Author Topic: Australian Investing Thread  (Read 538174 times)

FFA

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Re: Australian Investing Thread
« Reply #800 on: April 22, 2015, 03:49:42 PM »
There's no scientific solution, it mightve been better to put a range as i have posted in the past, anywhere from 70/30 to 40/60 (aus/global) is good i reckon. Depending on your personal desire for home bias to collect franking credits etc. vs your desire for diversification.

i also try to hold higher aus shares outside super and higher global in super. As per other posts on asset location.

slothman

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Re: Australian Investing Thread
« Reply #801 on: April 22, 2015, 09:56:22 PM »
There's no scientific solution

If I wanted to do more reading....is there an optimal split? Right now im 75 aus (LICs and VAS) : 25 overseas (VGS)....

P.S. when are you going to start posting on your blog again? :)


potm

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Re: Australian Investing Thread
« Reply #803 on: April 22, 2015, 10:36:27 PM »
Some of the factors in the analysis on page 14 are inaccurate though, especially transaction costs.

FFA

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Re: Australian Investing Thread
« Reply #804 on: April 23, 2015, 01:56:24 AM »
There's no scientific solution

If I wanted to do more reading....is there an optimal split? Right now im 75 aus (LICs and VAS) : 25 overseas (VGS)....

P.S. when are you going to start posting on your blog again? :)
Hi Slothman, aiming to start writing again in May.... still surrounded by boxes here, our sea container arrived last week. Mmm forum has been a welcome procrastination from the joys of unpacking. I thought we werent materialistic people but i am dismayed by the amount of stuff we accumulated!

dungoofed

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Re: Australian Investing Thread
« Reply #805 on: April 23, 2015, 03:18:09 AM »
Regarding optimal splits, this might be one place to start:

https://www.stockspot.com.au/how-it-works/portfolios/

Scroll down to the bottom, if you remove bonds and gold, the ratios for the most and least aggressive portfolios would be:

Topaz: 67% / 33% (Aussie/International)
Amethyst: 46.5% / 53.5%

To me this seems quite heavy home bias. My stock holding targets 33% Australian stocks, but I often think it is way too high considering the Australian stock market makes up 2% of the global market.

superannuationfreak

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Re: Australian Investing Thread
« Reply #806 on: April 23, 2015, 06:04:44 AM »
I'm starting to think about the principles of asset location for the Australian prospective early-retiree
.....
3. I focus alot on practical issues too, like holding my international shares (hedged) allocation in super since its easiest and lower cost to add regularly in small chunks.
5. IMHO asset allocation is more important to get right than location.

Broadly agree with your last point, although there are some assets that aren't worth holding when 'taxable'.

On 3. I forgot about hedged funds, thanks; currency hedged international is definitely best held in Super as the hedging income is taxed as ordinary income in my experience.  It came as a shock the first time I saw it, from memory the value of my holdings actually went down (due to share market fluctuations) but I still had to pay tax on the hedging income.

Two things related to other parts of the thread.

On ASX diversification, in Super I've considered the Colonial Wholesale version of the Realindex Australian Small Companies fund.  It's definitely pricier than I'd like at 0.89% p.a. (Super version) and I think/hope cheaper alternatives will arrive over time.  But it is the closest we have to a Small Value Index fund and if held in Super the fee 'lock-in' is mitigated (if something cheaper comes along and you switch your super you don't directly pay the capital gains tax in a pooled fund, it effectively gets spread over the remaining unit holders).

On International diversification there really isn't a correct answer.  For maximal diversification, aim for only a few % in Australia.  For maximal tax advantages a higher amount makes sense.  The (expected) efficient frontier would lie somewhere in between.  I personally wouldn't be comfortable with less than 30% of my equities being International, or more than 60% International.  50/50 is a pretty usable rule of thumb but whatever you choose needs to be a strategy you can stick with.

slothman

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Re: Australian Investing Thread
« Reply #807 on: April 23, 2015, 07:23:25 AM »
50/50 is a pretty usable rule of thumb but whatever you choose needs to be a strategy you can stick with.

But VGS only spits out 2% without franking credits :(

Edit: Just to confirm is the 4% SWR based on selling part of your portfolio every year to fund the difference between the 2% divs and living expenses?
« Last Edit: April 23, 2015, 07:28:04 AM by slothman »

steveo

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Re: Australian Investing Thread
« Reply #808 on: April 23, 2015, 03:18:36 PM »
50/50 is a pretty usable rule of thumb but whatever you choose needs to be a strategy you can stick with.

But VGS only spits out 2% without franking credits :(

Edit: Just to confirm is the 4% SWR based on selling part of your portfolio every year to fund the difference between the 2% divs and living expenses?

The 4% rule is about withdrawing that amount of money every year from your portfolio. It doesn't matter if its dividends or selling down your portfolio.

Australia though has relatively high dividends that are also franked so you might receive dividends of say $5k plus a potential tax rebate of say $2k. I think that is pretty significant.

I'm still leaning towards a 50/50 split however I can see the advantage of just doing 100% VAS.

slothman

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Re: Australian Investing Thread
« Reply #809 on: April 23, 2015, 04:01:27 PM »
I'm still leaning towards a 50/50 split however I can see the advantage of just doing 100% VAS.

I can see the advantage of international diversification but having a tough time reconciling ~5.7% gross yields offered by the ASX vs 2% yields of international index fund (VGS).

This is from the perspective of early retirement (investments held outside of super, and never having to sell assets to fund lifestyle).

I might need to overcome my fear of selling if I want to maintain a decent level of diversification and not having to amass a bigger stache than i would've if I was 100% LICs/VAS.

Edit: 5.7% grossed up yield based on 4% fully franked divs (e.g. AFI)
« Last Edit: April 23, 2015, 04:12:48 PM by slothman »

slothman

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Re: Australian Investing Thread
« Reply #810 on: April 23, 2015, 04:29:42 PM »
Would it be safe to say that markets like the US have a higher share price growth potential? Hence in exchange for a lower yield I can expect higher capital growth, a portion of which I can sell to fund lifestyle?

Figure 2 in the article below seems to indicate a large portion of returns from US and Japan are from capital growth.
https://www.credit-suisse.com/ch/en/asset-management/news-and-insights/insights.article.html/article/pwp/en/asset-management/2013/a-decent-dividend-yield-please.html

FFA

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Re: Australian Investing Thread
« Reply #811 on: April 23, 2015, 05:02:09 PM »
Would it be safe to say that markets like the US have a higher share price growth potential? Hence in exchange for a lower yield I can expect higher capital growth, a portion of which I can sell to fund lifestyle?

Figure 2 in the article below seems to indicate a large portion of returns from US and Japan are from capital growth.
https://www.credit-suisse.com/ch/en/asset-management/news-and-insights/insights.article.html/article/pwp/en/asset-management/2013/a-decent-dividend-yield-please.html
yes, with much bigger sectors like IT and also healthcare. Based on history too, the breakdown of returns is more CG and less dividend in the US.

Australia is heavily tilted to dividends, I think due to heavy financial sector weighting (mature companies). Also i'm sure it's been pumped up further lately with companies maximising dividends at all costs to keep yield hungry investors happy.

Roundabouts

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Re: Australian Investing Thread
« Reply #812 on: April 23, 2015, 05:22:24 PM »
I don't have any per-market stats on how effective it is for companies to pay out profits vs reinvesting them, but Roger Montgomery has been running a series on it recently.

http://rogermontgomery.com/costly-dividends/

It is also a common theme among retirees, so there's plenty out there on the benefits and drawbacks of investing primarily for income (sorry, I don't have anything to hand).

potm

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Re: Australian Investing Thread
« Reply #813 on: April 23, 2015, 05:42:21 PM »
US companies pay lower dividends and do more share buybacks because of tax implications.
There is concessional treatment of dividends but it is not as good as franking credits.

slothman

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Re: Australian Investing Thread
« Reply #814 on: April 23, 2015, 09:05:08 PM »
There is concessional treatment of dividends but it is not as good as franking credits.

What kind of concessions and how does it get treated on our tax returns?

bigchrisb

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Re: Australian Investing Thread
« Reply #815 on: April 23, 2015, 09:26:00 PM »
I don't have any per-market stats on how effective it is for companies to pay out profits vs reinvesting them, but Roger Montgomery has been running a series on it recently.

http://rogermontgomery.com/costly-dividends/

It is also a common theme among retirees, so there's plenty out there on the benefits and drawbacks of investing primarily for income (sorry, I don't have anything to hand).

Its an underlying issue with dividend imputation, which means income distributed from a company gets treated at a taxpayers marginal rate.  For a zero tax payer, they would be far better off getting a dividend than having profit reinvested in the company.  For a high rate taxpayer, they are better off with it not distributed, and hence reinvested at the company tax rate.

For example:

A company makes $1 of profit.  It pays 30 cents tax, leaving 70 cents.  It can either distribute all, part or none of this 70 cents.   

The company chooses to distribute the 70 cents, with a 30 cent franking credit. 
Our zero tax payer (say a super fund in pension mode) gets the 70 cents, and then gets the franking credit refunded.  It then has $1.00 it can spend or reinvest.
Our 49% taxpayer (high income earner) gets the 70 cents.  The taxpayer owes 49 cents in tax on this money.  They get a credit for the franking credit of 30 cents, and pay the remaining 19 cents.  They are left with 51 cents to spend or reinvest.

Instead, our company chooses not to pay a dividend, and invests the 70 cents. The price of a share goes up by 70 cents. Our shareholders would have to sell shares to access the funds.
Our zero tax payer would sell 70c of shares.  As they pay no tax, they don't pay any capital gains.  They have 70 cents to spend or invest. They are worse off than if the dividend was paid.
If our 49% taxpayer wants to reinvest the money in the company (not sell the shares), they have invested 70c.  They are better off than getting the dividend.  If they want to spend the money, they would have 70c of capital gain to declare.  Say they wait a year for the 50% discount.  They would pay 17c in tax (70*.5*.49), keeping 53 cents. They are better off than being paid the dividend.

So, if your tax rate is below the company tax rate, you want the dividends to be paid.  If your tax rate is above the company tax rate, you want earnings retained.   

For the Australian market, the value of super funds is about the same as the total market cap. i.e. they are one of the largest and most vocal investor classes, and have tax rates well below corporate tax rates.  Hence there is a strong incentive in the Australian market to have a high payout ratio, as it makes your stock more tax effective for one of your largest investor groups.  Indeed, you see a lot of large cap stocks running high payout ratios, while using DRPs to provide capital for expansion.

That's a significant part of my theory as to why payout ratios in Australia are substantially higher than other jurisdictions.


dungoofed

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Re: Australian Investing Thread
« Reply #816 on: April 23, 2015, 10:27:31 PM »
Great writeup! Too bad there is no "Aussie Hall of Fame" section.

One further effect is that you should see investment in growth stocks that may one day become dividend-spewing blue chips (or be bought out by an incumbent) during the accumulation phase. Indeed, I think potm has a strategy similar to this.

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Re: Australian Investing Thread
« Reply #817 on: April 23, 2015, 10:36:06 PM »
Yeah, great writeup!  I hadn't thought about the various tax situations.

steveo

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Re: Australian Investing Thread
« Reply #818 on: April 24, 2015, 02:20:00 AM »
I can see the advantage of international diversification but having a tough time reconciling ~5.7% gross yields offered by the ASX vs 2% yields of international index fund (VGS).

I'm struggling with this as well.

potm

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Re: Australian Investing Thread
« Reply #819 on: April 24, 2015, 03:22:32 AM »
A company makes $1 of profit.  It pays 30 cents tax, leaving 70 cents.  It can either distribute all, part or none of this 70 cents.   

The company chooses to distribute the 70 cents, with a 30 cent franking credit. 
Our zero tax payer (say a super fund in pension mode) gets the 70 cents, and then gets the franking credit refunded.  It then has $1.00 it can spend or reinvest.
Our 49% taxpayer (high income earner) gets the 70 cents.  The taxpayer owes 49 cents in tax on this money.  They get a credit for the franking credit of 30 cents, and pay the remaining 19 cents.  They are left with 51 cents to spend or reinvest.

Instead, our company chooses not to pay a dividend, and invests the 70 cents. The price of a share goes up by 70 cents. Our shareholders would have to sell shares to access the funds.
Our zero tax payer would sell 70c of shares.  As they pay no tax, they don't pay any capital gains.  They have 70 cents to spend or invest. They are worse off than if the dividend was paid.
If our 49% taxpayer wants to reinvest the money in the company (not sell the shares), they have invested 70c.  They are better off than getting the dividend.  If they want to spend the money, they would have 70c of capital gain to declare.  Say they wait a year for the 50% discount.  They would pay 17c in tax (70*.5*.49), keeping 53 cents. They are better off than being paid the dividend.

So, if your tax rate is below the company tax rate, you want the dividends to be paid.  If your tax rate is above the company tax rate, you want earnings retained.   

The capital gains calculation is not correct. You would only pay capital gains on the 70c you sold minus the cost base, not the entire amount. This may actually be a capital loss and decrease the amount of tax you have to pay on other gains. Still, the original 30c the company paid to the ATO is not ultilised in this scenario unless the company finds a way (see 2 lines below).
General dividends are better for ppl on lower tax brackets than higher but whether a dividend or selling shares to provide cash is more tax effective depends on the circumstance.
Overall, the most effective way for a company to distribute surplus cash is through buy backs at a discount to market value with a fully franked dividend component. This ultilises franking credits and provides them to those who can make most use of them and thus are willing to pay the highest price for the buyback, benefiting all share holders.

There's other factors to consider besides tax. It may not be tax effective to receive a dividend if you are on high income but it's still a hell of a lot better than the company blowing the surplus money on an overpriced acquisition that flops. Also dividends tend to be more stable than share prices (most of the time). This is important if you are relying solely on shares to provide your income to live. If the world goes totally insane tomorrow and share prices drop by 90%. It would be hard if you were selling shares regularly to fund your life. If the company is still able to generate profits and pay dividends as usual, then you are fine. of course shares dropping by 90% might affect the company's profits or some other event would have caused both prices and profits to go down together. We know that markets can be very irrational though, paying drastically different amounts for a dollar of earnings at different times.

Dividends are good but you shouldn't use the div yield as the only factor in judging an investment. Overseas countries tend to pay lower dividends because the tax incentives are different and as Chris mentioned, there isn't as significant ownership by lower tax bracket beneficiaries. Overall though, it is true that US stocks are more expensive than Australian shares at the moment. That may be justified based on higher growth prospects but who knows. It's hard enough to judge the growth prospects of a single company, let alone hundreds in an index. It was supposed to be passive index investing remember.

FFA

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Re: Australian Investing Thread
« Reply #820 on: April 24, 2015, 04:35:37 AM »
interesting theory bigchrisb, maybe something in it, but I still favour the simple explanations for asx dividend orientation : 1) the sectoral breakdown and mature nature of the large companies in it, 2) Oz franking policy and huge investor demand for yield.   

Share prices jump on any surprise dividend increment, or plummet on any dividend disappointment, as per bhp's previous results. What would you do if you were a ceo ? even the resources stocks who should conventionally be growth companies with high re-investment, are trying to recast themselves as dividend plays....

I really don't know if the tax considerations are such a big driver of corporate strategy, or more an afterthought. Anyway, most of the MNC's use aggressive tax minimisation to lower their tax rate to negligible :(

CSL is a great example of a growth company, well managed over the  *long* term. Pays a small dividend, completely unfranked, but still a market favourite for the growth it has consistently delivered. The US market has loads of CSL's. The ASX has ..... well just CSL and perhaps a few more. If you know their names please let me know, I need some investment ideas ! :)
« Last Edit: April 24, 2015, 05:33:51 AM by FFA »

marty998

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Re: Australian Investing Thread
« Reply #821 on: April 24, 2015, 07:50:24 PM »
Great posts Chris, FFA, Potm.

One additional theory I have is that US executives are a little bit more entrepreneurial than their antipodean counterparts. They hence retain more profits to reinvest and grow their businesses...

Depends of course on the size of the company, it's sector, and stage of its lifecycle as FFA pointed out.

CSL is a great example of a growth company, well managed over the  *long* term. Pays a small dividend, completely unfranked, but still a market favourite for the growth it has consistently delivered. The US market has loads of CSL's. The ASX has ..... well just CSL and perhaps a few more. If you know their names please let me know, I need some investment ideas ! :)

Apart from CSL we really lack quality science, tech and biotech companies.

CSL used to be a government entity - Commonwealth Serum Laboratories. Since listing on the ASX if I recall correctly it's gone on to be a 100 bagger.

I know there was a big blowup last year about budget funding for the CSIRO....perhaps if the government privatised that one... well you never know if one day it could match the phenomenal performance of CSL.

AustralianMustachio

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Re: Australian Investing Thread
« Reply #822 on: April 26, 2015, 08:17:23 AM »
I have been having thoughts recently about "safe withdrawal rates" in Australia. I have read that the rate varies across different countries, and in Australia it might be closer to 3% than 4%, etc. etc.

However for me I'm thinking much more about an early semi retirement if anything, not a complete retirement. I do creative work which I love, however in the main it's not always paid well and I have to choose jobs I like a lot less, which pay a lot better. So I wouldn't be living 100% off the income, it would just be there to support me to choose the jobs based on what I really like and not consider the money aspect.

For my situation, and I'm sure many others are like me in the stashing stage, my portfolio is almost 100% shares. I can't see why I over the very long term, I wouldn't just be able to "safely withdraw" the dividend yield, and allow any capital gains to keep my portfolio growing over time. Yes, it will grow less than if I reinvested the dividends, but it's not going to go backwards over the long term.

In that case, with an 100% shares portfolio (say 70% Australian Shares and 30% International) with a grossed up yield of around 5%... the safe withdrawal rate should be... 5%?

So if I'm looking to semi retire with a portfolio of shares, I can actually work with a higher safe withdrawal rate, due to the franking component.

Sure, if there was a crash, the dividends might go down or dry up. But I I've read interviews with bankers etc. that in general, the companies on the ASX "know the deal" and will rather fire people than cut dividends. And if the dividends really did stop completely, it would be unlikely to affect me beyond having to pick up some less enjoyable work to make up for the lost income. Capital loss won't affect me because I'm not looking to sell down my portfolio to fund my lifestyle. All the while the portfolio is growing, and once I get older and closer to full retirement, I would gradually switch the asset classes over to more stable income assets.

So this sounds great in theory. And makes my semi retirement goal seem closer. Anyone care to point out any holes with this idea?

FFA

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Re: Australian Investing Thread
« Reply #823 on: April 26, 2015, 08:45:34 AM »
Hi AustralianMustachio,

Not a hole but a clarification :

As I understand SWR it is real not nominal (after inflation), i.e. if you're assuming 5% return on investment assets and 2% inflation, then your SWR is 3%.  SO when people talk 4% SWR as a rule of thumb, I understand this to be 6-7% investment return (dividend plus capital growth) minus 2-3% inflation.

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Re: Australian Investing Thread
« Reply #824 on: April 26, 2015, 03:25:23 PM »
In that case, with an 100% shares portfolio (say 70% Australian Shares and 30% International) with a grossed up yield of around 5%... the safe withdrawal rate should be... 5%?

So if I'm looking to semi retire with a portfolio of shares, I can actually work with a higher safe withdrawal rate, due to the franking component.

From what I gather the concept of SWR is based on selling down a small portion of shares to fund lifestyle. I don't feel 100% comfortable with this so I'm going to base my retirement on pure dividends only (including tax benefits of franking credits) with a cash buffer for GFC-type events.

The benefit of the franking credits is dependent on your marginal tax rate. Assuming your taxable income is less than $20k (ie your creative gig and dividends), you'll get 100% of the franking credit back as a tax refund.


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Re: Australian Investing Thread
« Reply #825 on: April 26, 2015, 03:43:16 PM »
My only thought is to have a margin of safety for your late 50s/60s. It can be more difficult to pick up work at this age. Otherwise it seems a good plan to me - I enjoy downshifting.
Journalling at Happy Aussie Downshifter

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Re: Australian Investing Thread
« Reply #826 on: April 26, 2015, 05:36:59 PM »
Couldn't we consider Superannuation as a margin of safety for early retirees? If things do go bad, odds are we'll have a few extra hundred thousand to top up with when we reach preservation age, if need be.

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Re: Australian Investing Thread
« Reply #827 on: April 26, 2015, 06:26:20 PM »
perhaps there is a margin of safety in that you are not taking credit for capital growth. You will still need some, eg 2% to cover inflation as per my above post, but this is very conservative based on history

If you are confident in your assumption that companies won't backtrack on div yields, then it seems to make some sense.

Just be mindful it's an aggressive asset allocation, and you really need to be committed to stay the course. If you are unlucky and have a GFC like event around the time you are planning to retire, then that is the big risk you face. Cast your mind back 7/8 years. Are you comfortable with this risk and is it worth it for the extra 1-1.5% SWR ? That's the question i'd be asking myself....

AustralianMustachio

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Re: Australian Investing Thread
« Reply #828 on: April 26, 2015, 06:55:34 PM »
Thanks for the responses guys.

Slothman what you said was pretty much the strategy I outlined, I believe - just live off dividends and never sell.

Re: margin of safety. Using this, over the very long term I believe my margin of safety was pretty conservative - all I'm assuming is that the share portfolio grows in line with inflation over the long term. Historically they grown much more than that.

And yes this is my strategy to support me in semi retirement / the late stage of my career. When the time came for full retirement, which is still 30+ years away for me, I would look at changing the strategy to a more conservative allocation.

Also good point bringing up super. I think that would indeed provide a pretty good margin of safety. However due to being self employed now, studying for a long time before, and just working part time jobs here and there... my super is very minimal at this stage. I checked an account and it had actually gone to 0! I have to decide how I want to proceed with super being a self employed person. But I'm thinking I will try keep almost all of my portfolio outside of super, that way I can access it for my semi retirement plans, and just contribute a pretty small amount here and there and allow it to compound for a few decades before I hit the relevant age to access it.

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Re: Australian Investing Thread
« Reply #829 on: April 26, 2015, 08:06:56 PM »
Slothman what you said was pretty much the strategy I outlined, I believe - just live off dividends and never sell.

Re: margin of safety. Using this, over the very long term I believe my margin of safety was pretty conservative - all I'm assuming is that the share portfolio grows in line with inflation over the long term. Historically they grown much more than that.

Basically my strategy too, with a couple more margins of safety.  I'm probably over-egging the safety however.
Core FIRE income: - live off 50% of passive income (dividends / net rents) from my investments outside of super.

Safety net 1: Reinvesting 50% of passive income (dividends/net rents) outside super.  If we hit financial turbulence, I'll erode some of this 50% to maintain my standard of living - i.e. maintain nominal income.  Will not start increasing FIRE income again until I'm back at 50%.

Safety net 2:  Assumption that dividends only increase with inflation.  Historically, they have done better than that.  If this continues, it will provide a real increase in FIRE income.

Safety net 3: Generate a bit of side income from some work that I find interesting, but not necessarily well paid.

Safety net 3: Super.  I've been contributing the full concessional contribution to my SMSF, and intend to keep doing so until I cease employment.  This will sit compounding in the background, and provide a boost if I need it come preservation age.

Safety net 4: Capital gain / capital sell down.  If the above three fail, I'm yet to touch any principal.  I can tap into this if needs be - hopefully it will never come to this.

Note - edited to try to come across less like bragging.   
« Last Edit: April 27, 2015, 12:08:38 AM by bigchrisb »

DrowsyBee

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Re: Australian Investing Thread
« Reply #830 on: April 26, 2015, 08:53:11 PM »
I get so god damn jealous every time you post about your financial position, Chris.

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Re: Australian Investing Thread
« Reply #831 on: April 26, 2015, 10:13:39 PM »
Random question: how can the last price for any given stock be off-step? For example, $4.665. It suggests to me that last price (like opening and closing price) is a formula, not a figure. Perhaps an even volume of 4.66 and 4.67 were sold at the same time?

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Re: Australian Investing Thread
« Reply #832 on: April 26, 2015, 11:24:22 PM »
Couldn't we consider Superannuation as a margin of safety for early retirees? If things do go bad, odds are we'll have a few extra hundred thousand to top up with when we reach preservation age, if need be.

I definitely don't think so as I think we should all be including super in our assets for when we FIRE. If you aren't including it then I think you should be.

DrowsyBee

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Re: Australian Investing Thread
« Reply #833 on: April 26, 2015, 11:54:11 PM »
Couldn't we consider Superannuation as a margin of safety for early retirees? If things do go bad, odds are we'll have a few extra hundred thousand to top up with when we reach preservation age, if need be.

I definitely don't think so as I think we should all be including super in our assets for when we FIRE. If you aren't including it then I think you should be.

I disagree. I'm 25 and won't be able to access my superannuation for 35 years. If I were to take advantage of how superannuation is taxed and just put a bunch of money straight into super, my net worth might be a whole lot, but it sure as shit won't help me retire early. For the purposes of ER, I don't think I'll start considering it part of my net worth until I'm about 50 years old. I even think of it in some way as a large inheritance. It's something I kind of expect to come my way in the future, but I don't know how much it'll end up being or when I'll ever get it. I've seen so many changes to Super over my first 25 years of my life, and now I have to go through another 25 + 10 before I can touch it.

If I become Financially Independent and still work, I'll definitely contribute to super because there's a lot of benefit to it, but right now I don't see it as a part of my net worth.

potm

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Re: Australian Investing Thread
« Reply #834 on: April 26, 2015, 11:57:27 PM »
I'm aiming for a similar approach to Chris.
Achieve a passive income amount sufficient for me to live off about 50% of it and investing the other 50% and continue to max out of the concessional contribution cap in retirement.

Another thing to consider when using a dividend target is the payout level of your investments. It's very different if you're holding something like CSL compared to YMAX.

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Re: Australian Investing Thread
« Reply #835 on: April 27, 2015, 12:19:35 AM »
And from the very long term to the very short term, anyone else enjoying watching the hedge funds getting creamed with the short squeeze on FMG?  Up 16% today, with a large portion at the end of the days trade.  Looks like a true short squeeze in place - I'm expecting to see a whole lot of short funds/punters getting margin calls over night.  Kind of enjoying watching the carnage of the speculators in a voyeuristic kind of way!

A good reminder of the reasons for staying diversified and long in our investments!


 

AustralianMustachio

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Re: Australian Investing Thread
« Reply #836 on: April 27, 2015, 01:07:36 AM »
Great discussion, as always.

It seems a few people have similar goals to me. Using this as a strategy, the higher the dividend yield of your portfolio, the lower the actual amount of capital needs to be, and hence the time it takes to reach this amount (and FIRE) is reduced. This makes Australian high yielding shares seem much more appealing than international. However we then run into the problem of diversification.

This has been discussed at length here. I think most people concluded that somewhere between 25-50% international exposure would be enough. However 25% is obviously more appealing, since 75% Australian shares gives a much better dividend yield than 2%, and hence you don't need to amass as much capital. Even more so if you include some VHY instead of VAS.

How dangerous would it be to not have much international exposure? I know many SMSFs probably have extremely minimal international holdings. What is the risk really - that Australia enters a recession while the rest of the world's businesses do really well? I know in the other thread about mustachian philosophy in Australia, Dodge was advising that as Australians we should underweight Australia. However over the last hundred years or so the ASX has done well along the rest of the world, so along with the dividend yield, the home bias appears to be calling me!
« Last Edit: April 27, 2015, 01:10:23 AM by AustralianMustachio »

steveo

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Re: Australian Investing Thread
« Reply #837 on: April 27, 2015, 01:15:30 AM »
Couldn't we consider Superannuation as a margin of safety for early retirees? If things do go bad, odds are we'll have a few extra hundred thousand to top up with when we reach preservation age, if need be.

I definitely don't think so as I think we should all be including super in our assets for when we FIRE. If you aren't including it then I think you should be.

I disagree. I'm 25 and won't be able to access my superannuation for 35 years. If I were to take advantage of how superannuation is taxed and just put a bunch of money straight into super, my net worth might be a whole lot, but it sure as shit won't help me retire early. For the purposes of ER, I don't think I'll start considering it part of my net worth until I'm about 50 years old. I even think of it in some way as a large inheritance. It's something I kind of expect to come my way in the future, but I don't know how much it'll end up being or when I'll ever get it. I've seen so many changes to Super over my first 25 years of my life, and now I have to go through another 25 + 10 before I can touch it.

If I become Financially Independent and still work, I'll definitely contribute to super because there's a lot of benefit to it, but right now I don't see it as a part of my net worth.

Maybe you can answer some questions to help clarify your approach.

1. Do you consider becoming FI means that you don't have to work for life ?
2. Do you believe that you will live past 60 ?

If the answer to both questions is yes then I think you have to include super. If the answer to the second question is no then super is probably meaningless for you and you shouldn't include it. If the answer to question 1 is no then I suppose you can cut it however you want too.

steveo

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Re: Australian Investing Thread
« Reply #838 on: April 27, 2015, 01:20:55 AM »
It seems a few people have similar goals to me. Using this as a strategy, the higher the dividend yield of your portfolio, the lower the actual amount of capital needs to be, and hence the time it takes to reach this amount (and FIRE) is reduced. This makes Australian high yielding shares seem much more appealing than international. However we then run into the problem of diversification.

This has been discussed at length here. I think most people concluded that somewhere between 25-50% international exposure would be enough. However 25% is obviously more appealing, since 75% Australian shares gives a much better dividend yield than 2%, and hence you don't need to amass as much capital. Even more so if you include some VHY instead of VAS.

How dangerous would it be to not have much international exposure? I know many SMSFs probably have extremely minimal international holdings. What is the risk really - that Australia enters a recession while the rest of the world's businesses do really well? I know in the other thread about mustachian philosophy in Australia, Dodge was advising that as Australians we should underweight Australia. However over the last hundred years or so the ASX has done well along the rest of the world, so along with the dividend yield, the home bias appears to be calling me!

I find this a really tough issue at this point. I lean towards a significant home bias due to the increased dividend yield and franking credits. I'm starting to think that the quickest and possibly safest path to FI is to utilise predominantly VAS and then post FI redistribute my assets more towards bonds and overseas shares.

Say I invested completely in VAS outside of super and then went for a cash back-up and then over the course of being retired put a little more into bonds and os shares. I think that this approach would be pretty robust. It might be more risky with regards to a lack of geographical diversification but the pay off for the lack of geographical diversification might mean getting to FI earlier.

terrier56

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Re: Australian Investing Thread
« Reply #839 on: April 27, 2015, 01:37:35 AM »
Couldn't we consider Superannuation as a margin of safety for early retirees? If things do go bad, odds are we'll have a few extra hundred thousand to top up with when we reach preservation age, if need be.

I definitely don't think so as I think we should all be including super in our assets for when we FIRE. If you aren't including it then I think you should be.

I disagree. I'm 25 and won't be able to access my superannuation for 35 years. If I were to take advantage of how superannuation is taxed and just put a bunch of money straight into super, my net worth might be a whole lot, but it sure as shit won't help me retire early. For the purposes of ER, I don't think I'll start considering it part of my net worth until I'm about 50 years old. I even think of it in some way as a large inheritance. It's something I kind of expect to come my way in the future, but I don't know how much it'll end up being or when I'll ever get it. I've seen so many changes to Super over my first 25 years of my life, and now I have to go through another 25 + 10 before I can touch it.

If I become Financially Independent and still work, I'll definitely contribute to super because there's a lot of benefit to it, but right now I don't see it as a part of my net worth.

Maybe you can answer some questions to help clarify your approach.

1. Do you consider becoming FI means that you don't have to work for life ?
2. Do you believe that you will live past 60 ?

If the answer to both questions is yes then I think you have to include super. If the answer to the second question is no then super is probably meaningless for you and you shouldn't include it. If the answer to question 1 is no then I suppose you can cut it however you want too.

I think the main concern is if you are drawing down on 4% of total (Stash + Super) will this cause your stash to expire before you reach preservation age.

This is a legitimate question and one that effects me. I have runs some numbers and come up with this.

The stash to super ratio is the key.

Retire at 30 and you need a minimum stash to super ratio of 3.02 (Investment accounts outside of super > 3.02*super)
35 - 2.32
40 - 1.74
45 - 1.25
50 - 0.86
55 - 0.54

If you get to these amounts then you are out of the woods when it comes to not drawing your stash dry.

happy

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Re: Australian Investing Thread
« Reply #840 on: April 27, 2015, 03:55:28 AM »
I'm not sure about your calculations for the high end of the range Terrier56.  If you are 55 you need 5 years worth of money til 60, but then after 60 you might need 25,30,40 years worth. Not sure how your pre 60 money needs to be as much as half your super money for that difference. I'm thinking more like .25/maybe .3, back of envelope calculation.

Currently I'm running 50:50 Aussie:international shares in my super fund. This year I'm planning to change to SMSF…think I've learnt enough to feel up to the job. I'm appreciating the conversation about this. My desired proportion of  Aussie dividend shares is one thing I'm considering.  At the moment I don't even know what  makes up "Aussie shares" with any accuracy. The other annoying thing is that I can't readily tell how much return I'm getting in dollar terms unless I calculate it, because the fund tells me x is returning y%PA, and does not clarify the amount in $terms with regard to capital gain/dividend yield on my statement.  I can do the math to calculate return, but not see what it is made up of.

edit last 2 sentences to more clearly reflect the issue
« Last Edit: April 27, 2015, 04:01:08 AM by happy »
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DrowsyBee

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Re: Australian Investing Thread
« Reply #841 on: April 27, 2015, 05:59:08 AM »
Maybe you can answer some questions to help clarify your approach.

1. Do you consider becoming FI means that you don't have to work for life ?
2. Do you believe that you will live past 60 ?

If the answer to both questions is yes then I think you have to include super. If the answer to the second question is no then super is probably meaningless for you and you shouldn't include it. If the answer to question 1 is no then I suppose you can cut it however you want too.

1. Yes
2. Yes

The thing that gets me is exactly what Terrier56 said. For myself, I want to be able to do things like eventually buy a house and have access to my investments. It would be unwise to put as much as possible into super, but I need a stash that lasts, for instance, the years between 40/45-60. Maybe it requires a lot of running the maths. This brings me to the next post.

I think the main concern is if you are drawing down on 4% of total (Stash + Super) will this cause your stash to expire before you reach preservation age.

This is a legitimate question and one that effects me. I have runs some numbers and come up with this.

The stash to super ratio is the key.

Retire at 30 and you need a minimum stash to super ratio of 3.02 (Investment accounts outside of super > 3.02*super)
35 - 2.32
40 - 1.74
45 - 1.25
50 - 0.86
55 - 0.54

If you get to these amounts then you are out of the woods when it comes to not drawing your stash dry.

So, say I need $500,000 to retire at 45 with $20,000 a year, this would mean I need the total stash + super to equal $500,000. Then I'd need >$325,000 in investments and $250,000 in super?

happy

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Re: Australian Investing Thread
« Reply #842 on: April 27, 2015, 06:07:43 AM »
Except that 325 +250 is 575k i.e. @4%WR = 23k/yr, but @3.5% its pretty close to 20k. But as far as the math goes, yes thats the way I read terriers post.
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This_Is_My_Username

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Re: Australian Investing Thread
« Reply #843 on: April 27, 2015, 06:09:08 AM »
It seems a few people have similar goals to me. Using this as a strategy, the higher the dividend yield of your portfolio, the lower the actual amount of capital needs to be, and hence the time it takes to reach this amount (and FIRE) is reduced. This makes Australian high yielding shares seem much more appealing than international. However we then run into the problem of diversification.

This has been discussed at length here. I think most people concluded that somewhere between 25-50% international exposure would be enough. However 25% is obviously more appealing, since 75% Australian shares gives a much better dividend yield than 2%, and hence you don't need to amass as much capital. Even more so if you include some VHY instead of VAS.

How dangerous would it be to not have much international exposure? I know many SMSFs probably have extremely minimal international holdings. What is the risk really - that Australia enters a recession while the rest of the world's businesses do really well? I know in the other thread about mustachian philosophy in Australia, Dodge was advising that as Australians we should underweight Australia. However over the last hundred years or so the ASX has done well along the rest of the world, so along with the dividend yield, the home bias appears to be calling me!

I find this a really tough issue at this point. I lean towards a significant home bias due to the increased dividend yield and franking credits. I'm starting to think that the quickest and possibly safest path to FI is to utilise predominantly VAS and then post FI redistribute my assets more towards bonds and overseas shares.

Say I invested completely in VAS outside of super and then went for a cash back-up and then over the course of being retired put a little more into bonds and os shares. I think that this approach would be pretty robust. It might be more risky with regards to a lack of geographical diversification but the pay off for the lack of geographical diversification might mean getting to FI earlier.

I'm in the same spot.  I love australia's high dividend yields + franking.  It makes my FIRE target lower.

ASX will be fine, surely nothing bad will happen.   : |

This_Is_My_Username

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« Reply #844 on: April 27, 2015, 06:18:48 AM »
see the attachment for an easy calculation of inside/outside super. 

here is an example: from the attachment.
At age 40, you spend 32,094 per year.  So your FIRE number is  802,353. 

You could have 802,353 outside super and you are FIRE.

But instead you could also have   457,819 Outside, and 374,485 Inside super.  This is easier to acquire than 802,353 outside super.

Plagiarised from Notch

steveo

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Re: Australian Investing Thread
« Reply #845 on: April 27, 2015, 07:03:52 AM »
For myself, I want to be able to do things like eventually buy a house and have access to my investments. It would be unwise to put as much as possible into super, but I need a stash that lasts, for instance, the years between 40/45-60. Maybe it requires a lot of running the maths. This brings me to the next post.
.....
So, say I need $500,000 to retire at 45 with $20,000 a year, this would mean I need the total stash + super to equal $500,000. Then I'd need >$325,000 in investments and $250,000 in super?

The point is that your total stash remains the same. You just need a certain amount outside of super.

This is easier to acquire than 802,353 outside super.

Yep. This is a key point. You may as well use super. You just can't have all your money in there.
« Last Edit: April 27, 2015, 07:07:44 AM by steveo »

steveo

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Re: .
« Reply #846 on: April 27, 2015, 07:05:39 AM »
I'm in the same spot.  I love australia's high dividend yields + franking.  It makes my FIRE target lower.

ASX will be fine, surely nothing bad will happen.   : |

There is an advantage isn't there. As for something bad happening to the ASX it could definitely happen. The question is though what is the chance of the ASX going bad whilst the rest of the world is fine. I think that is pretty unlikely.
« Last Edit: April 27, 2015, 07:07:29 AM by steveo »

FFA

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Re: Australian Investing Thread
« Reply #847 on: April 27, 2015, 07:28:25 AM »
a few different angles here.

on the issue of super, I approached it like drowsybee. retiring pre-40, I exclude super from my NW and treat it as safety margin. Conservative, but that's in my nature.

on the issue of dividend investing and asset allocation. I do agree the high asx yield and franking credits make it attractive to home bias, the difficult part is by how much.... however i'd caution against allocating based on dividend yield alone to bring forward FIRE dates. Need to consider overall returns, ie. capital growth, as well as exchange rate risk, diversification, etc. Yes we have discussed this at length already!

I noticed sunsuper recently came out with some revised asset allocations for their diversified mixes and have increased ratio of international:asx.

slothman

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Re: Australian Investing Thread
« Reply #848 on: April 27, 2015, 12:07:28 PM »
on the issue of super, I approached it like drowsybee. retiring pre-40, I exclude super from my NW and treat it as safety margin. Conservative, but that's in my nature.

I'm more of a realist. Preservation age will likely get raised to something like 65 with a whole bunch of new access restrictions added in. I too am looking to be FIRE pre-40, and as such exclude super from my NW.

I'll have a very strong home bias due to higher yields and franking credits but will still have an allocation (likely 25-30%) of unhedged international shares for diversification and rebalance yearly if it falls out of target allocation range.

Have a look at page 12 for risk/return of various allocations.
https://static.vgcontent.info/crp/intl/auw/docs/resources/plain-talk-guides/ptg_realisticexpectations.pdf?20150422|114500

Have a look at the table on page 4 for which asset class performed the best over previous years:
https://www.vanguardinvestments.com.au/adviser/adv/campaign/index_chart.pdf

Also it's great to see that major international markets don't have a strong correlation with Australia, e.g. USA/UK/Japan. see figure 1 :
https://static.vgcontent.info/crp/intl/auw/docs/literature/research/the-role-of-global-equities-for-australian-investors-brief.pdf

International/US shares have outperformed Australian shares from about 2012-2014. Would've been great to ride that boom and sell some of the gains during the yearly rebalance to divert some funds towards Aussie shares that have been lagging (but still produce good yields).

happy

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Re: .
« Reply #849 on: April 27, 2015, 03:21:17 PM »
see the attachment for an easy calculation of inside/outside super. 

here is an example: from the attachment.
At age 40, you spend 32,094 per year.  So your FIRE number is  802,353. 

You could have 802,353 outside super and you are FIRE.

But instead you could also have   457,819 Outside, and 374,485 Inside super.  This is easier to acquire than 802,353 outside super.

Plagiarised from Notch
Thanks TIMU, this makes more sense to me.
Journalling at Happy Aussie Downshifter