Should I Stay Or Should I Go?

Sun Herald

Sunday March 23, 2008

George Cochrane

Leave your cash in super - moving it all into one share such as Telstra is too risky, writes George Cochrane.

I AM a single retired woman of 65. Last November, after consulting a financial adviser, I put most of my savings ($130,000) into my super of $6000, making a total of $136,000. That was then converted into an allocated pension of which I draw $7020 a year. I was most alarmed after contacting my super fund (REST) that my investment had dropped by about $6000, probably more by now. My first reaction was to remove what was left and put it in the bank but the adviser and friends say sit tight. I own my home within a retirement village but have levies of $6500 a year. My brother says I would be better off with Telstra shares. I would really appreciate your advice. J.V.

Don't forget that you can choose your portfolio within an allocated pension so, if you are concerned with market falls, you can switch into a secure cash fund, which most funds offer. However, if you do this, you must be brave enough to switch it back into your current balanced or equity fund so as to catch any subsequent climb. After all, that's the whole point of being in such an investment, so that your money can grow over time. However, once in cash, many people are too fearful to move out of it until the sharemarket is well and truly up and much of the growth has passed by.

I agree with your adviser and your friends - hold on. The world is going through a financial mugging by US investment banks but I don't think we're on the verge of a Great Depression.

Your brother's advice is unwise - putting all your money into one share is a bad strategy, made worse by choosing a company whose profit continues to be less than the dividends it pays out.

But I already did my tax

FOLLOWING the merger of Villa World and MFS Diversified in August 2006 I sold my MFS shares in January 2007. I calculated a capital loss that went into my tax. But then in November 2007, long after my tax return had gone in, MFS sent 12 pages of correspondence referring to a class ruling from the ATO. I have no idea what to do with it. Can you offer an opinion?

Also, when AGL split into AGL Energy and Alinta in October 2006 and I sold my Alinta shares in April 2007, I seemed to end up with a huge discounted capital gain. Because of the tax involved, I sought two opinions for calculating the cost base etc. Each person gave a different answer. I have a friend who has a huge portfolio of shares because he believes selling such shares is too complicated and will leave it to his deceased estate to sort out as it is better than having a nervous breakdown! A.W.

Your friend's lawyer will ultimately love him for the fees that can be charged but his beneficiaries will be unhappy. If you're going to run a share portfolio, I believe (as I suspect the ATO would) that you take on the task of ironing out the complexities, usually along with your accountant.

Regarding the Villa World (or VWL) takeover, look up the ATO Class Ruling CR2007/98 on the ATO website. The listed group, MFS Diversified (or MFT), offered one of its stapled securities plus a $0.60 cash payment and a $0.20 fully franked special dividend paid by VWL.

As the special dividend of 20 cents was included in your assessable income, you can reduce any capital gain made from selling your VWL shares by 20 cents. You or your accountant will need the ruling to calculate the cost base of your MFT shares and you may need to adjust your tax return. Selling the MFT shares would rank among the best moves you may have made as the price has nearly halved since.

Regarding your old AGL shares, when AGL and Alinta merged and then split up, the cost base of new Alinta shares was the cost base of your AGL shares - 27.97 per cent. Again, you did well by selling before getting caught up in the Babcock & Brown takeover of Alinta. The avalanche of paper issued by B&B subsidiaries is universally down more than 40 per cent.

Reduce mortgage or renovate?

I AM a 48-year-old single man, recently divorced. I owe $50,000 on my mortgage and have a similar amount in the bank after selling a block of land. My house is in dire need of renovation. My capital gains tax will be about $8000 next time round. Should I reduce my mortgage with the money, renovate my house and have nothing left or contribute to my modest superannuation? I earn $40,000 a year. N.R.

Money is there to make you happy. If you are going to stay in the house and would enjoy feeling more comfortable there then, after putting money aside to meet your tax bill, spend the rest on renovations. Just be sure these will increase the value of the house proportionately.

If you have a question for George Cochrane send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: bank ombudsman 1300780808; pensions 132800.

© 2008 Sun Herald

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