Hot Issues
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Resources on our site to help you, your family and your friends.
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Calls to Review ASIC's Definition of Lapse Insurance
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Paperwork bungles lead to $38k in payments
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Self-employed? Don't miss out on super
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Australian Dietary Guidelines and healthy eating chart (PDF)
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Big concessions looking likely for transfer balance limit: ATO
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Raft of superannuation measures enter Parliament
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US Fed policy: Normalisation begins
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What the gig economy may mean for your super
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Powerful Budgeting, cash flow and Super Tools available on our site.
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Australia's leading causes of death - ABS
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Government introduces first home scheme laws
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Are young investors wasting their youth?
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ATO granted super enforcement powers
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The great Australian (retiree) dream
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ATO to release further guidance on reserves
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A real-world benchmark for SMSF performance
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How is your super going, ready for retirement?
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Our 'hardest' SMSF tasks
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Lack of literacy promotes unrealistic goals
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Young investors: Time is on your side
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Is your SMSF retirement-ready?
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Key Economic Indicators, 2017 - updated
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Investors acting their age
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ATO locks in details, addresses panic on real-time reporting
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Government ‘undermines’ tax system in new moves on property expenses
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Multiple super accounts in a 'gig' society
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Why Australian retirees aren't happy and what we can do about it
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Doing a budget is a good idea but ....
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Technical expert flags estate planning strategies for 2017-18
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Government to shut down salary sacrifice loophole
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Items that heat up your depreciation deductions
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‘Tens of thousands’ of SMSFs at risk with ECPI
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Do’s and don’ts of estate planning
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LISTO to help boost women’s super
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Smart ways to stretch retirement money
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Low economic growth likely for years
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Recorded Crime - Offenders, 2015-16
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Adequacy of savings still a concern among Australians
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‘Bank-like heists’ make way for new wave of cyber crime
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Give your children a saving and investing edge - for life
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Women still in the dark about finances
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Lessons learnt - often the hard way
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Australian population figures
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ATO poised to ramp up focus on key compliance area
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Benefit payments rise dramatically ahead of July 1 super changes
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There's no magic pudding when it comes to super
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ATO guidance provides clarity on death benefit confusion
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Beyond super: Our other personal investment market
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The three core pillars of this year's budget
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Federal Budget - 2017-18 - Overview
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Federal Budget - 2017-18 - Budget documents
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Global economy synchronised and thriving
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Life's financial turning points: good and not-so-good
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2011 Census - what was the make up of your area?
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ATO set to release guidance targeted for SMSF clients
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More withdrawals from 'the bank of mum and dad'
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Tax headache relief: Here’s more help with pension assets changes
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Most Aussies shun super advice
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Australia in a nutshell
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ATO finalises guidance on transfer balance cap
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Fit for purpose? The super story so far...
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SMSFs urged to review segregation clauses in trust deed
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Big insto addresses CGT misconceptions
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Dollar-cost averaging for millennial investors
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Calls for calm over pending CGT amendments
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Almost the world's best for retirees
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ATO reports on top contravention areas for SMSFs
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What recent retirees can teach pre-retirees
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Deloitte points to ‘red flag’ SMSF patterns
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Save early, save often
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Government pushes forward with multinational tax measures
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Jump-start your retirement savings
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Government urged to rectify ‘legislative shortcoming’ with CGT relief
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Some financial terms explained
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Areas of key focus for SMSFs in 2017.
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Powerful Superannuation modelling tools available on our site.
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Your New Year reading: beyond John Grisham
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What a long-term view of the market can teach investors
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CGT confusion seeing unnecessary sell-offs
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‘Devastating’ property investments hitting SMSFs
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Asset valuation crackdown imminent for SMSFs
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New Year (investment) resolutions
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Trump stimulus to boost global markets
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Female advice customers on the rise
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Retirement costs outpace rise in CPI
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ATO set to scrutinise CGT relief claims
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Investor habits: The good, the bad and the ugly
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Keeping finances in the family
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The inter-generational financial squeeze
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Merry Christmas for 2016, a Happy New Year and a prosperous 2017.
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ATO set to clamp down on range of super issues
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SME retirement plans in jeopardy, research finds
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SMSFs show restraint in hot residential market
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Investment's building blocks - always worth reinforcing
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Warnings issued on traps with CGT transitional rules
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Meet SMSFs' early and late arrivals
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Beware, the ATO is on the hunt for lifestyle assets
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'Brexit means Brexit' means what?
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SMSFs tipped to be hardest hit by pension changes
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SMSF assets hit record, but funds still hoarding cash
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Markets caution advised as economic bubbles loom
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Stretching retirement income
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Some financial terms explained
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Market Update – September 2016
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Checking in on our 2016 economic outlook - and looking ahead
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Making a fairer and more sustainable Superannuation System
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Going undercover
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‘Winners and Losers’ from new super proposals
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The gymnastics of keeping your portfolio balanced
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Market Update – August 2016
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Stop!! Don't do a paper Budget, use our online budgeting tools instead.
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Advisers the key to retirement stability, research shows
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The toughest tasks for self-managed super
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Lawyer warns on ‘adverse’ death taxes with insurance
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Don't get distracted by super changes
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A savings mirage?
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Market Update - July 2016
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The three biggest economic issues likely to affect markets in 2016
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SMSFs warned on looming property ‘tough times’
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Diversification counts when uncertainty beckons
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Strong economic data stablises markets
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Starting a super pension in 2016-17?
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Market Update - June 2016
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ATO extends looming SuperStream deadline
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ATO's deadline for review non-arm's length LRBAs extended
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A paradoxical relationship: The self-employed and super
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Fresh SMSF documentation warnings surface
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Making investing a family affair
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Super and divorce: a personal finance issue
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Market Update - May 2016
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ASIC flags SMSF investors in scam risk
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Older, greyer and still working
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Working and contributing to super past 65
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The pitfalls of part-year pensions
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Replenishing SMSF memberships
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Budget will hit 15% of SMSFs
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The insidious side of low interest rates
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Market Update - April 2016
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Budget 2016-17
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Do investment principles stand test of time?
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Estate Planning - early inheritance
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US economy will bend, not break
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A detailed look at the ATO’s new LRBA guidance
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Defying life's blueprint
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ATO continuing lodgement crackdown
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Another twist on the gender savings gap
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Market Update – March 2016
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Going solo
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Use our online budgeting tools to help plan your future.
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Age Pension means-test prevents rational decision-making
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Changing times for super collectables
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Preservation Age Rule
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Why investing for retirement isn't just about super
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Possible tax benefits through early inheritance
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Market Update - 29th February 2016
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Mortgages, personal debt and retirement
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Cost of retirement continues to climb
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Personal finance goes 'viral'
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ATO warns on poor asset records causing SMSF breaches
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When is an unallocated contribution account a reserve?
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Market Update – 31st January 2016
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Australians still need better retirement planning
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What to expect from investment markets in 2016 and beyond
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‘Irrational fear’ impacting SMSF longevity risk: CSIRO
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Tax scam reaps hundreds of thousands
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Morrison signals direction of super tax changes
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Market Update – 31st December 2015
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Should we expect stormy skies or sunshine in 2016?
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Merry Christmas and Happy New Year 2015
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There's no one-size-fits-all retirement income
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Market Update – 30th November 2015
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Diversifying and cutting costs with ETFs
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Why the ATO’s new powers make SMSF compliance more important than ever
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'Unretiring' retirees
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The detrimental impact of poor SMSF record-keeping
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Counting the cost of 'grey' divorce
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Combining total-return investing with realistic investment expectations
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Market Update – 31st October 2015
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Another telling reminder for SMSF trustees
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Death in paradise – or your SMSF
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Elderly exploited for assets
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Intergenerational challenges for retirement saving
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Death benefits – navigating the minefield
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Strategy over structure
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Market Update – 3oth September 2015
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SMSF and limited resource borrowing – a warning
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External partnerships and the in-house asset rules
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Take a closer look at SMSF age demographics
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Avoiding tax consequences with the related-party rules
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Focusing on after-tax returns
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Market Update – 31st August 2015
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The gender gap in retirement
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Why popularity of ETFs is surging among SMSFs
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Clearing up confusion about accessing super.
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Good (investor) behaviour
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Five reasons the RBA will likely cut rates again
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Market Update – 31st July 2015
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Customer-centred innovation underpins high satisfaction among financial advice customers
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What the ATO is keeping an eye on
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Through life and death
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Why astute investors are a little like astute kayakers.
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Your first SMSF portfolio
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Market Update - June 2015
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Money-smart ageing
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A new (financial) year’s resolution for your SMSF
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What’s ahead for US interest rates?
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Super: Looking to June 30 and beyond
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End of year tips for SMSFs
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Reminders and Tax Strategies for SMSFs pre-year end
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Market Update – May 2015
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An investor's personal trainer
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SMSF trustee penalties going up
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Contraventions rife among non-advised SMSF trustees
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Dealing with investor uncertainty
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Reserve bank gives the economy a lift
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Retirement planning: the gap between intention and reality
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Market Update – April 2015
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Budget 2015 - some professional opinions
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Australian Government - Budget 2015
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What does the ATO want from you?
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Making sense of the new excess contribution rules
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Greying, working and contributing
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Simple-yet-smart investment housekeeping
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Market Update – March 2015
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Two sides to the age profile of SMSF members
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Actuaries call for end to superannuation policy tinkering
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ATO urges caution on pensions
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Market Update - February 2015
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Aussie economy shifts gears as structural changes take hold
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The catch 22 of retirement savings
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Are there reasons to help the tax man do his job?
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Some financial terms explained
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Small business paradox
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Good financial planning finally has a value: 23% more income in retirement
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Market Update - January 2015
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‘Incredibly high’ number of trustees hold no life insurance
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SMSFs in 2015 Budget’s firing line
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Rebalancing resolutions
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Hammering away at asset allocation is only part of the retirement income solution
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Market Update – December 2014
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We wish all our clients a Merry Christmas,a Happy New Year and a restful holiday
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A great overview of investing and good Holiday reading.
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The final nail in the coffin for LRBAs?
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Market Update – November 2014
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Online financial tools your family and friends can use.
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Overcoming our behavioural barriers to saving
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‘Unintended consequences’ threaten SMSF tax reform
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Retirement income: every bit counts
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ASFA continues to sound warnings on retirement savings
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Market Update - October 2014
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The little-known rule with huge implications for self-managed super funds
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Grappling with the uncertainties of retirement
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Change to ATO decision relevant to SMSF in-house assets
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Taking a personal perspective on the global super challenge
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Some terms defined - Super & Investment
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The perils of market-timing and over-confidence
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Market Update – 30th September 2014
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Hardly a do-it-yourself job
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Super insurance: wide coverage, limited understanding
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ASIC eyes SMSF loan sign-off
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Redesigning retirement incomes policy - from the ground up
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Industry terms
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Market Update - August 2014
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Keeping to super's sole purpose
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Taxing times for self-managed super funds
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The relationship between SMSFs and their advisers
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How family financial planning opened the door to a holistic advice career
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Spotlight on your retirement income
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Market Update - July 2014
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The new 65?
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Report reveals 'alarming' super savings stats
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Anchors aweigh!
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A retiree's choice: super pension or lump sum
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Fundamentals for investing success
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Market Update - June 2014
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Messages Worth Remembering
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Workforce rides the 'silver tsunami'
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ATO outlines SuperStream concerns for SMSFs
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Help investor's to save $82 per week
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Super dollars
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Market Update - May 2014
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Market Update - April 2014
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How familiar are you with this graph?
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Federal Budget 2014-15 - Overview
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Federal Budget 2014-15 - Overview of main responsibilities
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Federal Budget Papers 2014-15
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Keeping a close watch on contribution caps
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Any changes to the Age Pension make saving through super crucial: ASAF
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New insights into women and super
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Keeping super in the family
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Afternoon Thoughts (US, Asia and Europe)
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Market Update - March 2014
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Younger SMSF members
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SMSF Specialist wanted
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Aged Care
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Crowd control
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Philanthropy upswing
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Market Update - 28th February 2014
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SMSF investment process is broken, but a good financial planner can fix it
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A behavioural barrier to successful saving
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Spending of super lump sums
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What the past can teach us about the current emerging turmoil
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Spending control in a low-interest environment
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Market Update - January 2014
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The return of a resilient US
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Putting financial literacy to the test.
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No intention to retire
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Outlook for Japan in 2014
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Understanding Profit Metrics: Gross, Operating and Net Profits
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Market Update - 31st December 2013
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Super tax changes: winners and losers
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Market Update - 30th November 2013
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Australians overweight and unhealthy, AIA
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The insurance gap
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Some more Financial Ratios
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Market Update - 30th October 2013
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Debt control in countdown to retirement
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ASIC: web here to help
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Merry Christmas to all our clients, your staff, family and friends.
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Sound SMSF advice is critical
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Insurance: too complex for the Internet?
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Some Financial Ratios
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SMSFs: the dos and don'ts
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Market Update - 30th September 2013
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Retiring SMSF baby boomers
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Your retirement-savings check-up
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C'mon Aussie, work longer!
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A heart-to-heart client conversation
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How to start saving for retirement
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Do a budget
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A selection of Liberal Party policies and discussion papers
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Retirement-savings disaster looms
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SMSFs and the cost factor
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New SMSF trustees sign-up - by the thousands
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Explainer: the role of budget deficits
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Market Update - 31st August 2013
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Some terms defined
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Retirement maze
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"Australia's most motivated profession"
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How realistic are your investment goals?
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Income generation requires tailored strategies
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Critical warning for SMSFs
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Market Update - July 31st 2013
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A matter of knowledge
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By George! Pension win for SMSF trustees
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Ahead of the curve: SMSF trustees love an expert
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The dollar's risk and reward
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Baby boomers see red
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Some Terms defined.
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Market Update - June 30 2013
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Gen Ys wary of much-needed advice.
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Relationship breakdown: a destroyer of person wealth
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Private wealth managers searching for good fit.
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Financial Literacy and Finding Relevant Information
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Market Update - 31st May 2013
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Take extra care not to exceed super contribution caps.
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The revival of the West
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The great advisory challenge for team SMSF
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Boost for tax data-matching.
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Extra Online support from your Financial Planner.
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Budget wrap: industry welcomes continuity
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Market Update - 30th April 2013
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2013-14 Federal Budget at a Glance
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Budget 2013-14 Overview
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Full version of the Federal Budget speech for 2013-14
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Market Update - 31st March 2013
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Flawed super tax = long-term problems: Mercer
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A matter of confidence
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Super tax changes: winners and losers
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The big super split
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The hot super debate
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For those clients who like to do some extra research.
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The growing return expectation gap
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"EU will survive no problem", US in recovery
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Love, money and relationship breakdowns
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Reports find risk appetite rising but still reluctant
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Market Update - 28th February 2013
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Research finds advisers key to SMSF growth
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Road-testing retirement
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China may run hot, but will investors overheat?
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2013 rays of hope
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Market Update - 31st January 2013
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Investors polarised as sentiment edges upward
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Market Update - 31st December 2012
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Drive your retirement dollar further - and forget the silver Porsche
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Is there a silver lining for asset allocation in 2013?
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Shrinking the McMansion
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Merry Christmas to all our clients, your staff, family and friends
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Budget wrap: industry welcomes continuity
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SMSF flows increase as confidence retuns
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Market Update - 30th November 2012
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A couple of super classics
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A plunge worth taking
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Asset allocation ranks number one
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Like to do some of your own tax, super, pension, tax rates, etc research?
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ASIC spruiks need for advice in "complex" future
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The long arm of tax
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Market Update - 31st October 2012
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Politicians, stop super tinkering!
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Your personal trainer
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Super members thirsty for financial advice
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SMSF flows increase as confidence returns
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What an A-grade pension system looks like
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Market Update - 30th September 2012
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Super's most disadvantaged
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Improve your financial literacy and help others with theirs.
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Spread your energy bets
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Making a comeback
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Government tinkering a 'body blow' to SMSFs
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Market Update - 31 August 2012
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Securely transfer your personal and business information
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'Speeding tickets' for SMSFs
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Cashing in risk
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Those who miss out
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Debt Consolidation and Budget review tools added to the Cash Flow / Financial tools on this website.
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Abbott clarifies super stance
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Advisers beat banks in fostering client loyalty
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SPAA sounds warning on tax backdating
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What a relationship breakdown may mean for an SMSF
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Create opportunity from market volatility
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Retirement savings challenge
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New Financial year: the outlook for markets
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Market Update - 30th June 2012
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Asian Growth Engine
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Can investors adapt to a deleveraging world?
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ATO focuses on novice investors
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Last-minute super contributions
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Market Update - 31st May 2012
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SMSF: Costs versus performance
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Australian House Prices down 10% from Peak
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Some financial jargon defined
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Investors sweat as Spaniards protest austerity
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Once again, the budget shifts the super goalposts
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Market Update - 30th April 2012
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Federal Budget 2012-13 - An Overview
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Federal Budget 2012 - 2013 - At a Glance
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The Federal Budget 2012 - 2013
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Do you like to do some of your own tax, super, pension, etc research?
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A question for Baby Boomers
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Terminology: Pension and Cash Rate
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Dressed up tax schemes
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The war at the end of the US dollar
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Market and Asset Class Reports as at 31st March
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Securely transfer your personal and business information to your Financial Planner.
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Coping with instant wealth
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Some industry terminology
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Home alone
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Market Update - 29th February 2012
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Little savings, big rewards
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Love and money ........
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Market Wrap - 21-2-12
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Lessons from a rocky road
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Quarterly Market Report to 31-12-2011
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Securely transfer your personal information over the Internet
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Retirees make a comeback
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Some Terminology
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Retirement evolution
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Identifying Market Trends
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Market and Economic Update - December 2011
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Merry Christmas 2011
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Few know exactly what their true financial position is, do you?
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The art of balancing bad news
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How economic reality influences the market.
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Market and Economic Updates - November / December 2011
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Want to do some of your own research – no problems?
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Lump sum love affair
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How much money do you need to comfortably retire?
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You can afford to contribute more to super but .....
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10 most indebted nations
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Market and Economic Updates - October / November 2011
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Timeless lessons meet new challenges
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Securely transferring Your information to your Planner.
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Gender Gap
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The 5 types of earnings per share
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No more Star Trek conventions for Spock
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An introduction to behavioural finance.
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Market Updates - September / October 2011
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The Budgeting Tools /Calculators on our website have been upgraded.
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Stosur plan an antidote for volatility
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The best performing market over the past 10 years.
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Why it takes courage to stand still
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China buys US for a bargain
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Market Updates - August / September 2011
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Buckle up for a bumpy US recovery ride
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SMSF Management
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How the US debt downgrade impacts Australia
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Mixing business and super
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The tangled web of the Australian housing bubble
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Market Updates - July / August 2011
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Under your control
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Improving your financial literacy is vital to your future ......
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5 reasons you should care about Greece
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The more things change ...... (the Carbon Tax)
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Is the US already in a double dip recession?
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Market Updates - June / July 2011
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Wanted: a proper understanding of personal finance
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Will your retirement income be enough?
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Facing up to the wall of sound
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A look at Corporate profit margins
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Market Updates - May / June 2011
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A budget deficit worth watching
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Securely transferring your personal data over the Internet
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Hints on how to interpret a company's Prospectus
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The birth of a new class of Investor
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Demographic trends and the implications for investment
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Market and Economic Updates - April / May 2011
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Federal Budget 2011-12.At a Glance
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Federal Budget 2011-12. Overview
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Reality versus perception
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Improving the financial literacy of your children.
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The Economic Reasons behind Nuclear Power
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Room for improvement (Pensions)
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Some more terminology explained
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Market Updates - March / April 2011
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Uninformed and impatient
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Perspective on the tragedy in Japan.
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The essentials of Corporate cash flow.
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Out in the cold (the self employed)
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Some terminology explained.
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Market Updates - February / March 2011
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Improving financial literacy is an objective we should all have.
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Why baby boomers face a super sprint
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Don't buy yet - first calculate the stock's P/E and PEG ratio
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SMSFs: Age matters
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Some more terminology explained
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Market Updates - January / February 2011
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Secure File Transfer
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CPI won't stop rate rises, says Economist
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Super contender
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Super birthday ahead
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Some terminology explained
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Market Updates - December / January 2011
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Merry Christmas and Happy New Year
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A very good Budgeting Tool is available on our site.
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Flexibility the key to spending
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8 Financial Tips For Young Adults
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Retirement boomers
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Market Updates – November / December 2010
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Finding your Super comfort zone
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What’s your debt really costing you?
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Out in the cold – and forgotten
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Tips For Buying The Perfect Investment Property
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Market Updates – October / November 2010
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Professional help
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On-line Sales Under Scrutiny
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An often overlooked side of SMSFs
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6 basic financial ratios
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9 signs you can’t afford your mortgage.
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Market Updates – September / October 2010
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Jobs for Life
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Scams
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Breakdown shocker
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Market Updates – August / September 2010
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Three Stages of Retirement
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Deemed Dividends
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When PEG beats the P/E Ratio
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Super Debt
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5 Billionaire habits…
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Market Updates – July / August 2010
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Five things to do before interest rates go up.
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Save for retirement – 'I am not kidding'
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Commodities Boom Hinges on China
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Debt, Debt and more Debt
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Market Updates – June / July 2010
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Help your young adult children better understand their financial position.
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Reality challenges many super perceptions
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Comparing the Japanese and U.S. Bubbles
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Watch out for overseas investment cons
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What is a cash Flow Statement
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Market Updates – May / June 2010
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Who are Australia’s best and worst savers?
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Greece: The worst-case scenario
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Is your investing style Hot or Not?
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A need for simple guidance
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Market Updates – April / May 2010
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2010-11 Commonwealth Budget
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What does GDP measure?
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Super falls short for women
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World's worst countries for jobs.
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High controversy
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Market Updates – March / April 2010
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Personal Credit Ratings
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The essentials of Corporate cash flow.
By Investopedia.com | 21.03.2011

If a company reports earnings of $1 billion, does this mean it has this amount of cash in the bank? Not necessarily. Financial statements are based on accrual accounting, which takes into account non-cash items. It does this in an effort to best reflect the financial health of a company. However, accrual accounting may create accounting noise, which sometimes needs to be tuned out so that it's clear how much actual cash a company is generating. The statement of cash flow provides this information, and here we look at what cash flow is and how to read the cash flow statement.

What Is Cash Flow?

Business is all about trade, the exchange of value between two or more parties, and cash is the asset needed for participation in the economic system. For this reason - while some industries are more cash intensive than others - no business can survive in the long run without generating positive cash flow per share for its shareholders. To have a positive cash flow, the company's long-term cash inflows need to exceed its long-term cash outflows.

An outflow of cash occurs when a company transfers funds to another party (either physically or electronically). Such a transfer could be made to pay for employees, suppliers and creditors, or to purchase long-term assets and investments, or even pay for legal expenses and lawsuit settlements. It is important to note that legal transfers of value through debt - a purchase made on credit - is not recorded as a cash outflow until the money actually leaves the company's hands.

A cash inflow is of course the exact opposite; it is any transfer of money that comes into the company's possession. Typically, the majority of a company's cash inflows are from customers, lenders (such as banks or bondholders) and investors who purchase company equity from the company. Occasionally cash flows come from sources like legal settlements or the sale of company real estate or equipment.

Cash Flow vs Income

It is important to note the distinction between being profitable and having positive cash flow transactions: just because a company is bringing in cash does not mean it is making a profit (and vice versa).

For example, say a manufacturing company is experiencing low product demand and therefore decides to sell off half its factory equipment at liquidation prices. It will receive cash from the buyer for the used equipment, but the manufacturing company is definitely losing money on the sale: it would prefer to use the equipment to manufacture products and earn an operating profit. But since it cannot, the next best option is to sell off the equipment at prices much lower than the company paid for it. In the year that it sold the equipment, the company would end up with a strong positive cash flow, but its current and future earnings potential would be fairly bleak. Because cash flow can be positive while profitability is negative, investors should analyze income statements as well as cash flow statements, not just one or the other.

What Is the Cash Flow Statement?

There are three important parts of a company's financial statements: the balance sheet, the income statement and the cash flow statement. The balance sheet gives a one-time snapshot of a company's assets and liabilities. And the income statement indicates the business's profitability during a certain period.

The cash flow statement differs from these other financial statements because it acts as a kind of corporate checkbook that reconciles the other two statements. Simply put, the cash flow statement records the company's cash transactions (the inflows and outflows) during the given period. It shows whether all those lovely revenues booked on the income statement have actually been collected. At the same time, however, remember that the cash flow does not necessarily show all the company's expenses: not all expenses the company accrues have to be paid right away. So even though the company may have incurred liabilities it must eventually pay, expenses are not recorded as a cash outflow until they are paid.

The following is a list of the various areas of the cash flow statement and what they mean:

* Cash flow from operating activities - This section measures the cash used or provided by a company's normal operations. It shows the company's ability to generate consistently positive cash flow from operations. Think of "normal operations" as the core business of the company. For example, Microsoft's normal operating activity is selling software.

* Cash flows from investing activities - This area lists all the cash used or provided by the purchase and sale of income-producing assets. If Microsoft, again our example, bought or sold companies for a profit or loss, the resulting figures would be included in this section of the cash flow statement.

* Cash flows from financing activities - This section measures the flow of cash between a firm and its owners and creditors. Negative numbers can mean the company is servicing debt but can also mean the company is making dividend payments and stock repurchases, which investors might be glad to see.

When you look at a cash flow statement, the first thing you should look at is the bottom line item that says something like "net increase/decrease in cash and cash equivalents", since this line reports the overall change in the company's cash and its equivalents (the assets that can be immediately converted into cash) over the last period. If you check under current assets on the balance sheet, you will find cash and cash equivalents (CCE or CC&E). If you take the difference between the current CCE and last year's or last quarter's, you'll get this same number found at the bottom of the statement of cash flows.

In the sample Microsoft annual cash flow statement (from June 2004) shown below, we can see that the company ended up with about $9.5 billion more cash at the end of its 2003/04 fiscal year than it had at the beginning of that fiscal year. Digging a little deeper, we see that the company had a negative cash outflow of $2.7 billion from investment activities during the year; this is likely from the purchase of long-term investments, which have the potential to generate a profit in the future. Generally, a negative cash flow from investing activities are difficult to judge as either good or bad - these cash outflows are investments in future operations of the company (or another company); the outcome plays out over the long term.

The "Net Cash from Operating Activities" reveals that Microsoft generated $14.6 billion in positive cash flow from its usual business operations - a good sign. Notice the company has had similar levels of positive operating cash flow for several years. If this number were to increase or decrease significantly in the upcoming year, it would be a signal of some underlying change in the company's ability to generate cash.

Digging Deeper into Cash Flow

All companies provide cash flow statements as part of their financial statements, but cash flow (net change in cash and equivalents) can also be calculated as net income plus depreciation and other non-cash items.

Generally, a company's principal industry of operation determine what is considered proper cash flow levels; comparing a company's cash flow against its industry peers is a good way to gauge the health of its cash flow situation. A company not generating the same amount of cash as competitors is bound to lose out when times get rough.

Even a company that is shown to be profitable according to accounting standards can go under if there isn't enough cash on hand to pay bills. Comparing amount of cash generated to outstanding debt, known as the operating cash flow ratio, illustrates the company's ability to service its loans and interest payments. If a slight drop in a company's quarterly cash flow would jeopardise its loan payments, that company carries more risk than a company with stronger cash flow levels.

Unlike reported earnings, cash flow allows little room for manipulation. Every company filing reports with the Securities and Exchange Commission (SEC) is required to include a cash flow statement with its quarterly and annual reports. Unless tainted by outright fraud, this statement tells the whole story of cash flow: either the company has cash or it doesn't.

What Cash Flow Doesn't Tell Us

Cash is one of the major lubricants of business activity, but there are certain things that cash flow doesn't shed light on. For example, as we explained above, it doesn't tell us the profit earned or lost during a particular period: profitability is composed also of things that are not cash based. This is true even for numbers on the cash flow statement like "cash increase from sales minus expenses", which may sound like they are indication of profit but are not.

As it doesn't tell the whole profitability story, cash flow doesn't do a very good job of indicating the overall financial well-being of the company. Sure, the statement of cash flow indicates what the company is doing with its cash and where cash is being generated, but these do not reflect the company's entire financial condition. The cash flow statement does not account for liabilities and assets, which are recorded on the balance sheet. Furthermore accounts receivable and accounts payable, each of which can be very large for a company, are also not reflected in the cash flow statement.

In other words, the cash flow statement is a compressed version of the company's checkbook that includes a few other items that affect cash, like the financing section, which shows how much the company spent or collected from the repurchase or sale of stock, the amount of issuance or retirement of debt and the amount the company paid out in dividends.

The Bottom Line

Like so much in the world of finance, the cash flow statement is not straightforward. You must understand the extent to which a company relies on the capital markets and the extent to which it relies on the cash it has itself generated. No matter how profitable a company may be, if it doesn't have the cash to pay its bills, it will be in serious trouble.

At the same time, while investing in a company that shows positive cash flow is desirable, there are also opportunities in companies that aren't yet cash-flow positive. The cash flow statement is simply a piece of the puzzle. So, analyzing it together with the other statements can give you a more overall look at a company' financial health. Remain diligent in your analysis of a company's cash flow statement and you will be well on your way to removing the risk of one of your stocks falling victim to a cash flow crunch.

By http://www.compareshares.com.au/ - for more articles like this click here.
www.thebull.com.au is Australia's pre-eminent news and investing site for investors and traders, covering shares, superannuation, property, financial planning strategies and more.