Paying Ones Bills

In NZ we can be grateful to previous guardians for fiscal responsibility. We are not the basket case that is Greece, a country famous for its mathematicians, philosophers and democratic past. Something is fundamentally wrong when countries, companies and citizens continue to default. The promise to repay and the honor of that promise is a basic moral. Obviously a disconnect has occurred when continuing default is an on-going experience. That’s Greece and many NZ citizens. Paying on time and without question is not the norm.

As with the situation in Greece I’m convinced most people would prefer to honor rather than dishonor a pledge – a promise to pay or repay. Unfortunately it’s why most lenders are required to formalize lending criteria. In a commercial situation (Banks) there is a simple test.

The 3 C’s –

Character (the history of budget control)

Capacity (income – the ability to repay)

Collateral (the asset value loaned against).

Individuals get caught in the consumption trap.

When politicians start borrowing, redistributing and repaying their motivation (rationale) for not paying can obfuscate the moral premise. The European bank and IMF were obviously having an off day when challenging the Greek 3 C’s or there was a stronger reason to keep Greece in debt and in the Union. Probably political, probably the Russian fear and certainly a capitalist/socialist dichotomy.

Risk and return are correlated whether investing or lending. There is no investment with low risk and high return. Understanding overarching criteria when investing, borrowing, building a business or planning a purposeful life is helped when disciplined to a commercial consideration for critical decision making. Planning doesn’t guarantee success but it sure improves the ratio of success to failure when incorporated into most aspects of life.

For example: When investing in anything it pays to do due diligence on the following:

1. The overarching considerations
2. The action steps

A1 Risk and Return.

Two Examples.

Term Deposits. Current interest rates on term investments with NZ Credit Union Baywide are 4.6% for 12 months and 5% for three years. Deposits start at $1,000. NZ has 14 licensed credit unions and four have credit ratings. Baywide are one of the four with a BB rating. There is a big difference in risk between investment and sub-investment grade deposits. On paper a BBB rating (TSB bank, BBB+) and a BB looks close. But the stats tell a different story. There is a one in 30 chance of default on a BBB deposit (investment grade) or just over a 3% chance. Yet with a BB deposit the risk triples to one in 10 or a 10% chance of default. A ‘B’ rating (asset finance) indicates a company with a one in five chance of default over 5 years.

A Balanced managed fund. Standard deviation is a statistical measure that provides the portfolio’s average annual deviation from its long term average return. Taking the 50/50 example portfolio (from an actual 20+ year experience) based on statistical measures – 68% of the time (roughly two years out of three) the 12 month return for the portfolio will fall within plus or minus 6% of its long term average. (In this case 8% - after manager’s fees).

An international pure equity fund risk/return ratio from the same portfolio managers is 9.1% return - 14.3% standard deviation (risk-measure)

The NZX50 – 9.14% return - 11.6% standard deviation

A2. Other overarching considerations

Taxation

Liquidity

Flexibility

Fees and commissions

I’ll expand on how to use these considerations and what to look for on another occasion

B.  The Action Steps (for investment)

B1 Start with a plan (structure, strategy, systems to use)

B2 Understand specific goals (short, medium, long term)

B3 Asset allocation (equities, property, income)

B4 Diversification (of each asset class – sectors and countries)

B5 Implementation (timing and prioritization)

B6 Measurement and review (quantitative, qualitative)

Somehow I think when it comes to past Greek governments and many current Kiwi consumers other motivations overpower the sensibilities associated with using decision making and disciplines in alignment with values based goals