followed the earnings growth. This can be applied to all companies and is my key tool for analysing the companies that my clients hold equity in.
The earnings growth rate varies between the banks, so it is important to be in the right bank(s). Since 2015 my clients have only held equity in only one bank, which has 6.9% projected earning growth in 2022 and should be a clear winner over their competitors.
From our earnings growth approach it’s easy to know what companies to invest in, and what not to invest in. In my article Standout Companies in Australia (21 October 2020) I showed the excellent earnings growth outlook for the one bank our clients hold equity in, which in combination with five other outstanding Australian companies, provide a positive return outlook of 14.1% per annum over the next two to three years. The simple message is that there are better companies in Australia than just the banks or high dividend paying shares.

But you need income?

In my article Securing a 6% to 8% Income Stream (November 18, 2020), I explained how, as a result of the bond market collapse of 1994, I developed the Draw Down Approach to solve the dilemma facing retirees in a falling interest rate environment.
Regular readers will know that this approach is very similar to the sell-off approach recommended by famed US investor Warren Buffet. My approach has always been ideal for clients drawing a monthly income from superannuation, but we have seen the approach very popular with readers of the Wentworth Courier who have surplus funds in bank accounts earning very little interest.
These Wentworth residents are delighted to be earning and drawing a monthly income, mostly in the 4% to 6% range. You can draw more than this rate if needed, or less if you wish. The flexibility to draw what you require is the beauty of the approach.

Security when investing

One of the questions I’m often asked when Wentworth Courier readers meet with me for the first time, is regarding security when investing.
The most obvious form of fraud from someone holding themselves out to be a financial adviser, is to have funds made out to the adviser, or their trust account. Over the last 32 years, all of our clients’ investments have been made in their name, directly with BT (owned by Westpac) or the Macquarie platforms, or any other super fund, investment, or security that we recommend.
One of the advantages of having my own licence is that I am not tied to any bank or financial institution. This allows me to recommend the best platform, managed funds, and shares for clients.
With the investment relationship being between you and these institutions or investment, only you can have access to your funds. Reports, such as tax statements, are sent directly to you from the institution, and investments can be monitored online on a daily basis, or whenever you wish. My role is to provide strategic and investment advice tailored precisely for your individual needs. The only money that can be taken as an income stream, or withdrawn as a lump sum, has to go into your nominated bank account. This provides our clients with a very high level of security.

An invitation

If you have money sitting in bank accounts earning little interest, please come in and meet with me to discuss how the Draw Down Approach can provide you with the income stream that you need, without the risks of chasing high yield. Your initial discussion with me will be provided without cost or obligation.

Disclaimer: This information is general advice only, & has been prepared without taking into account the objectives, financial situation, or needs of any individual. It is not a specific recommendation to buy, sell or hold any product or security. Readers should seek financial advice before making a decision & should consider the appropriateness of this advice in light of their own objectives, financial situation, &needs.