John Cameron's personal blog

A self-managed superannuation fund can be valuable to people who want maximum control of their fund’s investments, especially when they own their own business, if the fund can buy and lease back property.

Should the worst happen a superannuation fund also gives some of your assets a degree of protection from creditors.

Super funds can now borrow to buy assets, though the procedures are complex, opening up even greater opportunities for mutual benefit between a fund and a business.

Words are funny things. Their meanings change over time, as does their usage.

One word that appears to be undergoing a metamorphosis right now is “retirement”. According to the Oxford English dictionary, retirement is:

“the action or fact of leaving one’s job and ceasing to work”

And what’s its role in creating wealth?

In this newsletter, I want to look at costs. Not just any costs, mind you, but a special kind known as ‘opportunity costs’ and its importance in wealth creation.

The concept of opportunity costs is well covered in most university courses in finance and accounting, but often gets overlooked in personal finances.

This quote is from Jonathan Pain’s paper, delivered at a conference I attended in Sydney in February this year.

The conference was a full day affair, with 13 very intelligent people talking about the end of quantitative easing and what effect that might have on investment markets. However, Jonathan Pain’s statement set me thinking about the all too human biases that affect human decision making and often cause markets to move in ways that at times seem irrational.

The fact that we are talking about irrational thinking deserves some explanation. In the years following World War II, there was a fierce debate within economics about how they should treat human decision making. The debate was largely won by the neo-classicals, who assumed that we are all human computers who take in a vast amount of data about prices, products, services and whatever else we are buying, then do a superfast calculation before deciding to act in the way that will maximize our own financial position. No room for doubts or emotions to cloud judgement. These assumptions permeated much of finance and economists built more and more complex models, all highly mathematical, and all ignoring the more human elements.

A subject attracting much media attention recently, is the question of ‘tapering’ and what effect it might have on investment markets, especially the stock market.

Tapering refers to the process by which the US Federal Reserve starts to reduce the level of quantitative easing. Quantitative easing is the process by which the Fed buys bonds and other assets from the private sector to inject cash into the economy. It has been one of the main weapons used to counteract the GFC and get the American and global economies back on track.

Currently the US Fed is buying up bonds at the rate of $85 billion a month. Any reduction in this rate would amount to a reduction in the level of quantitative easing. Any reduction will happen gradually and hence the use of the word ‘taper’.