Author Topic: Australian Investing Thread  (Read 764306 times)

lolzmonster

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Re: Australian Investing Thread
« Reply #950 on: May 12, 2015, 12:44:41 PM »
Okay guys, so Im kind of torn on this and I want some opinions, do you guys think now is the time to invest or time to hold cash?

I mean with all the fear of mining and oil right now, it seems to me like now is the perfect time to jump in, while everyone seems to be fearful of the industries, and that would be true considering how risk averse investors seem at the moment. So I wanted to get people's opinions on this and what their current strategies are, although I know many of you have already actually mentioned briefly what they plan to do.

Me: Continue to DCA on Vanguard, but possibly spend a bit of "fun money" in bigger mining companies.

marty998

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Re: Australian Investing Thread
« Reply #951 on: May 12, 2015, 04:11:30 PM »
Okay guys, so Im kind of torn on this and I want some opinions, do you guys think now is the time to invest or time to hold cash?

I mean with all the fear of mining and oil right now, it seems to me like now is the perfect time to jump in, while everyone seems to be fearful of the industries, and that would be true considering how risk averse investors seem at the moment. So I wanted to get people's opinions on this and what their current strategies are, although I know many of you have already actually mentioned briefly what they plan to do.

Me: Continue to DCA on Vanguard, but possibly spend a bit of "fun money" in bigger mining companies.

Hold cash, pay down debt.

We are about to enter our 25th year of uninterrupted economic growth. Joe Hockey's budget is built on stretching that to 28 years.

To my knowledge, no advanced economy in history has ever gone that long without some form of correction.

I've suppose I've turned very bearish in the last couple of months...those recent bank profit results told quite an interesting story.

IT and biotech are the 2 sectors I'd be looking at. High risk, but lets be honest, half the economy is going to be automated at some point. Biotech is always hit and miss, however, healthcare is always listed as the #1 priority for Australians.

bigchrisb

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Re: Australian Investing Thread
« Reply #952 on: May 12, 2015, 06:06:44 PM »
I've been dabbling with acquisitions in this space - additions to my portfolio over the last 6 months have included BHP, RIO and STO, along with a bit of unlisted commercial RE.

That said, I've been investing less than my savings over this time, to try to work down my leverage a bit, and provide a bit more buffer / ammunition in case further opportunities arise.  Despite this, I'm still fairly leveraged, with total investment debt in the ballpark of $1M.

AustralianMustachio

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Re: Australian Investing Thread
« Reply #953 on: May 12, 2015, 07:17:42 PM »
Okay guys, so Im kind of torn on this and I want some opinions, do you guys think now is the time to invest or time to hold cash?

I mean with all the fear of mining and oil right now, it seems to me like now is the perfect time to jump in, while everyone seems to be fearful of the industries, and that would be true considering how risk averse investors seem at the moment. So I wanted to get people's opinions on this and what their current strategies are, although I know many of you have already actually mentioned briefly what they plan to do.

Me: Continue to DCA on Vanguard, but possibly spend a bit of "fun money" in bigger mining companies.

With regards to "hold cash or invest?" - I really think it depends on your mindset. I.e. can you hold on during a downturn? If you're simply DCAing and can stick with it, then I believe thats the best approach. If you can't hold, you'll most likely sell low and buy high, and hence underperform the market.

More importantly, with individual companies, do you feel like you are confident that you can value them well enough to know what they should be worth? If you cant, then your buying and selling decision will most likely be an emotional not a rational one. This will lead to poorer results.

For me, I've learned that indexes are best suited to my mindset. I don't know enough about fundamental analysis to value individual stocks better than the market. I don't know enough technical analysis to attempt to plan out my entries and exits. So if I tried individual stocks, then I wouldn't have a confident plan... so my decisions would be emotionally driven more than rationally.... and i would most likely underperform.

And I think if you already own VAS or the big LICs or something similar, then you already have plenty of exposure to the mining companies on the ASX. I don't think we're suddenly going to see another commodities boom any time soon, we're still just coming off the back of one of the biggest ones in history. Oil is a different story of course

FFA

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Re: Australian Investing Thread
« Reply #954 on: May 12, 2015, 09:20:27 PM »
+1 to what Australianmustachio said... important to be clear on your approach and if you decide to do market timing / stock picking, then to do it a focused and disciplined way.

possibly spend a bit of "fun money" in bigger mining companies.

Maybe just semantics, but the above phrasing is not a good indicator for success. Hobbies or leisure might be a better way to spend fun money ? Not trying to pick lolzmonster, but if you want to add value to your portfolio via direct trades on mining companies, I don't think it will be easy and you need to have the right mindset. Good luck!

qwerty8675309

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Re: Australian Investing Thread
« Reply #955 on: May 13, 2015, 05:16:19 AM »
Okay guys, so Im kind of torn on this and I want some opinions, do you guys think now is the time to invest or time to hold cash?

I think drafting a good long term investment plan, and sticking with it is always the best approach. That way, you invest when the market is bad, as well as when the market is good. I think making binary moves in and out of the market based on sentiment is a good way to lose money.
« Last Edit: May 13, 2015, 05:33:32 AM by qwerty8675309 »

dungoofed

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Re: Australian Investing Thread
« Reply #956 on: May 13, 2015, 06:37:58 AM »
bigchrisb - I remembered this morning that the government has already solved the excess cash balances problem!

http://www.abc.net.au/news/2015-03-28/federal-government-set-to-introduce-tax-on-bank-deposits/6355662

(This is from the end of March).

Guys was the "Bank Tax" on deposits a part of The Budget? I couldn't see it confirmed nor denied in any of the mass media.

lolzmonster

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Re: Australian Investing Thread
« Reply #957 on: May 13, 2015, 11:25:22 AM »
Okay thanks for the advice guys, yeah I would probably be better off sticking with my current DCA strategy then, after all, I definitely wouldnt consider myself a professional investor or a good stock picker, so thanks for the wake up call! I guess I will just hold on to my cash for now and DCA into VAS slowly.

and yeah its scary how high the valuations are for banks at the moment, just goes to show how risk averse investors in our economy are at the moment.

@bigchrisb: are you talking margin loans or is this in real estate :/? because wow thats a lot of debt

bigchrisb

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Re: Australian Investing Thread
« Reply #958 on: May 13, 2015, 05:09:37 PM »
@bigchrisb: are you talking margin loans or is this in real estate :/? because wow thats a lot of debt

A combination. About $600k is secured against an investment property (soon to be PPOR), and about 400 as margin.  This is against assets of about $800k of house, ~$1.6M of stocks and about $200k of cash (that I can't access for close to a year). For more details, see my journal.

I guess the point I was trying to make is that while I'm less bullish than a couple of years ago (buying stock at about 250% of savings), I'm still putting some of my savings into the market, and some into debt reduction (maybe 50/50). 

A lot of the "buy for the long haul" comes down to your psyche - what will you actually do in a financial crisis?  I was still buying on margin at the depths of the GFC, and wishing I could buy more.  By inference, as long as I steer clear of margin calls and forced liquidation, I'm comfortable with a very high allocation to stocks. 

However, I suspect as my portfolio size has grown (during the GFC was a couple of years was under 1 years income, these days is many years income), my risk tolerance is dropping.  Changes in circumstance make it pretty hard to keep a good feel on how you will actually respond to crisis!

This_Is_My_Username

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« Reply #959 on: May 14, 2015, 03:53:21 AM »
I want some opinions, do you guys think now is the time to time the market?
lolololololololololol NO.

However, make sure to track all your investments and measure the extent of your failure.  hopefully you won't lose too much.

Wadiman

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Bond ETFs
« Reply #960 on: May 14, 2015, 08:40:16 PM »
I want to increase the fixed interest allocation in my super (from around 10% currently to 20% of total investment) to help smooth out volatility over the next 10 years.

I currently hold the Russell Semi Govt Bond ETF (RSM - fee= 0.26%, running yield = 4.8%) but am also looking at the Russell Australian Govt Bond ETF (RGB - fee = 0.24%, running yield = 4.06%).  I prefer the Russell funds over the Vanguard ones due to their higher liquidity.  I would like to consider international FI ETFs as well but suspect yields would be very low.

I've been doing some reading about how bonds work and am growing my understanding about their characteristics but get confused about the factors that influence their daily price movement.  I understand that the main factor is prevailing domestic and international interest rates but don't understand why prices drop when interest rates are lowered.

It's probably a pretty complex area but can anyone chime in on this and provide insights?

Also - if there are any other bond ETFs - particularly International ones - that you rate I would be happy to hear about them.

Thanks!

superannuationfreak

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Re: Bond ETFs
« Reply #961 on: May 14, 2015, 10:27:11 PM »
I've been doing some reading about how bonds work and am growing my understanding about their characteristics but get confused about the factors that influence their daily price movement.  I understand that the main factor is prevailing domestic and international interest rates but don't understand why prices drop when interest rates are lowered.

...

Also - if there are any other bond ETFs - particularly International ones - that you rate I would be happy to hear about them.

Bonds are tradeable claims to a stream of payments.  E.g. a bond from the Australian government paying 3% p.a. for the next 10 years.  If interest rates go up and a new bond with the same maturity would require the Australian government to pay 4% p.a. then existing bonds (3% p.a.) have to fall in price so that buyers would be indifferent between buying them and the new bonds.

To be honest, the best value bond funds I've found in Australia are offered by industry funds.  For example AustralianSuper offer Australian Fixed Interest for 0.18% p.a. or International Fixed Interest for 0.24% p.a.  Note that if you go with some International Fixed Interest you probably want it substantially currency-hedged, since the value of a bond fund is to reduce volatility in your overall portfolio.  This will be the case with most Australian-based international bond funds and ETFs but means it may not be worth using funds and ETFs which are meant for a US investor, for example.

FFA

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Re: Australian Investing Thread
« Reply #962 on: May 15, 2015, 12:15:43 AM »
i'm curious if anyone invests in the exchange tradeable Aust. Gov Bonds (AGB's), and any feedback/comments on that experience ?

bigchrisb

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Re: Australian Investing Thread
« Reply #963 on: May 15, 2015, 12:23:24 AM »
Didn't even know they existed!  Thanks for pointing them out. Good to know about for future reference - once I pay down my investment debt, I'd like to include some direct bonds.  Also not really interested in buying them at their current price/yield - I struggle to see much upside in them at the moment, given the equity/bond yield spread.

dungoofed

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Re: Australian Investing Thread
« Reply #964 on: May 15, 2015, 12:49:43 AM »
i'm curious if anyone invests in the exchange tradeable Aust. Gov Bonds (AGB's), and any feedback/comments on that experience ?

I've got some GSBG37, and will top up again shortly. It has dropped sharply recently in anticipation of rates never going below 2%, but you can see from the graph below that this was not always the assumption.

http://hfgapps.hubb.com/asxtools/Charts.aspx?asxCode=GSBG37&chartType=3&volumeInd=9&TimeFrame=D6

The liquidity for GSBG37 isn't great - there's basically one market maker that gives you all the liquidity you'll ever need, albeit at very average spreads. This will making "rolling your own" a little more expensive if you tend to prefer the longer-dated products. On the plus side, there is more movement if you aren't in a rush to sell/buy and the market is moving in a favourable direction.

You literally just enter the code on this page into your trading system:

http://www.asx.com.au/asx/markets/interestRateSecurityPrices.do?type=GOVERNMENT_BOND


Rob_S

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Re: Australian Investing Thread
« Reply #965 on: May 16, 2015, 01:57:09 AM »
Any thoughts on the HVST ETF?

HVST invests in a portfolio of the current top 20 dividend paying stocks who are about to pay, then rebalances every 2 months, so there is a constant dividend stream thatís paid monthly, aiming to provide double the ASX yield.

It hasn't been around long.

I had planned on living of VHY dividends with capital gains a nice bonus. Maybe HVST would be a better idea, particularly when the missus and I call it quits with our proper jobs. It could even get us to FIRE faster...

potm

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Re: Australian Investing Thread
« Reply #966 on: May 16, 2015, 02:57:11 AM »
You're basically hoping that the stock doesn't drop in the 2 months or however long the ETF holds it by more than the dividend.

It really shows the Australia's obsession with dividends that funds like these are popping up now.

What matters is how much money the underlying businesses that you own make, not how much is paid out.

AustralianMustachio

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Re: Australian Investing Thread
« Reply #967 on: May 16, 2015, 03:36:59 AM »
Yeah the dividend harvester fund sounds a bit sus to me.

A bit like YMAX even. But YMAX sells options in order to hedge against downside risk. It is supposed to "underpeform a strongly rising market, but outperform a slowly rising, flat or falling market" from memory. I do wonder how realistic that is with a 9% dividend yield or whatever it was

nath

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Re: Australian Investing Thread
« Reply #968 on: May 16, 2015, 05:56:10 PM »
I saw this in the Age today. Is it really possible for people to be this leveraged up? WOW, I am not sure that I could sleep at night if this was me. At least they got a sensible reply, suggesting that they do a 7% interest rate stress test on their mortgage debt. They also were advised to sell one of the properties and reduce debt. What do you think of this situation?

Q. My wife, 28, and I, 30, have annual incomes of $100,000 and $120,000 respectively. We live in a property we bought for $900,000, now worth $1.1million with $809,000 owing and $480,000 in our offset account.

Our other investments consist of two townhouses (worth $2.7 million, with $2 million owing, and are returning $1300 and $1350 a week respectively) and an apartment (worth $520,000 with $460,000 owing and is returning $540 a week). Both are on interest-only loans. In our superannuation, I have $100,000 and my wife $40,000. My wife also has $25,000 in shares. We have no other debts.

We maximised the amount of salary packaging. What is the best way to make the most of our wealth as we probably need to build some savings to prepare for children in the next few years? We would also want some passive income, should one of us be unable to work. A.N.


Saw this the other day too and was stunned at the ignorance of the response from the editor.

I feel this couples position is not too bad, doing a quick calculation in my head the investment properties would be positive geared on Interest only loans. Meaning those tenants are helping payoff the mortgage on their own house too. The value of the townhouses is quite high meaning they are probably in a really fancy part of Sydney or Mel. The market for those properties $1mill+ is getting stronger every month.
If this couple did the basics for the next couple years and just put more savings from their day job in their offset account, they would have a paid off house to live in and their investments would be very good. If worst came to worst and they could not get a tenant or a job loss or whatever, they currently have $480k in their offset account? Not a small sum to keep them afloat for many years until things recovered. If the real estate market totally crashed (pretty unlikely as we know) , they ares still young and could hold their properties for decades if they wanted to wait it out.
Looking at the path this couple is on , most likely in less than 10 years they will be multi multimillionaires holding some excellent pieces of properties for decades of growth. Why sell out now?

mrpercentage

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absolute truth... prison guard that has seen shanks does not makes 45k a year managing bullshit tech that was outsourced for what?.... cheaper tech and less taxes... probably

dungoofed

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Re: Australian Investing Thread
« Reply #970 on: May 16, 2015, 08:39:50 PM »
http://www.smh.com.au/business/what-bubble-local-stocks-not-overpriced-yet-citi-says-20150515-gh28rj.html

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Global economic conditions are providing a "good breeding ground for bubbles" but the Australian sharemarket isn't overvalued, Citigroup says.

For Australia, the main concern would appear to be that US equities are on the threshold of bubble territory, although "euphoric" European bond markets could also provide a few headaches, according to a study by the US investment bank.

Quote
Within Australia, said the Citi report, "fixed income proxies" such as infrastructure stocks, utilities, real estate investment trusts, telcos and banks were the sectors most at risk of being overvalued.

Let me know if you want me to stop posting links to these kind of broad macro speculative articles : )

Having said that, several on this thread and others have already come to similar conclusions as Citi. Tilting away from dividend stocks in Australia however is easier said than done.

TJEH

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Re: Australian Investing Thread
« Reply #971 on: May 17, 2015, 05:16:31 AM »

I've got some GSBG37, and will top up again shortly. It has dropped sharply recently in anticipation of rates never going below 2%, but you can see from the graph below that this was not always the assumption.

http://hfgapps.hubb.com/asxtools/Charts.aspx?asxCode=GSBG37&chartType=3&volumeInd=9&TimeFrame=D6

The liquidity for GSBG37 isn't great - there's basically one market maker that gives you all the liquidity you'll ever need, albeit at very average spreads. This will making "rolling your own" a little more expensive if you tend to prefer the longer-dated products. On the plus side, there is more movement if you aren't in a rush to sell/buy and the market is moving in a favourable direction.

You literally just enter the code on this page into your trading system:

http://www.asx.com.au/asx/markets/interestRateSecurityPrices.do?type=GOVERNMENT_BOND

I also found this calculator on the asx website:
http://www.asx.com.au/asx/research/bondCalculator.do

I'm new to bonds and had been pondering either VGB or VAF while planning out the defensive part of my portfolio. I too had forgotten about the above option.

How do you approach buying bonds, from a timing perspective? Is there any sense trying to or should you just treat them like an index or individual stock and DCA your way along?

dungoofed

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Re: Australian Investing Thread
« Reply #972 on: May 17, 2015, 07:12:09 AM »
I'm relatively new to investing in bonds myself. I started with them as a hedge against a deflationary environment rather than for the stable returns they provide, with the latter being just a bonus rather than the main purpose.

(this is also the reason I prefer TBs over TIBs - TIBs tend to have their returns dulled in deflationary environments)

Having said that, all signs at the moment point to the major governments of the world committing to never allowing deflation to take hold (think: negative interest rates in Switzerland) so the scenario may never play out. Even if it does you may have enough cash on hand to weather the storm as well as pick up a few stocks at bargain basement prices. Finally, if past performance is anything to go by the "uptick" effect when deflation beckons is much much less on AGBs than say US Treasuries.

Regarding VAF vs VGB, VAF is more correlated with the health of the Australian economy. Specifically, if we have a situation where the Australian stock market is tanking and companies are going bust, there's a chance there will be companies defaulting on the bonds in VAF. That means your VAS (for example) would be taking a hit at the same time as your VAF, a double-whammy. The bonds in VGB on the other hand are backed by the sovereign right of the Australian government to tax the populace, and theoretically they could just keep increasing taxes in order to pay bondholders*

You'll often notice VAF returns slightly more. Just be aware of this possible scenario playing out (and even if it does, it's extremely hard to predict how it will play out, whether there will be bailouts, etc).

The other thing I'd note about both VAF and VGB is that the term of the contained bonds tends to be quite front-heavy, with very little exposure to bonds with >10 years until maturity. I believe this is because that's where both the liquidity and stable returns are, but both products could underperform under certain environments eg deflationary environment drawn out over 10 years.

* "Increase taxes on those hardworking Aussies, Government. Then pay me. Because you own them, and I own you!! bwahahahahah!!!" --I promise I never have this thought when buying AGBs

TJEH

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Re: Australian Investing Thread
« Reply #973 on: May 17, 2015, 10:17:54 PM »
Thanks dungoofed, I still have much to learn about bonds!

Have you purchased the exchange tradeable bonds (e.g. GSBG37) or an ETF such as VGB? Just interested how you would lean towards one or the other? I guess the former is a single bond whereas the latter contains a number of bonds with different face values and maturity?

That is a good point about the corporate bonds in VAF being at risk in parallel to VAS taking a hit (although there is only around 10% exposure to corporate bonds in VAF, so I guess at least the damage would be minimized).

I am thinking around 80\20 growth\defensive, plus around two years of living expenses in something simple such as an online saving account. I'm trying to decide on whether bonds are the right thing for the defensive side, and if not then what else. Is anyone else taking this approach, i.e. an additional cash buffer outside the growth\defensive split?  The additional cash would not be counted towards the FIRE amount.

dungoofed

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Re: Australian Investing Thread
« Reply #974 on: May 18, 2015, 02:37:24 AM »
Robinhood free trading is coming to Australia

Thanks for the heads-up! Will be good to see if they can shake things up a little. There are already a couple of incumbents in the Australian market but I'm all for more competition if it means lower trading costs.


Thanks dungoofed, I still have much to learn about bonds!

Me too!

At their basic level they are quite simple to understand, but once you look deeper you see lots of moving parts. In fact, it was precisely because (non-institutional) Australians tend to shun them in favour of shares/property that I thought there might be an opportunity here, and that drives the product I choose for investment.

Quote
Have you purchased the exchange tradeable bonds (e.g. GSBG37) or an ETF such as VGB? Just interested how you would lean towards one or the other? I guess the former is a single bond whereas the latter contains a number of bonds with different face values and maturity?

I have both actually : )

I'm embarrassed to say but I started in bonds with a bit of VGB because I wasn't confident to place the actual trade for a single TB ETF. This bought me some time to learn more about GSBG37 and also let me observe how VGB moved in response to different market conditions.

I aim to hold a ladder of bonds dated between 15-20 years. I'm not looking for fixed income, but may in future, so it's a nice option to have - you'd just not sell once it was 15 years from maturity, and continue to receive dividends.

Not sure what I'm going to do with VGB though. Its strength is constant income under ideal conditions, when compared to a period of volatility for stocks. I think I might hold it until just after the next 20+ year TB ETF is issued, collect one last dividend and then sell VGB, buy the TB ETF.

Quote
That is a good point about the corporate bonds in VAF being at risk in parallel to VAS taking a hit (although there is only around 10% exposure to corporate bonds in VAF, so I guess at least the damage would be minimized).

I think there will always be some correlation between bonds and stocks in a "healthy" economy.

Wadiman

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Re: Australian Investing Thread
« Reply #975 on: May 18, 2015, 05:59:21 AM »
I had no idea about the range of ETBs available - need to look into this a bit more and understand what I'm looking at - feels like this is pretty complex in comparison to most of the other stuff that's discussed here.

idjces

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Re: Australian Investing Thread
« Reply #976 on: May 18, 2015, 02:21:39 PM »
http://www.afr.com/personal-finance/how-a-multimillionaire-internet-entrepreneur-invests-20150515-1mvncp

Leaving this here incase it pique's anyone else interest. It mentions the three funds steve baxter chooses to invest in, and his asset allocation at the bottom. I found it somewhat reassuring someone like him chooses to invest in the montgomery fund - i'm not in a position to myself, but find it interesting following the fund's blog discussions

FFA

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Re: Australian Investing Thread
« Reply #977 on: May 18, 2015, 03:27:13 PM »
http://www.afr.com/personal-finance/how-a-multimillionaire-internet-entrepreneur-invests-20150515-1mvncp

Leaving this here incase it pique's anyone else interest. It mentions the three funds steve baxter chooses to invest in, and his asset allocation at the bottom. I found it somewhat reassuring someone like him chooses to invest in the montgomery fund - i'm not in a position to myself, but find it interesting following the fund's blog discussions
Thanks for the link. I read their blog too and find it quite informative and educational. Considered investing too, but got turned off by the fees. His other two fund managers are run by big Investment Banks, so I guess he is not very fee conscious. Fair enough, if you believe they can deliver better than market returns. Personally, after finding the boglehead philosophy I favour index investing myself.

FFA

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Re: Australian Investing Thread
« Reply #978 on: May 18, 2015, 03:47:00 PM »
I had no idea about the range of ETBs available - need to look into this a bit more and understand what I'm looking at - feels like this is pretty complex in comparison to most of the other stuff that's discussed here.
I just read this blog post, which may help albeit Canadian oriented.

http://canadiancouchpotato.com/2015/05/18/how-changing-interest-rates-affect-fixed-income/

well worthwhile to understand bonds, at least conceptually, and ideally in some details too. As we are reminded recently it is a huge impact on equities valuations as most investor/analysts use 10 year govt bond yields as the risk free rate to discount and value companies.

TJEH

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Re: Australian Investing Thread
« Reply #979 on: May 18, 2015, 09:40:06 PM »

I aim to hold a ladder of bonds dated between 15-20 years. I'm not looking for fixed income, but may in future, so it's a nice option to have - you'd just not sell once it was 15 years from maturity, and continue to receive dividends.


Could you explain this strategy a little more? I did read up on the concept of bond ladders, but I'm unsure what you're doing in the above approach.

I see what you mean in an earlier comment about the relative short-term maturity of the bonds in VGB. If I can can my head around all this it might make the exchange tradeable options attractive. Or I'll sit here scratching my head about it getting more confused and do nothing :)


dungoofed

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Re: Australian Investing Thread
« Reply #980 on: May 19, 2015, 02:10:42 AM »
There are a couple of good (albeit US-centric) summary pages on the Bogleheads wiki, specifically:

https://www.bogleheads.org/wiki/Laddering_bonds_or_CDs
https://www.bogleheads.org/wiki/Individual_bonds_vs_a_bond_fund

These have links to relevant threads on the forums plus external sources, and you can literally spend days reading to your heart's content.

I have a lot of notes from when I was in the "research everything"-phase that we all go through but unfortunately they're not in any format that I can upload (there is a lot of information in Japanese too, because the JGB situation is somewhat an enigma in the world of bonds, and it's hard to find much information in English where things aren't being viewed through a Western lens).

I think the biggest misconceptions among individual investors are statements along the lines of:

"bonds = stable returns" or
"bonds = defensive asset class"

These are true statements on the surface, but there are a significant number of exceptions to the rule, and if you're going to be investing in bonds then you do yourself a favour by being aware of the risks.


I aim to hold a ladder of bonds dated between 15-20 years. I'm not looking for fixed income, but may in future, so it's a nice option to have - you'd just not sell once it was 15 years from maturity, and continue to receive dividends.


Could you explain this strategy a little more? I did read up on the concept of bond ladders, but I'm unsure what you're doing in the above approach.

Ok so I have an AGB bond ladder, purchasing the longest-dated AGBs available (currently 22 1/2 years from maturity), and selling them* when there is only 15 years remaining until maturity.

What I am trying to do here is create a hedge against any black swan event that resembles a (prolonged) period of deflation, while not creating too much drag on portfolio performance.

The main point is that no-one knows what is around the corner, and this is an attempt to hedge against events which look like deflation.

The overwhelming consensus is that deflation, or specifically a deflationary spiral, is a terrible thing. Having spent a decade in Japan I'm a little on the fence about it myself. Regardless, during times of deflation (or anticipated deflation), rates tend to trend down, causing bond prices (in particular long term bond prices) to "flick" upwards. Combine that with the investors scrambling for long term guaranteed returns and it can theoretically be quite a powerful movement.

The hedge works by purchasing these bonds now.

There is a fair chance that the market will move against me in the interim (or not. ref: Switzerland's negative rates) and I'll lose money, but that doesn't matter. What matters here is that I won't lose my job and then be forced to sell equity holdings when one day deflation (or something like it) hits, thus preserving my wealth.

I want to go into more detail about why a bond fund wouldn't offer the same protection but I've gotta keep moving. More later!

* Or not selling them. There are cases where I may be better off remaining in bonds for a bit longer, or until maturity. This flexibility is why I probably wouldn't purchase a long term bond fund even if it were available.

dungoofed

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Re: Australian Investing Thread
« Reply #981 on: May 19, 2015, 03:39:11 AM »
Found it!

http://www.crawlingroad.com/blog/2009/02/09/permanent-portfolio-25-bond-allocation-faq/

This describes in fair detail the kind of hedge I'm trying to achieve.

FFA

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Re: Australian Investing Thread
« Reply #982 on: May 19, 2015, 07:35:33 AM »
a few thoughts/opinions on the way I approach it, FWIW :

I view bonds as a defensive asset and from the perspective of holding them to maturity. To me, it is just like cash except with a fixed interest rate. Both are deflation hedges. If deflation really takes hold then sure a bond/TD is better as you would've locked in a higher rate. Cash rates might be next to nothing in a deflationary environment, but at least you're cash is still appreciating in real terms. In extreme cases if banks start charging you to place deposits, as in Europe, you can always pull it out and stick it under your bed (or maybe prudent to invest in a safe if your stash is too big to fit under your bed).

So as far as i'm concerned, it's an interest rate call. Similar to when you take a home or margin loan and you need to decide to fix or float (except in reverse of course as this is a deposit not a loan). Right now, with everywhere globally having historic low interest rates, I am not keen to fix much, if any, for my portfolio. I think the TD option is worth considering in Oz, sometimes attractive deals pop up. I managed to book a 5 yr TD at slightly above 4%, just 3-4 months ago. At the same time a 5 year AGB was probably below 2.5% or something like that. Since the TD is govt guaranteed anyway (amount less than 250k), it seems a good deal to me to take the extra 1.5+%. Sure the bond has extra flexibility to trade in/out in secondary market, but as I said at the outset, I see these as defensive assets (ie. for capital preservation and portfolio protection), i'm not looking to optimise here.

There was a RBA speech earlier in the week, I think it was Guy Debelle, and he covered the transition to low interest rate world. It seems it will be here to stay for some time. But he also said he fully expects the tide to turn and rates to normalise eventually. I'm prepared to be patient and wait for a normal interest rate environment where central banks haven't scooped up all the bonds in the world. Meanwhile i'm grinding my teeth as the banks drop rates on online saver accounts faster that I can open them up !

Edit: rba was philip lowe not debelle
« Last Edit: May 19, 2015, 09:12:33 PM by FFA »

Wadiman

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Re: Australian Investing Thread
« Reply #983 on: May 19, 2015, 09:03:06 PM »
Dungoofed and FFA - Thanks for your bond posts.

Dungoofed - would you consider state government bonds as well or just Australian Govt bonds for your ladder?

dungoofed

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Re: Australian Investing Thread
« Reply #984 on: May 24, 2015, 03:47:13 AM »
Hi Wadiman -

Sorry, I meant to come back to this but have been away.

No, I wouldn't consider state government bonds. If you go to the link above there are a few sections which touch on the reasons why (US-centric but the same applies) eg

"Most bonds have credit and default risk and this is priced into them as higher interest rates. However the US Treasury bonds are considered extremely low risk of defaulting because the government can always tax people or print money to pay off the debt. As a result, US Treasury bonds pay lower interest than other types of bonds because the risk of holding them is lower."

So for state bonds you may get a slightly higher rate (I haven't checked, but assuming), but that's because the risk is higher. When your goal for holding bonds is that you want to be in the *safest* product when things start to go pear-shaped in the economy then you really need to choose the safest product ie AGBs.

As per the above quote, the Australian government can tax the populace and print money in order to meet its obligations. Compare this to state revenue, which has to go through GST --> Federal Government --> State Governments and you can see (default) risk starting to creep in, with all these moving parts and whatnot. Again, I doubt we'd ever reach a stage where the Federal Government decided to shortchange a state to the point that they couldn't pay their bondholders, but that's not what matters if your purpose for holding the bond is to profit from a sudden influx of institutional investors when things start to go pear-shaped.

If this is not your goal, and you're looking for guaranteed income, then I'm sure you could do worse than (a product which contains) state government bonds : )


Wadiman

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Re: Australian Investing Thread
« Reply #985 on: May 25, 2015, 04:15:56 AM »
Thanks Dungoofed - that makes sense - I would like to achieve both goal for bonds so will consider a mix of the AGBs (direct) for portfolio protection and an ETF that contains state govt bonds for yield/some protection.

australian_investor

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Re: Australian Investing Thread
« Reply #986 on: June 02, 2015, 06:37:25 AM »
Hello,

Thanks for the great thread.

Has anyone else looked into whether ETFs held in Australia on US shares are liable for estate tax? I have shares in IVV and based on the link below I am concerned that I am liable for estate tax on these shares.
 
http://www.morningstar.com.au/smsf/article/tax-matters-investments/6540?q=printme
 
Cross-listed ETFs (Australian listings of foreign ETFs) also have their nuances. For example, the iShares Core S&P 500 ETF's (IVV) cross-listing means Australian investors can tap into the liquidity of the primary listing, contributing economies of scale and keeping a lid on bid-ask spreads. But IVV's New York cross-listing means Australian investors may incur some US estate tax on deceased estates.

superannuationfreak

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Re: Australian Investing Thread
« Reply #987 on: June 02, 2015, 07:24:52 AM »
I'm not a tax expert so recommend doing your own research /asking someone who is.

My understanding is that the Australia-US tax treaty allows us proportionally similar estate tax exemptions as US citizens. I'm having trouble finding proper references on my phone but here is a mention:
https://www.bogleheads.org/forum/viewtopic.php?t=165866#p2500181

It's called a "pro-rata unified credit provision" and my limited understanding is that if your estate is under the current estate tax exemption (~$5m indexed to inflation) then you shouldn't be impacted. But legislative change is a risk.

Personally this limits my dependence on US-domiciled ETFs to exposures i can't easily or cheaply get otherwise but doesn't stop me making US investments entirely. But as I say, I'm not an expert.

australian_investor

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Re: Australian Investing Thread
« Reply #988 on: June 02, 2015, 07:19:18 PM »
Thanks for that. I checked with my accountant and he had a similar view.

Which Australian domiciled ETFs have you used to gain US exposure? I know UBS have recently launched one UBU but management fee is 0.20% which is higher than IVV and Vanguard options so interested if there are other Australian domiciled options with lower fees.

FFA

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Re: Australian Investing Thread
« Reply #989 on: June 02, 2015, 09:48:49 PM »
I was reviewing global share etf options recently, in particular VGS vs VTS/VEU. In the end I opted to continue with VTS/VEU (already have some of these) rather than switch new investments to VGS (and possibly VGAD/VGE). VGS was tempting despite the higher MER, having extras like dividend reinvestment. But I like the fact VEU covers emerging markets also, as I wasn't sure I could be bothered adding VGE units periodically to cover this. I'm also interested to hear what others are doing.

qwerty8675309

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Re: Australian Investing Thread
« Reply #990 on: June 03, 2015, 05:16:02 AM »
I was reviewing global share etf options recently, in particular VGS vs VTS/VEU. In the end I opted to continue with VTS/VEU (already have some of these) rather than switch new investments to VGS (and possibly VGAD/VGE). VGS was tempting despite the higher MER, having extras like dividend reinvestment. But I like the fact VEU covers emerging markets also, as I wasn't sure I could be bothered adding VGE units periodically to cover this. I'm also interested to hear what others are doing.

I've been thinking about this lately too. This is the way I see it:

For VEU/VTS:
- Lower MER
- Higher liquidity
- Exposure to emerging markets

For VGS:
- Eligible for all foreign tax credits because fund is domiciled in Australia (for VEU, the foreign tax credits are lost)
- Easier to manage
- DRP

I'm still leaning towards VEU and VTS at the moment, but I might switch if Vanguard lowers fees for VGS, or the liquidity picks up.
« Last Edit: June 03, 2015, 05:20:44 AM by qwerty8675309 »

alsoknownasDean

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Re: Australian Investing Thread
« Reply #991 on: June 03, 2015, 06:20:34 AM »
I'm keen to put some of the cash sitting in my savings account to more productive uses. Can you please help an investing newbie? (the only other shares I've got are a small handful of AMP shares I got about ten years ago that I haven't touched since)

I'm looking at ETFs, should I just pick a broker and then start? I'm thinking of starting with $10,000 or so and buying more once a quarter.

Also should I look at an ETF based on Australian or international shares?

Thanks :)

MMMOI

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Re: Australian Investing Thread
« Reply #992 on: June 03, 2015, 07:45:39 AM »
I was reviewing global share etf options recently, in particular VGS vs VTS/VEU. In the end I opted to continue with VTS/VEU (already have some of these) rather than switch new investments to VGS (and possibly VGAD/VGE). VGS was tempting despite the higher MER, having extras like dividend reinvestment. But I like the fact VEU covers emerging markets also, as I wasn't sure I could be bothered adding VGE units periodically to cover this. I'm also interested to hear what others are doing.

I've been thinking about this lately too. This is the way I see it:

For VEU/VTS:
- Lower MER
- Higher liquidity
- Exposure to emerging markets

For VGS:
- Eligible for all foreign tax credits because fund is domiciled in Australia (for VEU, the foreign tax credits are lost)
- Easier to manage
- DRP

I'm still leaning towards VEU and VTS at the moment, but I might switch if Vanguard lowers fees for VGS, or the liquidity picks up.

Personally I've gone the VGS route: I really like the simple taxation and the DRP.
I see it as an all in one gateway to my international exposure.
I have been toying with the idea of VGAD - the hedged version of VGS - but given the current climate, will probably only keep adding to VGS only. It's not perfect since you don't get emerging markets, but I can live with that given how much it simplifies the rest.

So for me it's VGS for international exposure, and for local stocks I've got a bit of VAS, ARG and AFI.
Currently sitting at 50/50, I am having a hard time deciding how to allocate international exposure.
Given I have other assets in Aus (PPOR) for a significant higher value than what I have in shares, I am in a way inclined to get more international exposure - especially given the lack of diversification of the ASX - VGS is brilliant in this regard.
However, my strategy for shares is to benefit from FF dividends and DRPs to built an asset base that will deliver dividends to live off in the future. Local shares are better for that and shielded from FX rate fluctuations.

Regardless, I am keeping it simple: VGS for international exposure, VAS & LICs for Aus goodness :)

FFA

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Re: Australian Investing Thread
« Reply #993 on: June 03, 2015, 09:21:44 AM »
thanks both. yeah to me it's a line ball decision, I was on the cusp of buying VGS and flipped the other way. The only other plus i'd add for VTS/VEU is you can tinker with the US/non-US split, if you so desire.

PurpleEi

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Re: Australian Investing Thread
« Reply #994 on: June 03, 2015, 08:35:14 PM »
For those with ARG holdings, what are your thoughts on the Argo Global Listed Infrastructure Limited Offer?

bigchrisb

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Re: Australian Investing Thread
« Reply #995 on: June 03, 2015, 08:46:43 PM »
For those with ARG holdings, what are your thoughts on the Argo Global Listed Infrastructure Limited Offer?

I had a good look at this, and decided it was not for me.  I saw a couple of pros and cons:
- Infrastructure as an asset class is somewhat uncorrelated with the rest of my portfolio.  This is a good thing.
- Its operated as a fund of funds, with a fairly high expense ratio.  Certainly more fees than I'm prepared to pay.  This is a bad thing.
- Infrastructure assets tend to be inversely correlated with cash returns - a bit more like bonds than stocks*. They have fairly stable earnings, and the price tends to reflect what someone is prepared to pay for the earnings.  With low global cash rates, infrastructure assets have had an awesome return over the last few years.  The market timer in me would suggest that now is not the time...
- * or at least they would behave like bonds if they didn't have a high degree of debt.  One of the tricks infrastructure has been using is to lever up the balance sheet with cheap debt.  This has been great while debt gets cheaper.  It will not be so great in the reverse situation.  My gut makes me feel like infrastructure assets are geared like the REITS were pre-GFC, and it makes me a bit nervous.

On balance, I'm not inclined to increase my exposure to infrastructure, and if I was, I'm not convinced that this is the vehicle to use.

Disclosure - I have a market weight of infrastructure (through index/lic funds), and a direct holding in SYD (from its MQG spin-out).

FFA

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Re: Australian Investing Thread
« Reply #996 on: June 03, 2015, 09:35:04 PM »
I'm keen to put some of the cash sitting in my savings account to more productive uses. Can you please help an investing newbie? (the only other shares I've got are a small handful of AMP shares I got about ten years ago that I haven't touched since)

I'm looking at ETFs, should I just pick a broker and then start? I'm thinking of starting with $10,000 or so and buying more once a quarter.

Also should I look at an ETF based on Australian or international shares?

Thanks :)
Hi akadean, ultimately you need to research and make your own investment decision... as a general view ive stated a few times my opinion 50/50 aus/int is a reasonable starting point. If doing quarterly investments you could alternate between the etfs. Another option to consider is a diversified fund, although fees will be higher than etf, it is more convenient for regular topups and auto rebalancing the ratio.

superannuationfreak

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Re: Australian Investing Thread
« Reply #997 on: June 04, 2015, 04:41:44 AM »
For those with ARG holdings, what are your thoughts on the Argo Global Listed Infrastructure Limited Offer?

My main concerns are the high fees and that listed infrastructure does not seem to have been the diversifier that (presumably less leveraged) direct infrastructure has been.

If I were to have a specific Infrastructure allocation I would have it through an industry fund.  That could either be through a balanced fund or HostPlus have recently added an Infrastructure investment option from Industry Funds Management for 0.45% p.a.

terrier56

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Re: Australian Investing Thread
« Reply #998 on: June 04, 2015, 11:40:57 PM »
stock market is having a FIRE-SALE!!! nothing like the smell of fear to buy more shares lol.

I recently found the website [sharesight.com]. It is a great tracking tool for australians who buy and hold. if you have fewer than 10 holdings then its free!!

superannuationfreak

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Re: Australian Investing Thread
« Reply #999 on: June 05, 2015, 02:53:20 AM »
For those looking for factor diversification within the Australian Share market (damned home bias) there's a new ETF which is closer to what I have been looking for.

Market Vectors Small Cap Dividend Payers ETF (MVS) tracks liquid dividend paying small caps.  They charge 0.49% p.a.
http://www.marketvectors.com.au/funds/MVS/Snapshot/

For me the ETF is too new (literally days old) and small (less than $30m AUM) to invest in, particularly outside of Super (in Super there is less risk of large capital gains tax bills if the product is tax-inefficient or closes due to lack of interest).  And I would prefer it to emphasise Value or Shareholder Yield rather than dividend payers.  But its a step in the direction of a lower-cost rules-based small cap fund that avoids the "growthiest" small cap stocks (in Australia that has historically been junior miners but who knows what the future holds).
« Last Edit: June 05, 2015, 02:55:11 AM by superannuationfreak »