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Creativity And Innovation Management - Core Competencies And Competitive Advantage
Following is a brief definition of core competencies and competitive advantage and their fit with creativity and innovation management.
Core Competence:
A core competence is one which critically underpins the organisation's competitive...
How to choose: Laser Printers, Inkjet Printers, Dot Matrix Printers
Man is always in constant search for knowledge which he makes use to create innovations that will make his life better. Among the varied inventions of man is a computer printer. The first computer printer can be traced back in the year 1953...
Innovation Management Blocking: saying YES or NO.
Personalities can be divided into many types, but one of the simplest and easiest classifications that benefits idea generation and creative thinking is the concept of YES and NO.
Creativity can be defined as problem identification and...
Leadership Development - Leadership Styles and Training
What makes a good leader?
Leadership development
Ever since we started Impact Factory, lo these many years ago,
we have struggled with the whole notion of leadership
development or leadership training. Indeed, we have resisted
writing...
When Politics Prevent Innovation
When Politics Prevent Innovation Or
Still Fighting Battles and Losing Wars The objective is to beat the competition and make money. Everything a business organization does should be focused on that simple objective, with interpretation through...
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RETIRE SOONER ON OTHER PEOPLE'S MONEY
First Published in the Balanced Report Summer 1992
Today it is possible to have an investment portfolio without paying for it. In fact, the Government will buy it for you. Due to some innovations to the investment industry it is possible to use collateral to buy an investment portfolio. We then use the investment portfolio to service the debt and the tax refunds to pay off the loan. Sound too good to be true? Read on!
With interest rates now lower than they have been for many years it is now very attractive to borrow money to acquire an investment portfolio. Using other people's money has always been the best way to build wealth. By borrowing money at a fixed rate of interest to purchase an investment that will grow at a higher rate, this is simple enough to understand. It does beg the question though. If it is so easy, why doesn't everyone do it? The answer, not everyone has a good credit rating. They may not be credit worthy for many reasons, or perhaps they have no collateral to pledge as security for the loan. Also some people cannot handle risk of any kind and would therefore be uncomfortable with any debt. The old adage that you can't borrow from the bank, unless you can prove you don't need it, has a lot of truth in it. If you have your house paid for, or have a good equity in it, or other assets to use as collateral, this plan will work for you.
It is not too difficult for us to construct an investment portfolio for a client that will yield a compound rate of return of 12 percent or better per annum on a long-term basis. The other day I was playing on the computer using rates of return on some of the better mutual funds. 1 selected criteria of a compound rate of return over l2% for the last ten years. Then I put in an additional criteria of assets over 50 million dollars. We want funds with good diversification and that requires a good size to achieve. The next criterion is that they had to have management fees under 2.511% per annum. This is a figure the public does not usually see. We have to watch that we don't put a client into a fund with very high management expense charges. Sometimes the fund that appears to have no fees has exorbitant expenses, which cancel the other advantages. I then asked for the computer to print a list. There were over 36 funds on that list. The 12% percent figure is easily achieved.
If you took a mortgage on your house for 10% and the portfolio earned only 12%, the loan will be paid off within twelve years. Also, you would not have put a dime of your own money on the loan. How do we do that? We purchase a portfolio of 4‑6 different investments, mostly equity Mutual Funds. We set up an automatic withdrawal programme of 10% of the original investment. Each month the fund company transfers one twelfth of that amount electronically into your personal checking account at your bank. The Bank each month would debit your account for the interest cost of the loan or the monthly mortgage payment. So there should be no cost to you to service the loan. As the portfolio is growing at least by 12% per year and you are drawing down 10% per year, the portfolio grows on average by at least 2% per year. Remember this investment did not cost you anything.
Now, here comes the best part. At the end of the year the bank sends you a statement of the interest you paid on the loan or mortgage. The interest amount is fully tax deductible on that years Income Tax return, as it was an expense to purchase an investment. Suppose you took
out a $100,000 loan at a rate of 10% for the year. The $10,000 interest paid would be your tax deduction. If you are in the 48.33% marginal tax rule, as many of our clients are, your tax refund will be $4,833. As this is found money we suggest that it be applied directly to the loan principal when the refund is received. When the portfolio is sufficient to pay off the entire loan plus leave a balance of $100,000 we pay off the loan. By doing this each year, with no money out of your own pocket, the loan is gone within 12 years. Remember you have not put any of your own money into this investment. At the end of the twelfth year the fund is worth $123,167.00 and the loan has been paid off. The fund can continue to grow until your retirement or the withdrawal plan can be continued as your immediate retirement income.
For those with no mortgage, or anyone having enough cash flow to support a monthly payment against the loan, you can get rid of the loan even faster. In the above example, by making a payment of $1,000 per month, the loan is paid off by the sixth year.
We feel the timing is perfect for this investment as the country is now coming out of its recession. Our stock market is setting near half the book value of the US market. There are also some very exciting opportunities in international funds that specialize in Emerging Markets. These economics are growing at over three times the growth in North America. The very low interest rates that we have now are why this works so well. We are recommending a five‑year mortgage to prevent against an unexpected rise in interest rates. You can secure a five‑year mortgage today for 8.875%. A demand loan might he cheaper, but the prudent approach is a five‑year term and the interest is calculated semiannually instead of monthly on a demand loan Most mortgages allow you to pay down an additional 15 or 20% per year, anytime you want and to increase the payments. So there is an ability to pay down the loan very quickly without a penalty. If you ever want out of the whole thing the portfolio is very liquid and the loan can be paid out with the proceeds from the portfolio. There is of course a risk that the portfolio will not do well. You can count on a bad year for sure, at least once about every five or six years. However, it is our experience that these funds will usually double in value about every five or six years, even with a bad year or so in there.
I have prepared a four‑page report illustrating the loan reduction, with or without payments on your part. There are also graphs and a list of those 36 funds that have done better than 12% compounded over the last 10 years. If you would like a copy of that report please phone us and we will mail you a copy.
We believe in practicing what we preach, so we took out a mortgage on our home last month to add to our investment portfolio. We are excited about the opportunities that are now available and would be pleased to arrange this for you also.
Copyright www.money-software.com
About the Author
Peter F. Baigent CFP, CLU, CHFC, RFP. is a Past President of the Canadian Association of Financial Planners for British Columbia, a former Director of the Canadian Association of Financial Planners. He has spoken across Canada on financial planning matters and has taught courses for the Chartered Financial Consultants & Certified Financial Planners degrees. He is the founder of Money Minders Software which produces financial planning software.
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| DTI - Welcome to the DTI's Innovation Home Page |
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