Reaping what you’ve sowed

MAKING $10 million out of selling a farm sounds like a good start. But the next challenge is finding the right investment strategy. The Barefoot Investor has some ideas.

Selling the farm does not mean you should retire, says Scott Pape.

MAKING $10 million out of selling a farm sounds like a good start. But the next challenge is finding the right investment strategy. The Barefoot Investor has some ideas.

 

BILL ASKS: I recently sold my farm for $16 million. By the time I pay capital gains tax (CGT), pay off my debts, and give money to my ever-expectant family, I will have about $10 million. This amount will be paid in instalments over the next four years. Right now I have $980k, of which $180k is in super. I am genuinely scared of shares as I am worried about losing all my capital. The $180k in super is only earning 2.2 per cent and the rest is with Westpac earning 3 per cent. I receive $2.5 million in October. Help!

BAREFOOT REPLIES: Ker-bloody-ching! I’m guessing you’re now more popular than a ewe in a ram paddock, so today I’ll play the role of the bad cop. Blame the following advice squarely on me.

First, get yourself a new accountant. I know you’ve probably had your current accountant for years (and I’ve got nothing against them personally), but you’re now at another level. Interview at least three accountants who have had direct experience in helping farmers in your position — those who deal exclusively with high-net-worth farmers. And before you commit to any of them, ask them to talk you through the advice they’ve given other farmers. If you understand their answer, consider them. If not, thank them and keep looking. You are in control.

Second, don’t let your new accountant end up helping you “manage your money”. Yes, I know you’re stressed out about the responsibility of investing millions of dollars. That’s totally normal. But you’re up to it. You’re a farmer, so you must be a practical sort of bloke. Trust your gut. Now, you’ll find there are all sorts of people who’ll come at you with all sorts of plans. They’ll try to make your investment portfolio complex: hedge funds, active alpha managers, bonds, property deals. They’re not doing it because they have a crystal ball, but to justify the fees they’ll charge. If you were sitting across from me, I’d suggest that you keep things incredibly simple. You could keep your money in cash and live off the interest, if you like. Even with rates this low, you’ll never run out of money. However, you need to understand that this is one of the riskiest things you could do. Over time, inflation will eat away your fortune. Investor Warren Buffett is leaving his entire estate to his wife as follows: 90 per cent in a no-brainer ultra-low-cost index fund that tracks the 500 largest companies in the US, and 10 per cent in cash. He believes the returns from this simple strategy will beat 90 per cent of “smart” investors over the long run. You could look at doing something similar, with a mixture of Aussie and international shares. The dividends you receive will give you more income than your farm has ever given you. (Though don’t expect any adviser who gets paid on a percentage of your assets to agree with me.)

Third, don’t retire. The two most dangerous years of your life are the year you’re born and the year you retire. If you’re a cocky through and through, you’re naturally a worker. Just because you have enough money to never work again doesn’t mean you should hang up your Akubra. Keep working at something, even if it’s a day or two a week. Keep the grey matter turning. You’ve been blessed with a huge fortune. The real joy comes in giving some of it away, and making a difference to people. And I don’t just mean your “ever-expectant family”; leaving huge amounts to family members who haven’t earned it is almost always a bad idea. (Though don’t expect any of your family to agree with me.) Good luck!

YOU CAN’T EAT BRICKS

BRUCE ASKS: I am a chartered accountant and love your commonsense advice. But I just do not understand why you tell people to pay more into super before paying off their home loan. Surely they should pay off their debts, then pay more into super?

BAREFOOT REPLIES:

It’s simple: I meet a lot of old people who have a lot of house but not a lot of income in retirement. I like the simple action of increasing your pre-tax super contributions automatically, and then forgetting about it (behaviour beats brains). Studies show that saving 15 per cent of your income will afford a comfortable retirement.

 

SPRUIKING A FANTASY

WENDY ASKS: My husband and I are in our 40s and have paid off most of our house — $400k remaining on a house valued at $1.9 million. Our neighbour has recommended we buy positively geared property. The company’s philosophy is that you cannot have too much debt as long as it is positively geared. I guess it is easier to have a positive cashflow property with record low interest rates, but I do wonder what will happen when interest rates go up. Any thoughts?

BAREFOOT REPLIES:

Shrubs. You need to invest in good-quality, fast-growing shrubs that will block out your neighbours and their stupid advice. I Googled the company you referred to. It showed a young dude standing in front of a Ferrari. Wendy, invest in shrubs.

 

TIME WELL SPENT

RENEE WRITES: I went to see my bank and secured a reduction in the interest rate for my loan. I gave the bank a nice “white lie” about leaving and said I needed to know their best rate so I could shop it around to other banks before seeing a broker. The computer said “yes” and the bank instantly dropped my rate by 0.72 per cent, down to 3.95 per cent. All up, it took around 30 minutes to save $2964 per annum.

BAREFOOT REPLIES: Well done! Comparison site finder.com.au has found that, of the people who spend half an hour visiting their bank about their home loan, four out of five get a better rate.

 

barefootinvestor.com

The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice

Originally published as Reaping what you’ve sowed