Author Topic: Help with a huge $ portfolio [Australia]  (Read 1438 times)

Zebu12

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Help with a huge $ portfolio [Australia]
« on: February 04, 2019, 07:38:38 PM »
Hi Folks,

I was hoping to get some advise around my asset allocations and investment strategy on a not so usual portfolio!  I want to keep it simple, low fee etc.
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Details are as follows:
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- live in Australia. Wife and I are both 47. We have 2 kids now grown up.
- We have no debt.
- Our home is worth around $1.5M and has a granny flat that returns us 20k a year.
- We have a smsf that has no debt. It has a commercial warehouse worth 2M + 300k in shares in the SMSF. the commercial property brings in net rent of $120k a year.
- We have a Family trust which we use for investments and after a business sale has around $4m in it (1m in shares rest in fixed interest)
- For all intense purposes we are retired ( from a paid employment perspective) having worked our ass's off. It was all sweat and lots of tears!
- We need around $130k a year to maintain our lifestyle. ( or 3.25% of the $4m)
- we make 50k super contributions to superannuation between us.from the trust)

We don't need to take much risk with our portfolio, it's about asset protection. I'm also factoring in the Superannuation preservation age will have raised to 65 by the time we get to access our Super. At age 65 we should have around $4m in the smsf in liquid assets + the commercial property then worth $3m plus. I also work out we will have around $1.7m in liquid assets left in the family trust + the two residential properties maybe worth around $1.7m. As you can see we are in a good place.

I'm factoring in a couple of interest rate drops in Australia in the next, 12 months, a poor performing global economy, deflating global assets and probably some sort of GFC shock down the road.

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The Strategy
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Of the $4m in the investment trust....
- Put $1m into High interest Bank Term Dep/High interest accounts (currently returning around 2.75%, but moving forward I'm working on 2.25% with rate drops
- Put $1m into Bonds ( returning 1.75 to 2%)
- Put $1m into 2 x residential rental properties with net yield of around 3.25% + capital growth. I'm comfortable with property, its steady rental income, keeps up with and hopefully exceeds inflation over time. ( and buying in when the market corrects even further in the next 12 months) If the world melts down I can still ride my donkey past them and keep an eye on how the jungle is reclaiming them. I like tangible assets.
- Put $1m into shares (index funds) and working on conservative 6% return.

The above works out at around 3.7% annual return ( excluding any capital growth on rental properties) which is in excess of my 3.25% drawings. I realise that inflation is eating away at the pie. But the pie is big and that the superannuation pie is even bigger. I want to sleep at night, not worry about what the markets are doing.

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Combined Asset Allocation
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AA control is based around have 50% in bonds, 25% in property, 25% exposure to Equities, reducing to 20% by age 65. The goal is to then manage this asset allocation across all funds inside and outside of Super, which with some fun in excel I have tweaked to the finest degree.

The Superfund starts off with 80% in the commercial property but this drops quickly as the inflow of cash from commercial rent and super contributions off sets it.

But I can easily maintain a good balance by balancing out what happens in the investment trust with offsetting it with the strategy in Superannuation.
By age 65 the combined structure will be:
37% in property / 21% Equities / 32% Bonds. ( might then sell a property to reduce property exposure and add to bonds)


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How to invest in indexing
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So this is where I need some input. How to dice the funds up into Index funds.

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Bonds
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- Q1. Should I use VAF or also allocate (50%) to Vanguard Australian Inflation-Linked Bond Index Fund? I can't see any benefit in using Global Bond funds with hedging etc. Don't need exposure to currency risk. Or should I look at owning some direct holdings of govt bonds ? ( rates of return are much lower than VAF)

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Equities
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Q2. Would 65%Australian / 35% Overseas be an adequate split to offset Australian bias with the property holdings I have? . or should I lean to more international shares to reduces exposure to franking credits and increases currency risks ?

Q4. Would you reduce overseas exposure as I get closer to 65?

Q5. I was thinking VAS for Australian Exposure (70%) and (30%) in a equal weighted index fund like VanEck Vectors Australian Equal Weight ETF (MVW) to reduce exposure to financials and resources????

Q3. For overseas funds I was thinking 93% VGS with maybe 7% in Vanguard Emerging Markets Shares Index Fund

What's everyone's thoughts here?
« Last Edit: February 04, 2019, 07:40:58 PM by Zebu12 »

Andy R

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Re: Help with a huge $ portfolio [Australia]
« Reply #1 on: February 04, 2019, 11:41:36 PM »
I will leave it to others, but just wanted to mention that your Aussie-to-international allocation should be a portfolio-wide decision.

Since you have 25% in cash, and 25% in bonds and 25% in Australian property, you are already 75% in Australian based assets. So if you choose 65/35 for the remainder, then you are actually gong for 91/9 when you consider your entire portfolio of assets.

Until I have sold my properties which make up too much of my assets, I'm in an all-global portfolio. If the AUD goes up relative to the world, the fixed income and home country property maintains purchasing power. if the AUD goes down relative to the world, the global equities will help hedge against that. Global equities are also much better diversified.

And yes as you get closer to retirement, you want more in Aussie based assets, but if you are already at 75%, I think that is as much as you want. I think you still want some hedge against a falling AUD, and 25% seems like a good minimum to me.

Just something to think about...

Zebu12

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Re: Help with a huge $ portfolio [Australia]
« Reply #2 on: February 04, 2019, 11:50:38 PM »
Andy, thatís a good point. Itís hard to overcome that home country bias.  I agree  that higher overseas exposure makes more sense. Just wasnít sure if franking should fall into the equation and tend to pay higher divendends than overseas.  Perhaps  80% overseas and over the decades pull back to a  higher Australian  holding. Keen to hear what others think. Appreciate  your feedback 👍

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #3 on: February 04, 2019, 11:54:51 PM »
Your whole portfolio seems way too complex.

Work out your risk profile in regards to your percentage in shares in bonds & cash. Sell the commercial property. Personally I would go for a 80/20 portfolio (stocks to bonds). I would put at least 50% into VGS or something similar in Super and the rest into something like VAS but you could just go 80% VGS.

As stated by AndyR the bonds, cash and your house are already in Australian dominated assets and you should be diversifying out of those assets.

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #4 on: February 04, 2019, 11:57:49 PM »
Andy, thatís a good point. Itís hard to overcome that home country bias.  I agree  that higher overseas exposure makes more sense. Just wasnít sure if franking should fall into the equation and tend to pay higher divendends than overseas.  Perhaps  80% overseas and over the decades pull back to a  higher Australian  holding. Keen to hear what others think. Appreciate  your feedback 👍

Honestly I wouldn't worry about dividends and tax benefits when investing. Sure enough set up your structures - trusts, super etc - so that you minimise taxes but don't pick your assets based on preferential tax treatments. Those tax treatments can change and if those assets under-perform you won't be happy. If they over-perform you would probably be stoked but why take the risk.

marty998

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Re: Help with a huge $ portfolio [Australia]
« Reply #5 on: February 05, 2019, 12:12:00 AM »
I wouldn't sell the commercial property, fine to keep that.

I would go much more aggressively on equities though - you have decades ahead of you. Fixed interest at 2.5% with tax of 40%-45% isn't going to be very pleasant at all. Wouldn't be keen on more  property as you already have $3.5m tied up across your home and CP.

The more interesting question is "why are you here?" You have a net worth of almost $8m... and spending needs of $130k(?)

What is the plan, if not to die with tens of millions?


Trevor Reznik

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Re: Help with a huge $ portfolio [Australia]
« Reply #6 on: February 05, 2019, 01:01:00 AM »

The more interesting question is "why are you here?" You have a net worth of almost $8m... and spending needs of $130k(?)

What is the plan, if not to die with tens of millions?

Yeah I think he needs the opposite of a mustachian forum, he needs a forum where they give you ideas on what to blow your money on.

Zebu12

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Re: Help with a huge $ portfolio [Australia]
« Reply #7 on: February 05, 2019, 01:11:40 AM »
I wouldn't sell the commercial property, fine to keep that.

The more interesting question is "why are you here?" You have a net worth of almost $8m... and spending needs of $130k(?)

What is the plan, if not to die with tens of millions?
Lol Marty. Exactly! Donít worry i spent a decade earning 7 figures and living fast and loose with every toy  you could think off and every corner of the globe explored.  It was fun... for a while.  Then it becomes meaningless. Money is an interesting thing, we all work our arses off to get it, but few ever finally get financial freedom. When you do , you realise  itís not that important after all.  Or you go the other way and get greedy.  I see it this way. I have 8 chock chip cookies and a full stomach. . I can only ever eat 4 more.  So do i enjoy life and die with 4 cookies left or do i take 5 cookies and invest them aggressively, have sleepless nights to either run out of cookies before i die... or maybe die with 10 cookies.   When iím 6 feet under it doesnít matter if i have 4 or 10 cookies... i still cant eat them!!

Zebu12

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Re: Help with a huge $ portfolio [Australia]
« Reply #8 on: February 05, 2019, 01:19:14 AM »
Your whole portfolio seems way too complex.

Work out your risk profile in regards to your percentage in shares in bonds & cash. Sell the commercial property. Personally I would go for a 80/20 portfolio (stocks to bonds). I would put at least 50% into VGS or something similar in Super and the rest into something like VAS but you could just go 80% VGS.


Risk profile is easy. 25% shares 25% property 50% cash and bonds.   Spread across 3 properties and 3 index funds, pretty simple to manage. Super conservative, I know , but very low risk. Remember for me it's about preserving what I have and not taking any risk.  I don't need to make any more money, I'm already retired, realistically couldn't spend it all (if managed well. ) But to throw 80% in shares and see a GFC correction of 40% gone tomorrow would mean I'm back on the tools working for another decade when I could have been sipping cocktails 😜

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #9 on: February 05, 2019, 01:33:57 AM »
I wouldn't sell the commercial property, fine to keep that.

Why ? I'm honestly interested. I've never understood why people do this. Sure some people will make millions but it's risky and you are putting so many eggs into one basket.

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #10 on: February 05, 2019, 01:44:53 AM »
Your whole portfolio seems way too complex.

Work out your risk profile in regards to your percentage in shares in bonds & cash. Sell the commercial property. Personally I would go for a 80/20 portfolio (stocks to bonds). I would put at least 50% into VGS or something similar in Super and the rest into something like VAS but you could just go 80% VGS.


Risk profile is easy. 25% shares 25% property 50% cash and bonds.   Spread across 3 properties and 3 index funds, pretty simple to manage. Super conservative, I know , but very low risk. Remember for me it's about preserving what I have and not taking any risk.  I don't need to make any more money, I'm already retired, realistically couldn't spend it all (if managed well. ) But to throw 80% in shares and see a GFC correction of 40% gone tomorrow would mean I'm back on the tools working for another decade when I could have been sipping cocktails 😜

I get the comment in relation to preserving assets and I can understand holding some property that you live in (even if it is a little irrational). I don't get the commercial property at all and I don't understand being that conservative.

The problem with your portfolio is that 50% is going to decrease in value for sure over time. The 25% in property is poorly diversified and that could be a problem. No one really knows if this is the case but why take the risk especially when you state you don't want to lose money. It seems funny to be risk averse but to allocate 25% of your total assets to a risky asset.

The thing with corrections in the share market is that if you hold and you should be able to hold you are investing in the best market possible for long term returns that we know. If you invest in something like VGS you give yourself a great way to participate in that market.

A couple of points:-

1. I own my house. So I don't preach what I state.
2. I invest in the ASX (predominantly VAS) even though I'm not sold on this option. I do have 30% of my assets here and therefore it's probably not that bad for an Australian. I have 50% in international stocks (predominantly VGS).
3. You have a tonne of money so you've done well.
4. My FIL would have multiple times more than what you do and he was a hedge fund manager. He invests in property basically 100% plus his business plus when he has cash flow problems he looks to make money by trading. That is about the worst way to manage your money that I can possibly think of but he has been hugely successful from a financial perspective.

Could you just invest in VGS with any spare money that comes up and over time you may have a portfolio that is more aligned to modern portfolio theory.
« Last Edit: February 05, 2019, 01:47:02 AM by steveo »

Zebu12

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Re: Help with a huge $ portfolio [Australia]
« Reply #11 on: February 05, 2019, 01:52:48 AM »
Steveo commercial you have to know what you are doing. Most donít.  My commercial warehouse has a just under 10 years left on its lease as an e-commerce setup  with a large multinational.  It leases for 180k a year plus outgoings and cost me 1.7m to build myself.  Itís a no brainer.  If the tenant leaves, no issue, it owes me nothing and was built so it can be split into multi configuration s with up to 6 smaller leases.   I doubt it will ever sit vacant for long, it was built for usability not to get the most sim of buildings on a site. So itís superior compared to 95% of properties. And itís on a transport hub etc etc

Zebu12

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Re: Help with a huge $ portfolio [Australia]
« Reply #12 on: February 05, 2019, 02:06:25 AM »
Just interested in why property ( ie two residential rentals) would be considered risky? Compared to shares.

From my point of view:
- iím looking for well sort after properties in  good cbd areas.
- properties that have larger blocks so can have granny flats added , duplex etc.
- looking to buy in a correction
- they would have no debt. So are providing a steady rental income , much like bonds.
- They would net 3.5% after all fees and a good allowance for repairs and upgrade and vacancy.
- Sure property could tank 30%, but shares will as well.
- but likewise they are also going to rise with inflation even if there is no real capital growth.
- i never need to sell these, they could  go on collecting rent forever

If they were negatively geared, or i was skint- risky as. But iím neither.
« Last Edit: February 05, 2019, 02:09:29 AM by Zebu12 »

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #13 on: February 05, 2019, 02:12:13 AM »
Steveo commercial you have to know what you are doing. Most donít.  My commercial warehouse has a just under 10 years left on its lease as an e-commerce setup  with a large multinational.  It leases for 180k a year plus outgoings and cost me 1.7m to build myself.  Itís a no brainer.  If the tenant leaves, no issue, it owes me nothing and was built so it can be split into multi configuration s with up to 6 smaller leases.   I doubt it will ever sit vacant for long, it was built for usability not to get the most sim of buildings on a site. So itís superior compared to 95% of properties. And itís on a transport hub etc etc

So the lease covers your living expenses. Why not put more into VGS then. That is the gap in your portfolio. Sell 25% of your cash/bond position and put it into VGS. Your portfolio will look a lot more diversified.

Modern portfolio theory is based on generating the best risk/reward returns. You will probably be okay but if you are risk averse I don't understand why you would invest so differently from good practice.

I doubt I will convince you so why not educate yourself on the topic a bit more.

I like this advice:- https://www.youtube.com/watch?v=_chiIIxMGl0&list=PL24qYBiXaDDsSGgzBFxEe8SsECXiqVFpI
I also like William Bernstein's advice and particularly his "Investing for Adults" book series:- https://www.goodreads.com/book/show/15775307-the-ages-of-the-investor

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #14 on: February 05, 2019, 02:18:17 AM »
Just interested in why property ( ie two residential rentals) would be considered risky?

It's way too much of your portfolio that is poorly diversified. I think better put it should be considered extremely poorly diversified. That is risky. I really think you should read up on some of those investing books. What if property performs poorly over the next 50 years. What if world property and shares go gangbusters but Australian property tanks.

Think about it - my international equity tracker will self-cleanse o time. The crappy shares will go and be replaced by quality shares.

If anyone told me to invest 25% of my portfolio into a single share or a couple of shares I would think they are nuts.

In stating all of that like I said I think you will be okay but personally the high property percentage in tandem with 50% of your assets basically losing money it means you have 75% of your assets in extremely risky long term options. Personally I couldn't do that.

Risk isn't as simple as being shares are risky and bonds/cash/property not risky. There is short term and long term risk. You have a massive amount of long term risk and very little short term risk.
« Last Edit: February 05, 2019, 02:22:09 AM by steveo »

Zebu12

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Re: Help with a huge $ portfolio [Australia]
« Reply #15 on: February 05, 2019, 02:26:44 AM »
Awesome links mate. Thankyou.  Unfortunately the lease is inside  a smsf. So it doesnít cover my living expenses (yet). I could sell the commercial  but itís generating. 8% cpi increased until 2028. Will Vgs do that, maybe, but also maybe not.

Best investment practise relates to people trying to build a nest egg,rather than protecting  the egg. Different sides to the same coin.
we

Zebu12

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Re: Help with a huge $ portfolio [Australia]
« Reply #16 on: February 05, 2019, 02:31:17 AM »
Stevo . Thanks for challenging my thinking mate! What you say has merit.  Iíll look at reducing property exposure to 1 residential property and throwing an extra 500k into VGS.    cheers mate!!

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #17 on: February 05, 2019, 02:33:43 AM »
Stevo . Thanks for challenging my thinking mate! What you say has merit.  Iíll look at reducing property exposure to 1 residential property and throwing an extra 500k into VGS.    cheers mate!!

Sounds good. Watch that video series as well. I read all of those Bernstein books for free at one point. They were giving them away. They are great. I think the one that I linked too is the worst of the lot but they are good.

Like I said my FIL is extremely wealthy and I think he does everything wrong. The truth is that many different paths will work and you probably don't have to over-optimise.

Andy R

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Re: Help with a huge $ portfolio [Australia]
« Reply #18 on: February 05, 2019, 02:39:44 AM »
Andy, thatís a good point. Itís hard to overcome that home country bias.  I agree  that higher overseas exposure makes more sense. Just wasnít sure if franking should fall into the equation and tend to pay higher divendends than overseas.  Perhaps  80% overseas and over the decades pull back to a  higher Australian  holding. Keen to hear what others think. Appreciate  your feedback 👍

Well, it's a decision between franking credits and diversification.
Since you are going 50% in fixed income, it looks like you are more focused on risks instead of maximising return (which is the right way to look at it), so it seems a little unusual that you would give up diversification for the small amount of extra return from franking credits.

You are right that as you get closer to retirement, you want more AUD based assets, but only up to a point. You always want some kind of hedge against the AUD crashing. Don't forget that many of the goods you purchase are imported, so if your assets are all in AUD, your purchasing power would be going down with the AUD as it fell.

There are 2 types of currency risk - upside country risk and downside country risk. Having none or almost no non-AUD assets mitigates one of those risks but exacerbates the other.


Other random points
ē I personally would not sell your property if managing it is not difficult, but that is just my opinion. I love the way equities and property have such a low correlation. I also really like the proportion of 25%. Of course at some point you may want to get rid of it if there is any work involved and you get older and don't want or are unable to deal with it.
ē You can go more aggressive with more equities, but with your amount of money, you simply don't need to. If you wanted to be more aggressive you could, but I would question why anyone would suggest it is in any way better.
ē I noticed you posted on bogleheads. They are absolutely fantastic. Many on here offer good advice and some are excellent, but the quality of financial info over there is second-to-none. We are incredibly fortunate to have such a website available, and for free (certainly no disrespect intended towards this forum).
ē By the way, you probably should look into asset protection from a legal point of view. I really have no idea about this, and need either an accountant or lawyer (I don't even know which lol), but this is a big deal for high net worth individuals, and you should be doing this before making any more investment purchases if you have not done so already.

Zebu12

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Re: Help with a huge $ portfolio [Australia]
« Reply #19 on: February 05, 2019, 03:03:07 AM »
ē By the way, you probably should look into asset protection from a legal point of view. I really have no idea about this, and need either an accountant or lawyer (I don't even know which lol), but this is a big deal for high net worth individuals, and you should be doing this before making any more investment purchases if you have not done so already.

Mate i never would have got where i am with out the best accountants andsolicitors. I operate trusts and companies for asset protection.  Financial advisors... never have my interests at heart .

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #20 on: February 05, 2019, 03:03:33 AM »
ē You can go more aggressive with more equities, but with your amount of money, you simply don't need to. If you wanted to be more aggressive you could, but I would question why anyone would suggest it is in any way better.

I agree with basically all of your comments. Bogleheads are great. I disagree with this point though. 50% in poorly performing assets and 25% in property is risky especially over the longer term. It's a good sized portfolio but why take on such a high amount of risk in your portfolio under performing. If the property under-performs you are pretty much guaranteeing that your portfolio will lose significant value over the longer term.

Honestly I view investing too little into equities as being risky. It's a different sort of risk. You might not realise it now. You feel safer. I just think it's a false sense of security. Over the long term though you are taking on a different form of risk. It might be shallow risk but over the long term that shallow risk might hurt you a lot. I'd be more comfortable seeing my portfolio with a deep risk over the short term but knowing over the longer term I'm invested in assets that should appreciate in value.

I view an international index tracker as the gold standard of investing. I could even make an argument that due to the op's portfolio size the safest investment option for him is to be 100% in international equities. He would be invested in the most diversified option there is so he won't do poorly. To add to that as he doesn't have to draw down 4% or 5% per year so that when the market crashes he will be fine. It's simple and safe. Compare that to his current portfolio where 75% of his assets are risky over the longer term. Maybe property does well. Maybe it doesn't. Why take the risk ?

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #21 on: February 05, 2019, 03:05:31 AM »
Financial advisors... never have my interests at heart .

My parents use a financial adviser. My dad understands that they are there to rip him off. My mum likes telling people she has a financial adviser. Dad doesn't really care though because he has too much money to spend.

By the way this is a great topic. It helps me clarify my position when it comes to investing. Thanks for posting.

potm

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Re: Help with a huge $ portfolio [Australia]
« Reply #22 on: February 05, 2019, 04:55:11 AM »
Agree with the points steveo has made.

The only thing I would add is look at countries like Brazil, Venezuela, Iran. A lot of rich people in these countries lost fortunes and are no longer rich. If they had access and invested in international ETFs, they could have preserved their wealth a lot better.
$8 million won't seem like a lot if a loaf of bread costs $500. Low risk of that ever happening in Australia but that's the most likely scenario I see of you not having enough cookies to eat. Cash and bonds have risk too, even though they have less volatility when measured in dollars.

Andy R

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Re: Help with a huge $ portfolio [Australia]
« Reply #23 on: February 05, 2019, 05:31:47 AM »
ē You can go more aggressive with more equities, but with your amount of money, you simply don't need to. If you wanted to be more aggressive you could, but I would question why anyone would suggest it is in any way better.

I agree with basically all of your comments. Bogleheads are great. I disagree with this point though. 50% in poorly performing assets and 25% in property is risky especially over the longer term. It's a good sized portfolio but why take on such a high amount of risk in your portfolio under performing. If the property under-performs you are pretty much guaranteeing that your portfolio will lose significant value over the longer term.

Honestly I view investing too little into equities as being risky. It's a different sort of risk. You might not realise it now. You feel safer. I just think it's a false sense of security. Over the long term though you are taking on a different form of risk. It might be shallow risk but over the long term that shallow risk might hurt you a lot. I'd be more comfortable seeing my portfolio with a deep risk over the short term but knowing over the longer term I'm invested in assets that should appreciate in value.

I view an international index tracker as the gold standard of investing. I could even make an argument that due to the op's portfolio size the safest investment option for him is to be 100% in international equities. He would be invested in the most diversified option there is so he won't do poorly. To add to that as he doesn't have to draw down 4% or 5% per year so that when the market crashes he will be fine. It's simple and safe. Compare that to his current portfolio where 75% of his assets are risky over the longer term. Maybe property does well. Maybe it doesn't. Why take the risk ?

Drawing down 3.25%, with 25% in equities and 25% in property, I can't see that failing. If he was drawing down 5%, sure, but I just can't see it with 3.25%.

By the way, why do you consider property risky?

As for 100% international equities, just because you can do something doesn't mean you should. Why open yourself up to the chance of seeing your life savings halve, even if it is unlikely to stay down for decades, just no reason to go through the stress once you have won the game.

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #24 on: February 05, 2019, 07:43:55 AM »
ē You can go more aggressive with more equities, but with your amount of money, you simply don't need to. If you wanted to be more aggressive you could, but I would question why anyone would suggest it is in any way better.

I agree with basically all of your comments. Bogleheads are great. I disagree with this point though. 50% in poorly performing assets and 25% in property is risky especially over the longer term. It's a good sized portfolio but why take on such a high amount of risk in your portfolio under performing. If the property under-performs you are pretty much guaranteeing that your portfolio will lose significant value over the longer term. Property also tends to be risky with lower returns than stocks. This has not been the case in Australia but that doesn't give me any sense of security.

Honestly I view investing too little into equities as being risky. It's a different sort of risk. You might not realise it now. You feel safer. I just think it's a false sense of security. Over the long term though you are taking on a different form of risk. It might be shallow risk but over the long term that shallow risk might hurt you a lot. I'd be more comfortable seeing my portfolio with a deep risk over the short term but knowing over the longer term I'm invested in assets that should appreciate in value.

I view an international index tracker as the gold standard of investing. I could even make an argument that due to the op's portfolio size the safest investment option for him is to be 100% in international equities. He would be invested in the most diversified option there is so he won't do poorly. To add to that as he doesn't have to draw down 4% or 5% per year so that when the market crashes he will be fine. It's simple and safe. Compare that to his current portfolio where 75% of his assets are risky over the longer term. Maybe property does well. Maybe it doesn't. Why take the risk ?

Drawing down 3.25%, with 25% in equities and 25% in property, I can't see that failing. If he was drawing down 5%, sure, but I just can't see it with 3.25%.

By the way, why do you consider property risky?

As for 100% international equities, just because you can do something doesn't mean you should. Why open yourself up to the chance of seeing your life savings halve, even if it is unlikely to stay down for decades, just no reason to go through the stress once you have won the game.

I can definitely see his portfolio failing over the longer term. His portfolio is extremely risky because 50% will definitely lose real value and 25% is concentrated in an asset class that could go bust. Property especially investing in specific properties is the opposite of diversification. We don't know how property is going to perform so why take the risk. If I punted on one stock say in China with 25% of my portfolio would that be risky ? That is pretty similar to investing heavily in a couple of properties. Australian property has done great but it might not in the future. Why take this bet ?

I believe that 100% International equities with his withdrawal rate is significantly safer over time than his current portfolio. You seem to be thinking that a low WR and a conservative portfolio is safe. It is safe over the short term. It's extremely risky though over the longer term. His money can disappear over time. The point is that his current asset allocation means that he can go bust whereas a 100% equities portfolio and a low WR means he won't go bust ever. Maybe a better way to phrase this is that it's much more likely that he goes bust with his current portfolio rather than a rational 100% International equities portfolio especially with a low WR. Safe with relation to the current portfolio means that there is a definite chance of a slow but sure depletion of your portfolio. You won't get a massive drop but as potm there are a lot of people who were rich but aren't because they didn't diversify.

There are different types of risk. There are deep risks and shallow risks. Deep risks may be things like the stock market crashing 50%. That would suck with 100% International equities. The data that we have though says that stocks will rebound. With a portfolio like mentioned here that has 50% losing real money and 25% in a couple of concentrated positions it's I think much more risky than seeing a paper loss in your portfolio over a couple of years. That paper loss won't even affect your lifestyle if you are only withdrawing a little over 3%. If property doesn't perform well that 3% odd WR may actually fail. This could definitely happen and if you are risk averse why take that risk ? I doubt that there is a rational answer to this question because it doesn't make sense. I accept that we humans do irrational things and that is cool but maybe not to such an extreme level.

Go and play around with a high bond/cash allocation compared to a high equity allocation with a 3% WR. http://engaging-data.com/will-money-last-retire-early/?utm_source=mmm. I just did it and the high bonds/cash means you can run out of money whereas 100% equities is completely safe. The more stocks you have the safer you are over the longer term. This makes sense because inflation is your no 1 concern over the longer term and equities beat inflation.

There are I suppose 2 issues here:-

1. A lack of diversification which is risky. This is having too much of your portfolio in property and it's even worse it's concentrated in specific assets.
2. A lack of long term thinking and taking on too much long term risk. The small equity allocation means that you are exposed to a slow but sure depletion of your portfolio.

On top of that it's simpler and easier to just invest in a couple of funds that you don't really have to manage. You accept you can't pick markets, you accept the average return and you diversify as much as possible so that you aren't exposed to specific asset risks (such as purchasing individual stocks or individual properties).

Andy R

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Re: Help with a huge $ portfolio [Australia]
« Reply #25 on: February 05, 2019, 10:35:01 AM »
1. How does property go bust? Land doesn't suddenly become worthless.

2. What data do you have that says stocks will rebound? Data on stocks are extremely young relative to property.

3. Stock markets have gone under water for over decades (plural), and that is not just Japan, that includes the US crashed in 66 which only reached the same high almost 25 years later. Who cares if it "eventually" recovered if it takes two and a half decades of stress and worry.

4. As for long term risk, sure his money would disappear pretty aggressively over time if it was all in a day-to-day account and if he did not have an obscene amount of money.
Being in bonds or a HISA account means the interest will roughly offset inflation, so while that will not allow him to live off it indefinitely, it is not the same as cash. Any money that has not been used to live off will maintain purchasing power.
But yes, living off that would then deplete the portfolio over time.
However, with the amount of money OP has, he could still live entirely off this while the portfolio depletes and still make it comfortably through 50 years.
He has won the game - convincingly.
It may be your goal to take on more risk with a chance of ending up with 50 million dollars when you die, but that isn't everyone's goal.

It also doesn't matter if a 3% withdrawal rate is "completely safe" for 100% equities, because for the amount of money that OP has, even with 50% in bonds, he is also already "completely safe" because of the fact that we don't live for 200 years.


And again, I would really like to hear how land goes bust.

marty998

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Re: Help with a huge $ portfolio [Australia]
« Reply #26 on: February 05, 2019, 01:18:46 PM »
Frankly, I am bemused by the advice in this thread. Here we have a bloke who has literally made a fortune doing what he does best, and we're all advising him to change things up because we know better.

Honestly? Best thing you could do is build another warehouse. You know what you are doing, and you are successful at it. Why change a winning formula at all?

I wouldn't sell the commercial property, fine to keep that.

The more interesting question is "why are you here?" You have a net worth of almost $8m... and spending needs of $130k(?)

What is the plan, if not to die with tens of millions?
Lol Marty. Exactly! Donít worry i spent a decade earning 7 figures and living fast and loose with every toy  you could think off and every corner of the globe explored.  It was fun... for a while.  Then it becomes meaningless. Money is an interesting thing, we all work our arses off to get it, but few ever finally get financial freedom. When you do , you realise  itís not that important after all.  Or you go the other way and get greedy.  I see it this way. I have 8 chock chip cookies and a full stomach. . I can only ever eat 4 more.  So do i enjoy life and die with 4 cookies left or do i take 5 cookies and invest them aggressively, have sleepless nights to either run out of cookies before i die... or maybe die with 10 cookies.   When iím 6 feet under it doesnít matter if i have 4 or 10 cookies... i still cant eat them!!

Cookie Monster approves of this post, om nom nom.


chasingthegoodlife

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Re: Help with a huge $ portfolio [Australia]
« Reply #27 on: February 05, 2019, 01:43:56 PM »
Zebu12, I'm not going to wade into the asset allocation discussion, I will leave that to those most experienced.

What I want to suggest is that you take some time this year to review your estate planning. You say you have a great lawyer and accountant, so you may have recently done this and if so ignore me. But if not:
- When was the last time you did your will and financial POA, do the contents still reflect your wishes, where are copies and the original current stored, who knows where they are?
- What would be the impact on your SMSF and/or family trust if you lost capacity or passed away?
- Assuming that your partner will be your appointed decision making if you lose capacity/will inherit the majority of your joint assets upon your death, do they have the same level of knowledge about your investments and how to manage them? If not, would they like to learn more now or is there a trusted person (long term family accountant etc?) that could support them with this if needed?
- What is your adult children's understanding of your financial situation and of how you have set up your estate? The standard advice is to discuss estate planning decisions early and work through any concerns now, to avoid any conflict or bad feeling later when they will be vulnerable with grief, of course will depend on your situation. How is their financial knowledge? Would inheriting a large amount early in life be a positive or negative for them? Have you decided to pass on some of your wealth while you are alive and how will you do that in a way that promotes independence?
- Is there anyone else who might expect a 'piece of the pie' and how have you discussed with them what provision (or not) you have made for them?

Again please ignore if this is something you have done recently. However, I think with the level of assets you have the real risk is not that 15% of your assets will be allocated to a non-optimal class. It is very likely you will have 'enough'. For me a greater concern would be that such a 'big pile' has the potential to cause conflict among loved ones or leave them vulnerable should they suddenly be responsible for managing it without experience.

And of course staying physically and mentally healthy to enjoy your hard work! :)

Zebu12

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Re: Help with a huge $ portfolio [Australia]
« Reply #28 on: February 05, 2019, 05:06:14 PM »
This is a great discussion, that's what I love about investing forums, no two views are the same!!
Quote
What I want to suggest is that you take some time this year to review your estate planning. You say you have a great lawyer and accountant, so you may have recently done this and if so ignore me.
Absolutely! Risk mgmt 101. While our setup sounds complicated, it's actually rather simple. The wife I make sure is actively involved in everything, and could run everything her self if needed. (I had a good friend who passed away, and the wife didn't even know which bank they used ).  Most of my businesses involve dealing with overseas businesses and manufacturing and both my kids spent 3 to 4 weeks each year travelling with me on business trips since they were 9, sitting in on meetings and learning via observation how business is done.  With that foundation they will surpass my wealth by the time they are 30 for sure.

Quote
2. A lack of long term thinking and taking on too much long term risk. The small equity allocation means that you are exposed to a slow but sure depletion of your portfolio.
I agree, the long term risk is that the portfolio gets eaten away, but the size of the portfolio means it won't run dry before I die. And no sleep will be lost in market down turns. Also what we haven't taken into account, is I'll have more businesses that will generate an income, just that right now I'm enjoying following other passions. If the financial system, global politics wasn't so fragile, I would take a much more aggressive approach, but how do you fix a financial system that can't take anymore debt, and has few levers left to pull to kick a reckoning a little further down the road?  The market will deleverage at some point ( everything reverts to mean)  then it's a long sideways crawl for maybe a decade or more.   There is a lot of short term risk in markets.  If the market dropped 40% tomorrow, then I'd take proposed property purchase off the table and increase Equities.

Quote
How does property go bust? Land doesn't suddenly become worthless

Property ownership here seems to be the sore point. We all have different views. Below is an interesting article, comparing real estate vs shares. Overtime they perform similarly if you reinvested rent ( just like if you were reinvesting dividends from shares)

I obviously take the view that realestate for income from rent diversifies a portfolio.  commercial vs residential diversifies it further. Generally real estate has  lower correlation to Equities. It's a tangible asset. I don't see how they go bust like the share market regularly does. If realestate goes bust and loses 30% which is likely this year in Australia, how is that different to losing 30% in the share market? People still pay rent, still need a house to live in. Last time I checked no one was producing new land close to cbd areas where people like to live.  Keep in mind Australia has population growth, which many countries don't.

https://seekingalpha.com/article/4101909-stocks-vs-real-estate-one-wins

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #29 on: February 05, 2019, 11:36:08 PM »
1. How does property go bust? Land doesn't suddenly become worthless.

This is the wrong assumption or the wrong question. It's not about going bust or going to zero. Your portfolio can be smashed a lot earlier than going to zero.

2. What data do you have that says stocks will rebound? Data on stocks are extremely young relative to property.

Really. I think that this statement is factually incorrect. We have a decent amount of data on stocks.

3. Stock markets have gone under water for over decades (plural), and that is not just Japan, that includes the US crashed in 66 which only reached the same high almost 25 years later. Who cares if it "eventually" recovered if it takes two and a half decades of stress and worry.

I think you have inaccurate data when it comes to stocks. Sure stocks go down and they can stay down for a while but your comments aren't really factually correct. Statistically stocks perform better than basically all other asset classes. We can now invest in stocks via index investing and not have to worry about picking the right stock (which we typically get wrong) at a low cost. It's a really really good deal.

4. As for long term risk, sure his money would disappear pretty aggressively over time if it was all in a day-to-day account and if he did not have an obscene amount of money.
Being in bonds or a HISA account means the interest will roughly offset inflation, so while that will not allow him to live off it indefinitely, it is not the same as cash. Any money that has not been used to live off will maintain purchasing power.
But yes, living off that would then deplete the portfolio over time.
However, with the amount of money OP has, he could still live entirely off this while the portfolio depletes and still make it comfortably through 50 years.
He has won the game - convincingly.
It may be your goal to take on more risk with a chance of ending up with 50 million dollars when you die, but that isn't everyone's goal.

It also doesn't matter if a 3% withdrawal rate is "completely safe" for 100% equities, because for the amount of money that OP has, even with 50% in bonds, he is also already "completely safe" because of the fact that we don't live for 200 years.

It's not as simple as your comments make it out to be. If he was 50% stocks and 50% bonds you are correct but he isn't. He is 50% bonds/cash and 25% property which could produce funny returns especially because it's not an index of property but a specific property. Another point I'd make is that if Zebu12 was confident in his positions the fluctuations shouldn't bother him. Personally I intend to be 100% stocks at some point in my investing life. I like bonds/cash for a small period of time to help mitigate against SOR.
« Last Edit: February 05, 2019, 11:39:08 PM by steveo »

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #30 on: February 05, 2019, 11:45:41 PM »
Frankly, I am bemused by the advice in this thread. Here we have a bloke who has literally made a fortune doing what he does best, and we're all advising him to change things up because we know better.

No we don't know better. We only have data and principles to go off. The data and principles are what is at issue here and not a I'm a better stock picker than you. Modern portfolio theory gives some pretty good guidelines.

Maybe a better way to phrase your comments is that you think that modern portfolio theory and data should be ignored because we all know better.

Someone who picks a portfolio based on the available data and who indexes isn't someone who thinks he knows better. He accepts that he doesn't know better. He accepts that he can't beat the market. He just mitigates against risk.

Honestly? Best thing you could do is build another warehouse. You know what you are doing, and you are successful at it. Why change a winning formula at all?

Yep. The good old double down approach. It can work. The people who do this think they know better and don't need to look at the facts.

To answer your questions regarding why change a winning formula the best answer I can give is to diversify your portfolio to mitigate against catastrophic risk. If the property portfolio doesn't work out Zebu is going to be poor. If he is risk averse then surely you would be bonkers to state double up.

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #31 on: February 05, 2019, 11:50:01 PM »
If the financial system, global politics wasn't so fragile, I would take a much more aggressive approach, but how do you fix a financial system that can't take anymore debt, and has few levers left to pull to kick a reckoning a little further down the road?  The market will deleverage at some point ( everything reverts to mean)  then it's a long sideways crawl for maybe a decade or more.   There is a lot of short term risk in markets.  If the market dropped 40% tomorrow, then I'd take proposed property purchase off the table and increase Equities.

Maybe you are correct but maybe not. I accept that I don't have the answer to this question. I'm not sure if it is really an issue. I just bet on the best performing asset class and diversify myself as much as possible. I don't trust my opinion. I trust the process.

I obviously take the view that realestate for income from rent diversifies a portfolio.  commercial vs residential diversifies it further. Generally real estate has  lower correlation to Equities. It's a tangible asset. I don't see how they go bust like the share market regularly does. If realestate goes bust and loses 30% which is likely this year in Australia, how is that different to losing 30% in the share market? People still pay rent, still need a house to live in. Last time I checked no one was producing new land close to cbd areas where people like to live.  Keep in mind Australia has population growth, which many countries don't.

https://seekingalpha.com/article/4101909-stocks-vs-real-estate-one-wins

You have enough in property. I agree with your comments but again I don't believe in picking markets. Just pick a portfolio and invest on those principles.

Minion

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Re: Help with a huge $ portfolio [Australia]
« Reply #32 on: February 06, 2019, 12:01:36 AM »
Frankly, I am bemused by the advice in this thread. Here we have a bloke who has literally made a fortune doing what he does best, and we're all advising him to change things up because we know better.

Honestly? Best thing you could do is build another warehouse. You know what you are doing, and you are successful at it. Why change a winning formula at all?


This right here.

marty998

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Re: Help with a huge $ portfolio [Australia]
« Reply #33 on: February 06, 2019, 12:09:50 AM »
Frankly, I am bemused by the advice in this thread. Here we have a bloke who has literally made a fortune doing what he does best, and we're all advising him to change things up because we know better.

No we don't know better. We only have data and principles to go off. The data and principles are what is at issue here and not a I'm a better stock picker than you. Modern portfolio theory gives some pretty good guidelines.

Maybe a better way to phrase your comments is that you think that modern portfolio theory and data should be ignored because we all know better.

Someone who picks a portfolio based on the available data and who indexes isn't someone who thinks he knows better. He accepts that he doesn't know better. He accepts that he can't beat the market. He just mitigates against risk.

Honestly? Best thing you could do is build another warehouse. You know what you are doing, and you are successful at it. Why change a winning formula at all?

Yep. The good old double down approach. It can work. The people who do this think they know better and don't need to look at the facts.

To answer your questions regarding why change a winning formula the best answer I can give is to diversify your portfolio to mitigate against catastrophic risk. If the property portfolio doesn't work out Zebu is going to be poor. If he is risk averse then surely you would be bonkers to state double up.

Now hang on a minute, the bloke tells you he's not comfortable with a high asset allocation to shares, and you recommend him to..... have a high allocation of shares?

Yes yes, I studied Portfolio Theory in 2nd year finance, Fama and French and all that. No need to school me on the efficient market hypothesis.

The point is, this guy didn't get $8m and more in the usual way. He has a wealth generation method that works much better than us mere mortals who (rightly so) should accept the mundanity of index funds.

And on the topic of "catastrophic" risk - little thing called insurance comes in handy here.

steveo

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Re: Help with a huge $ portfolio [Australia]
« Reply #34 on: February 06, 2019, 12:18:46 AM »
Frankly, I am bemused by the advice in this thread. Here we have a bloke who has literally made a fortune doing what he does best, and we're all advising him to change things up because we know better.

No we don't know better. We only have data and principles to go off. The data and principles are what is at issue here and not a I'm a better stock picker than you. Modern portfolio theory gives some pretty good guidelines.

Maybe a better way to phrase your comments is that you think that modern portfolio theory and data should be ignored because we all know better.

Someone who picks a portfolio based on the available data and who indexes isn't someone who thinks he knows better. He accepts that he doesn't know better. He accepts that he can't beat the market. He just mitigates against risk.

Honestly? Best thing you could do is build another warehouse. You know what you are doing, and you are successful at it. Why change a winning formula at all?

Yep. The good old double down approach. It can work. The people who do this think they know better and don't need to look at the facts.

To answer your questions regarding why change a winning formula the best answer I can give is to diversify your portfolio to mitigate against catastrophic risk. If the property portfolio doesn't work out Zebu is going to be poor. If he is risk averse then surely you would be bonkers to state double up.

Now hang on a minute, the bloke tells you he's not comfortable with a high asset allocation to shares, and you recommend him to..... have a high allocation of shares?

Yes yes, I studied Portfolio Theory in 2nd year finance, Fama and French and all that. No need to school me on the efficient market hypothesis.

The point is, this guy didn't get $8m and more in the usual way. He has a wealth generation method that works much better than us mere mortals who (rightly so) should accept the mundanity of index funds.

And on the topic of "catastrophic" risk - little thing called insurance comes in handy here.

I'd recommend a high allocation of shares to everyone because that is what the data says is the smart option. The biggest risk to your portfolio over time is inflation and stocks are the best hedge against that. I also though recognise that he is a human being and he gets to pick a portfolio that he is comfortable with. As this is the case I recommended a couple of other options to him as well. Zebu has to decide what is right for him.

Yes a little bit of insurance would help. The best way to insure his portfolio would be to purchase something like VGS. Insuring your property and then if that market under-performs won't help one little bit.

I disagree with the point about he made it to this level. Yes he did and that is fantastic. That doesn't mean though that he should just keep doubling up. He has come here for some advice and I think we should provide advice that is based on what appears to be solid principles. Sure those principles may change and then we should adjust our recommendations based on those changes but at the moment the advice that I've stated is really just the same advice that I'd suggest is considered best practice.

bigchrisb

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Re: Help with a huge $ portfolio [Australia]
« Reply #35 on: February 06, 2019, 02:23:16 AM »
Hi Folks,

I was hoping to get some advise around my asset allocations and investment strategy on a not so usual portfolio! 
What's everyone's thoughts here?

You are getting the very conventional advice here, which will work for anyone starting from zero investments and an income.  You said it in the first line - you have a not so usual portfolio and are already retired for all intents and purposes.  Congratulations - what you have done has already won the game.  You have double what you need to maintain your desired spend rate.  You should give thought to avoiding loss - getting sued, divorce, defrauded - all weapons of mass financial destruction.

From what you have posted, my thoughts are:

- You say you need about $130k a year to spend.  I assume that's after tax, so spending $130k, not the post tax equivalent of $130k?  A lot of the advice on here ignores the impact of taxes on returns, as when drawing a low lifestyle (say $30-40k) the impact of taxes is minimal.  Want a higher burn rate and you need to factor in more tax.  I assume the trust means you can split income as needed and will  end up with $65k post tax for each you and your wife.    So splitting this to $65k post tax for you and your wife you need your pre-tax income to be closer to $90k each, for $180k total and $50 to the tax man, if its all from earnings.  Moving $50k a year into super from capital (as I think you are doing) will help offset this  a bit.

- The super fund would have enough earnings in it to support your lifestyle, with zero earnings in your own name, you have assumed from 65 (18 years away)
- You already have $20k earnings from the granny flat.  You could spend capital for the remaining $110k for 18 years (call it $2m) and take zero risk on that if you chose.  To me, that's the absolute maximum you should have in fixed income/bonds/bank deposits - anything above this is just gravy.   So, at a minimum you should put the other $2m into some form of growth assets.  I prefer shares, but you appear to know and prefer commercial property, so pick your flavour.  I personally can't get resi real estate to stack up. 
-  I fear losing portfolio value to inflation far more than market volatility. Over the long term, the difference between cash and equities has been 4-5% per year.  Post tax, cash has almost always had a negative real return - a slow, almost guaranteed loss.  Hence I prefer an asset allocation heavily skewed to growth assets.

I'm also semi-fired with enough assets to support double my burn rate - albeit about 10 years younger, with a toddler and a still working spouse. I've done what I can to optimise structures via smsf, company and trust.  I have my asset allocation as mostly shares (albeit more Aus biased than I think I should have), with a couple of years worth of spend in cash.  The dividends roughly double what I need to spend at the moment, so I reinvest what I don't need and let it keep rolling.  The thing is, when you are drawing under 2% of a portfolio (including super value here), you need to see a massive cut in dividend income to need to draw capital, and even if you do, the amount you would end up drawing has limited impact on the portfolio. 

If I were in your shoes, I'd leave the SMSF as it is, putting future earnings/contributions into share.  I'd put $2m of the trust that is currently fixed income to work in growth assets (shares make sense to me, but if you prefer property go for it, but consider non-resi).  $1m in term deposits and bonds is still a decade of your burn rate, with zero other earnings.

I'd also give some thought to what you enjoy and want to spend your time doing.  Sipping cocktails is fun for a while, but gets a bit boring after a year or so.  No point having the worlds best asset allocation if you lose your mental of physical health. 





Zebu12

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Re: Help with a huge $ portfolio [Australia]
« Reply #36 on: February 07, 2019, 06:43:29 AM »
bigchrisb -  great comments and balanced suggestions  - much appreciated .

Steveo -   I read thru those 4 Books from William  Bernstein. Great reading.

What I loved most Ė (and this reinforces my initial thinking ) was a great quote from ď Rational Expectations: Asset Allocation for Investing Adults (Investing for Adults Book 4) (p. 118). ď

Quote
If you learn nothing else from this book, remember this: the purpose of your investment plan is to accumulate an LMP  (Liability Matching portfolio) tailored to your retirement needs.  (LMP is the amount of money necessary to cover a retireeís future basic living expenses.

Your LMP, once achieved, should be sacred and should never, ever take a back seat to your desire for higher returns. The purpose of investing is not to simply optimize returns and make yourself rich. The purpose is to not die poor. Warren Buffett most succinctly expressed this concept in a commentary on the 1998 bankruptcy of Long Term Capital Management: ďTo make the money they didnít have and they didnít need, they risked what they did have and did need.Ē2 In other words, once youíve won the game, the wisest thing is to stop playing. This doesnít mean to sell all your stocks the moment you reach your LMP. Rather, it means not to retire until youíve reached it, and if you do acquire it before you retire, to start moving the risk out of your portfolio. ]

Sums up where I was coming from in those first few posts.

I love the LMP idea.  For me it would work like this:

I have $4M outside Super + $2.3M inside Super =  $6.3M  (excludes my own home worth $1.5M)

Im 47.  Iíll die at  85.  I need  42 years of LMP @ $130K =  $5.46M  (So in some ways Ė the game is already won (before inflation) 

Now I have 18 years until I can get to Super so Ė really all I need  is 18 x  $130K = $2.34M in cash/fixed interest until age 65 (or $2.8M if I allow 3% annual inflation)

So $2.5M is what should be taken off the table now. That leaves  1.5M to invest into the share market / growth assets.  (I will probably drop the resi rental idea)   If the market drops 90%...I wont lose a wink of sleep. If it does just 'average returns'  Ė I will more than have made up for inflation and taxes eating away at the fixed interest side of the portfolio.

I then structure the funds accumulating in Super so that I have around $2M in fixed interest by 65,  (that covers my LMP out until 77) which will leave $2m in the share market and plus the   commercial property in super worth around $3M.  (again based on really bad returns - love to work with worst case scenarios. )

Iíll actually probably hold a higher a much amount in fixed interest now outside of super  (and lower equities)  and on the flip side hold more equities in Super and less cash Ė to get the best tax efficiency on capital gains.

This turns out to be a low risk  asset allocation Ė because  LMP is always off the table at all times and never exposed to risk  at any point. If teh s$%T does hit teh fan - im cashed up enough to re-allocate to fight inflation or take opportunities as they arise.

I have had a great day developing  a 50+ column spreadsheet that   extrapolates the data out Ė working on very conservative rates of returns and worst case scenarios, allowance  for CGT, income tax,

At age 65 Ė the portfolio is worth around $10M (which in todays dollars is around $5m (based  on 3% inflation, cash returning 2% and the equities 5.5%) Ė so yes itís a Ďriskí that I lost real value of $1.5million. But thatís a worst case return scenario. Then compound interest starts to kick in and the kids should be well taken care of when im gone!

Thanks again everyone for your thoughts and ideas. So helpful!

nath

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Re: Help with a huge $ portfolio [Australia]
« Reply #37 on: Today at 03:53:10 AM »
Hi fellow Aussie.

Quite an interesting financial situation you are in, with the paid off expensive commercial property in super is something very different.  For a super fund it is completely un-divisified but it sounds like it gets great rent and it will of course keep appreciating over the longer term. The net rent I assume gets cashed and then is used to purchase the shares over time? Keep that going to infinity for sure. In 20 years time the share portion of that super fund might be worth more than your property.

As for the $4mill burning a hole in your pocket, sure you donít want to risk it all but the painful thing with such a large amount of money is you certainly donít want it sitting in a bank account earning 2-3% with full inflation risk, no appreciation and a taxed return.
It may take a lot more investment reading from your side to truly understand it, it took me years to finally grasp how simple it is, but buying an index fund takes care of everything.  The dividends re-invest and automatically grow your portfolio, inflation makes the price go up, and they have additional natural appreciation on top over the long term. Daily fluctuations up or down doesnít matter one bit. Index funds just build and build and build your wealth.
You never want to spend down and reduce your portfolio, you are only living off the returns, hence the 4% safe withdrawal rate.
Bonds / cash/ term deposits are costing you money every single day they are sitting idle.
The best index funds are the US ones, but then if you put all your eggs in that basket the currency risk is huge. So you maybe have several different indexes happening within your portfoloio.

Australian Property is also good as you know.
Just my personal perspective I would consider investment properties that have mortgages much more diversified as you are using other peoples money.
Consider this if/when buying the next IP that you may want to take out an 50-80% mortgage on it. Even in your retired no debt state it could offset some tax and you could buy several more properties if you wanted to. With a large enough deposit they would still be positive geared.
The returns are pretty similar overall in my opinion to shares. Just that RE is usually leveraged so itís magnified.
Good luck and happy sailing.