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Learning, Sharing, and Teaching => Investor Alley => Topic started by: Ozstache on February 20, 2015, 05:15:21 PM

Title: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 20, 2015, 05:15:21 PM
I have noted a considerable number of Australians now participating in these forums, and quite a few new ones recently at that. I therefore thought it may be worth putting up a post pointing out where Australian and USA mustachian philosophies tend to vary due to country differences that would be worthwhile for Australian forum participants to be aware of. This list is neither exhaustive nor absolute and I encourage others to query and add to what I have put up.

Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: FFA on February 20, 2015, 05:44:47 PM
Excellent idea for a thread. Replying to subscribe. I think you covered most of the points already.

One further that immediately springs to mind is the whole area of Fixed Interest / Cash for saving and defensive investment allocation.

I would say, Australians typically hold less in bonds (?) since online saver accounts can be found with comparable interest rates, there are also competitive term deposits available (analogous to CD's elsewhere), and Australian investors might have more residential property in their portfolio which can also provide relatively fixed income and inflation hedge. So when you see typical portfolios described here eg 60/40 stocks/bonds, an Australian equivalent might also hold this "bonds" chunk in other cash/FI assets and the percentage may be a bit lower if offset by investment property holdings.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on February 20, 2015, 06:28:53 PM
  • Paying off student loans. Student debt amounts for Australian universities are comparably lower than the USA due to government subsidised education. Also, the debt is indexed at CPI, meaning most other debts are more pressing to pay off. As such, paying down student loan is still a priority, just not a high one.
I'm not sure of this one. As people only need to pay once they reach a certain income, and it disappears when you die, ER people may find that keeping student debt forever is a financially sound alternative. I do not think it is morally sound. However, this may change if/when the government alters HECS.

Australian health and unemployment are funded quite differently to that in the US as well.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: kyith on February 20, 2015, 09:02:45 PM
i believe the tax regime and the difference in how stocks structure their capital returns affects international folks how we choose our method. here in Singapore, there tends to be rather heavy on property rental as well, although in singapore the prices are rather crazy (yet people still buy them because property prices never goes down)

our tax regime is also favorable since capital gains and dividends are not taxed. but i digress
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: burrow on February 20, 2015, 09:18:38 PM

A debate that seems to polarise! We own our own home but all the research I have read tends to suggest that residential property is not a good investment long-term, compared to alternatives. I don't count our home as an asset, but then I don't count implied rent as an expense either.

Conversely, security of tenure, the psychological benefits of ownership, family stability, enforced savings (for less well disciplined money managers) and creative license are very good reasons to own.



A good reason to keep a significant portion of investments outside the super environment, especially when planning to retire well before 60....65?....70? Our investments are 50/50.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: pancakes on February 20, 2015, 09:25:22 PM
  • Paying off student loans. Student debt amounts for Australian universities are comparably lower than the USA due to government subsidised education. Also, the debt is indexed at CPI, meaning most other debts are more pressing to pay off. As such, paying down student loan is still a priority, just not a high one.
I'm not sure of this one. As people only need to pay once they reach a certain income, and it disappears when you die, ER people may find that keeping student debt forever is a financially sound alternative. I do not think it is morally sound. However, this may change if/when the government alters HECS.
There is a risk that the terms of HECS loans can be changed on current loan holders though? Please correct me if I am wrong but I believe that the government of the day could make legislative changes to make an outstanding balance at death payable from the deceased estate? 

If proposed deregulation of fees happens this does seem like a likely next step. At the moment I believe the figure is about 20% of university debt is never paid off. With deregulation that value will only increase. I'm not sure that as a country we can afford to have huge debts written off at death.

Given the amount of university debt that the government is already writing off, I'm surprised that they don't bring back more attractive bonuses for voluntary repayments.

I would repay my debt tomorrow if the 25% discount was brought back. At the moment I'm not making more than the compulsory payments (at the lowest bracket), will most likely stop working in a few years to care for children and then go back to earning a low income before retiring and carrying the balance to my grave.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on February 20, 2015, 09:39:43 PM
Thanks Ozstashe for starting this thread!
  • Investing in super (retirement) funds. While super is tax effective for now, it isnít accessible to early retirees and, due to likely government manipulation in the near future, is at risk of being more restrictive to access and becoming taxable for future retirees. As such, it is critical to have enough retirement funds outside of super to fund your interim retirement period until preservation age and to mitigate these risks.
I tend to agree that the current tax shelter is not going to exist for much longer, but my conclusion is a bit different. If I was in my early career now and earning a reasonable amount, I would put 50/50 inside/outside super as per Burrow - or more probably 30/70 - depending on how soon I was retiring. This would enable me to have it in the current tax haven for longer, and could mean that proportion of my super would remain in a better environment (if changes to super grandfather what is already there). When the new scheme came in, I would revise this. It would mean that if I had a windfall, and retired even sooner, or started to have more expenses (eg. kids), I could reduce (or 0) the amount I was putting into super and it would just get bigger.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: skyrefuge on February 20, 2015, 10:17:15 PM
  • A 3.5%, not 4%, SWR is a more suitable mid-point target for the Australian investing environment. A 3.5% SWR in Australia with a 50/50 allocation over a 30 year period has historically provided the 95% success rate many aim for. References: http://wpfau.blogspot.com.au/search?q=australia+safe+withdrawal+rate and http://www.finsia.com/docs/default-source/Retirement-Risk-Zone/how-safe-are-safe-withdrawal-rates-in-retirement-an-australian-perspective.pdf?sfvrsn=2 page 21

That FINSIA report is generally pretty awesome, but I really wish they would have shown the full analysis for the US too. That's because SWR results vary based on the dataset and particular methodology used. As far as I know, no one has used that particular dataset+methodology on the US, so it's entirely possible that it would show a much lower difference (or even a negative difference) between US and Australian SWRs than the 0.5% you suggest here.

For example, if I use the 50/50, 30-year, 95%-success setup that gave 3.54% for Australia, cFIREsim (again, using different dataset+methodology) gives only 3.66% for the US. If I change it to 75/25, then we have 4.01% for Australia vs. 3.88% for the US.

Also note that these numbers assume you're using entirely domestic stocks/bonds, which is unlikely to be the case for either Australian or US retirees.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 21, 2015, 12:16:56 AM
Excellent idea for a thread. Replying to subscribe. I think you covered most of the points already.

One further that immediately springs to mind is the whole area of Fixed Interest / Cash for saving and defensive investment allocation.

I would say, Australians typically hold less in bonds (?) since online saver accounts can be found with comparable interest rates, there are also competitive term deposits available (analogous to CD's elsewhere), and Australian investors might have more residential property in their portfolio which can also provide relatively fixed income and inflation hedge. So when you see typical portfolios described here eg 60/40 stocks/bonds, an Australian equivalent might also hold this "bonds" chunk in other cash/FI assets and the percentage may be a bit lower if offset by investment property holdings.

Good point FFA. I personally don't hold any bonds and use fixed interest as a proxy. Also, while my own house is the only property I currently hold, I am likely to get another one (using some of that fixed interest money) to use for family, investment and as a potential downsizer when I get really old, in that order. As much as I think property is a rip off in Australia, there is something to be said for the security of bricks and mortar should this facade of modern economics unravel in future.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 21, 2015, 12:30:54 AM
  • Owning rather than renting your home. Accommodation savings achieved by owning your own home, especially when owned outright, generally exceeds the opportunity cost of investing house capital elsewhere. Also own-home capital gains are tax free and have historically tracked at inflation or better (in many cases much better). Eg. Where I live, $550K can either buy a house that would rent out for $550 per week or be invested to yield $370 a week before tax @ 3.5% SWR. Even after $5K pa overheads (rates, maintenance, insurance) for owning the house, ie. ~ $100 per week, I am still better off by $80 per week by owning.

A debate that seems to polarise! We own our own home but all the research I have read tends to suggest that residential property is not a good investment long-term, compared to alternatives. I don't count our home as an asset, but then I don't count implied rent as an expense either.

Conversely, security of tenure, the psychological benefits of ownership, family stability, enforced savings (for less well disciplined money managers) and creative license are very good reasons to own.


I have found USA own versus rent comparisons tend to favour renting due to their high property taxes and HOA fees. Our overheads, for houses at least, in Australia are much lower. Units are usually less favourable due to body corporate fees.

If you don't mind me asking, how does your current home stack up in a buy versus rent comparison? ie. What is the estimated value of your place now, what do you pay in overheads and how much do you think it would rent out for? Would a 3.5% SWR on the same investment amount as your house value be able to pay that rent after you've paid tax on it and the overheads are deducted?
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Sunnymo on February 21, 2015, 12:34:09 AM

  • Paying off own-home mortgage. Provides an excellent tax-free ROI due to relatively higher mortgage and personal income tax rates in Australia AND progressively improves the own savings side of the own versus rent equation.


From the time that I have spent of the MMM forum it seems that our US friends fall broadly in to 2 schools of thought on the pay off your house question:
1. A home loan is debt, debt is bad therefore pay down that beast as quickly as possibly.
or
2. A home loan is tax deductible for the interest component (up to 2 properties) so having a home loan is not necessarily a bad thing and can be advantageous to your income tax position so hang on to that baby (while you pay down other debt).

However we Aussies get no tax advantage from the owner occupied home loan and hence are more inclined as a group to try and kill the home loan. We also have little/no access to fixed rates beyond five years or terms that are not 25/30 years so these factor in to our approach to home loans.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 21, 2015, 12:35:29 AM
Thanks Ozstashe for starting this thread!
  • Investing in super (retirement) funds. While super is tax effective for now, it isnít accessible to early retirees and, due to likely government manipulation in the near future, is at risk of being more restrictive to access and becoming taxable for future retirees. As such, it is critical to have enough retirement funds outside of super to fund your interim retirement period until preservation age and to mitigate these risks.
I tend to agree that the current tax shelter is not going to exist for much longer, but my conclusion is a bit different. If I was in my early career now and earning a reasonable amount, I would put 50/50 inside/outside super as per Burrow - or more probably 30/70 - depending on how soon I was retiring. This would enable me to have it in the current tax haven for longer, and could mean that proportion of my super would remain in a better environment (if changes to super grandfather what is already there). When the new scheme came in, I would revise this. It would mean that if I had a windfall, and retired even sooner, or started to have more expenses (eg. kids), I could reduce (or 0) the amount I was putting into super and it would just get bigger.

I'm probably a bit of a pessimist, but here is the list of changes to super I think our government could be capable of initiating in future:
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Sunnymo on February 21, 2015, 12:50:24 AM
Housing in general (outside major centres) is cheaper and building up a cashflow positive portfolio of 5/10/15/20 etc properties is a doable strategy for a middle class two income family. It is a FIRE strategy that a number of people on these boards are working on.

Given the high cost of property across the board (not crazy cheap in regional areas) there are fewer people pursuing this strategy in Aus. Most property investors in Aus have 1/2/3 properties and they are generally cashflow negative and hence tax deductible.

Stepping away from property it seems the preferred non tax advantaged/retirement savings vehicle is managed/mutual funds (hello, Vanguard). I see disproportionally little commentary about direct shares. Many Aussies have some direct share investment through major IPOs/demutualisations (Telstra, Medibank, AMP, NRMA etc). Again the differing tax treatment through franking credits and higher average yields (made even better by franking credits) feeds in to this.

Also given that Super has been compulsory for over 20 years rather than US 401k participation which is optional means that we may be more aware the effects of stock market performance on our retirement fortunes.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 21, 2015, 01:09:56 AM
  • Paying off student loans. Student debt amounts for Australian universities are comparably lower than the USA due to government subsidised education. Also, the debt is indexed at CPI, meaning most other debts are more pressing to pay off. As such, paying down student loan is still a priority, just not a high one.
I'm not sure of this one. As people only need to pay once they reach a certain income, and it disappears when you die, ER people may find that keeping student debt forever is a financially sound alternative. I do not think it is morally sound. However, this may change if/when the government alters HECS.
There is a risk that the terms of HECS loans can be changed on current loan holders though? Please correct me if I am wrong but I believe that the government of the day could make legislative changes to make an outstanding balance at death payable from the deceased estate? 

If proposed deregulation of fees happens this does seem like a likely next step. At the moment I believe the figure is about 20% of university debt is never paid off. With deregulation that value will only increase. I'm not sure that as a country we can afford to have huge debts written off at death.

Given the amount of university debt that the government is already writing off, I'm surprised that they don't bring back more attractive bonuses for voluntary repayments.

I would repay my debt tomorrow if the 25% discount was brought back. At the moment I'm not making more than the compulsory payments (at the lowest bracket), will most likely stop working in a few years to care for children and then go back to earning a low income before retiring and carrying the balance to my grave.

A timely news story on a recent study on the low repayment rate of student loans here in Australia, supporting your claim of 20% of university loans never being repaid and an even higher 40% non-repayment rate for diploma level courses. The primary recommendation of the study is to reduce the income threshold at which you are required to start repaying the loan below the current $53,000 threshold. See: https://au.finance.yahoo.com/news/forty-per-cent-government-money-050524262.html (https://au.finance.yahoo.com/news/forty-per-cent-government-money-050524262.html)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: burrow on February 21, 2015, 01:25:42 AM
"If you don't mind me asking, how does your current home stack up in a buy versus rent comparison? ie. What is the estimated value of your place now, what do you pay in overheads and how much do you think it would rent out for? Would a 3.5% SWR on the same investment amount as your house value be able to pay that rent after you've paid tax on it and the overheads are deducted?"

Oz, our house would sell at market today for about 700K but rental yield is only about 3.7% ($26K pa). Overheads (rates/insurance/maintenance etc) total about $5K pa, providing a net yield of about 3.0%. If this 700K was invested in franked Australian shares, it would generate tax-free income of about $38.5K (5.5%) based on current holdings.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 21, 2015, 01:48:10 AM
"If you don't mind me asking, how does your current home stack up in a buy versus rent comparison? ie. What is the estimated value of your place now, what do you pay in overheads and how much do you think it would rent out for? Would a 3.5% SWR on the same investment amount as your house value be able to pay that rent after you've paid tax on it and the overheads are deducted?"

Oz, our house would sell at market today for about 700K but rental yield is only about 3.7% ($26K pa). Overheads (rates/insurance/maintenance etc) total about $5K pa, providing a net yield of about 3.0%. If this 700K was invested in franked Australian shares, it would generate tax-free income of about $38.5K (5.5%) based on current holdings.

Your unusually low rental yield and currently high dividend return is what pushes renting way out in front of owning. At the more commonly occurring 5% or better gross rental yield for houses and the NATO standard 3.5% SWR, the odds would dip in owning's favour. I'm interested if anyone else calculates that owning beats renting in their circumstance. If not, scratch that one off my initial list!
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: burrow on February 21, 2015, 02:51:59 AM
Oz,

Just wondering why you are comparing rental yield with SWR? I would have thought it should be compared with investment alternatives ie the 'opportunity cost' of renting and investing the difference.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 21, 2015, 03:16:13 AM
Because if rent is now a living expense, like other living expenses it has to be funded by your stash for which an SWR traditionally applies.

Also, according to this website at least http://dividends.com.au/compound-returns-with-dividend-reinvestment/ (http://dividends.com.au/compound-returns-with-dividend-reinvestment/) , the long term average dividend yield of the Australian share market is 4%, which indicates the 5.5% dividend you are currently enjoying is above average and hence not to be relied upon as a basis for future returns.

Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: bigchrisb on February 21, 2015, 04:17:41 AM
Owning outright beats renting for me. This is because my rent would be paid out of post tax money, while my imputed rent isn't taxed. I'm on the top marginal tax rate. If I were on the bottom tax rate, renting and investing would come out on top
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on February 21, 2015, 04:20:52 AM
Thanks Ozstashe for starting this thread!
  • Investing in super (retirement) funds. While super is tax effective for now, it isnít accessible to early retirees and, due to likely government manipulation in the near future, is at risk of being more restrictive to access and becoming taxable for future retirees. As such, it is critical to have enough retirement funds outside of super to fund your interim retirement period until preservation age and to mitigate these risks.
I tend to agree that the current tax shelter is not going to exist for much longer, but my conclusion is a bit different. If I was in my early career now and earning a reasonable amount, I would put 50/50 inside/outside super as per Burrow - or more probably 30/70 - depending on how soon I was retiring. This would enable me to have it in the current tax haven for longer, and could mean that proportion of my super would remain in a better environment (if changes to super grandfather what is already there). When the new scheme came in, I would revise this. It would mean that if I had a windfall, and retired even sooner, or started to have more expenses (eg. kids), I could reduce (or 0) the amount I was putting into super and it would just get bigger.

I'm probably a bit of a pessimist, but here is the list of changes to super I think our government could be capable of initiating in future:
  • Contribution tax increased Agree
  • Withdrawal tax introduced Agree - 0% withdrawal after 60 is money for jam
  • Preservation age extended Not sure - see below
  • Lump sum withdrawals restricted or even removed Not sure - see below
  • Annuities becoming compulsory Not sure - see below
  • Residual balances being retained by government rather than your estate upon your death Already happening to a certain extent
Preservation age extended - one problem is the high number of tradies and blue collar workers who just wear out. They need the preservation age to be lower, and the tradies for one tend to be the swinging voters that each political party needs to pander. A year ago, I would have said yes, but I have changed my mind - I definitely cannot see it extended above 65.

Lump Sum withdrawals - necessary for moving to a higher level of aged care - particularly with the enormous increase that the last government placed upon people with care packages. When you do the figures, lump sum withdrawal from super is mandatory. Maybe an age limit for lump sum withdrawals - minimum age 70?

Compulsory Annuities - sitting on the fence about this - annuities are such a very poor investment at the moment. But everyone says the missing brick is how the money in your super lasts for your retirement - and annuities should be the missing brick but they need to be worthwhile.

The way superannuation is currently structured it all gradually comes out because you cannot add any after 65 or 75, and the withdrawal rates increase each year. If they stopped you from having part in pension phase and part in accumulation phase, they wouldn't need to put on a withdrawal tax because after a number of years is would all be out from under the super umbrella anyway.

One difference I have recently discovered between the US and ourselves is that we are mostly DC (I think the figure was 17% DB), whereas the US is still mostly DB (I think it is something like 60%). This makes for quite different dialogues about pensions. I don't think anywhere near as many people ever had a DB in Australia - it may possibly partly be because of our aged pension.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: happy on February 21, 2015, 05:06:49 AM
@Deborah: What does DB and DC stand for?
@ Ozstache - great thread.

Just over 2 years ago I worked out rent vs stay in my house in great detail and it came out in favour of staying here, even if I rented a lower standard of housing. I was a bit disappointed because I'd gotten mustache fever and with the improved cash flow by selling up and renting, I theoretically could have retired. The subsequent 2 years have seen capital gains in housing of 15 and 12%,  tax -free - woohoo! So glad I stayed put.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: FFA on February 21, 2015, 08:37:34 AM
Defined benefit (company takes the investment risk and pays you a fixed formula return)
Defined contribution (you take the investment risk)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on February 21, 2015, 02:54:39 PM
As FFA says:

Defined benefit (company takes the investment risk and pays you a fixed formula return) = pension - often relates more to the age you retire than the contributions you put in. It you leave the company before retirement you often only get what you have put in.
Defined contribution (you take the investment risk) - You invest so you get the returns on investment whenever it comes out.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: happy on February 21, 2015, 03:02:29 PM
Thanks, I'm familiar with both since I have super in both types. I just couldn't figure out what the abbreviations were in your sentence.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: marty998 on February 21, 2015, 04:26:28 PM
Appears I missed the fun here yesterday!
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 21, 2015, 10:59:58 PM
Great thread. I've come to the same basic conclusions and I am following a similar path and its good to get some positive reinforcement however I'm not convinced on the 3.5% SWR versus 4% SWR. With the higher dividend payout I think we could for instance get to say a 625k asset base and invest it entirely in the market and kick back living on dividends.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 21, 2015, 11:42:54 PM
Great thread. I've come to the same basic conclusions and I am following a similar path and its good to get some positive reinforcement however I'm not convinced on the 3.5% SWR versus 4% SWR. With the higher dividend payout I think we could for instance get to say a 625k asset base and invest it entirely in the market and kick back living on dividends.

You raise an interesting conflict between the results on page 21 of the Finsia report, which shows that a 2.74% SWR is the SAFEMAX100 (ie. no failures) with 100% stocks over 30 years, yet other references I have found (such as http://www.macrobusiness.com.au/2011/06/relying-on-stock-market-averages/ (http://www.macrobusiness.com.au/2011/06/relying-on-stock-market-averages/) and http://www.finsia.com/docs/default-source/jassa-new/jassa-2006/3_2006_equity_returns.pdf?sfvrsn=6 (http://www.finsia.com/docs/default-source/jassa-new/jassa-2006/3_2006_equity_returns.pdf?sfvrsn=6) page 20) show the long-term weighted dividend return average to be over 4%. If someone is only living off these dividends, achieving an effective 4%+ average SWR, and never selling their shares, how can their portfolio fail 6% of the time (Finsia table 5 on page 20) with 100% stocks over 40 years at exactly 4% SWR?

One possibility is that if you retired just when the short-term dividend yield dropped below 4%, you would have to draw down on your capital to maintain the 4% SWR. Perhaps that draw down permanently injures your capital base such that a continued 4% SWR draws it down to nothing, even after dividend yields climb over 4% again. ie the sequence of return monster gets you.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: stripey on February 22, 2015, 12:41:23 AM
Nice thread. I appreciate the enthusiastic debate.

Regarding HECS, no matter which way I run the numbers, at present I can't justify making voluntary repayments. A 5% bonus is just not sufficient motivation. I think if I applied for a mortgage my (large-ish) HECS debt would be taken into consideration as it affects my take-home pay (presently, it's taken out at about 7% of my income, I think) which may be a motivator for some. In terms of the potential to change the repayment 'rules', I agree that there's some risk. My solution is to have the funds sitting elsewhere, making more in interest/dividends than the indexing that HECS-HELP debts are subjected to... and if for some reason due to government legislation it becomes advantageous to pay it all off, I can do it quickly. Probably with a rewards credit card, as the ATO accepts credit card payments.

Super? I'm 30, so I'm counting on the situation being different by the time I can access it, which is more than 20 terms away...
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 22, 2015, 12:55:06 AM
Great thread. I've come to the same basic conclusions and I am following a similar path and its good to get some positive reinforcement however I'm not convinced on the 3.5% SWR versus 4% SWR. With the higher dividend payout I think we could for instance get to say a 625k asset base and invest it entirely in the market and kick back living on dividends.

You raise an interesting conflict between the results on page 21 of the Finsia report, which shows that a 2.74% SWR is the SAFEMAX100 (ie. no failures) with 100% stocks over 30 years, yet other references I have found (such as http://www.macrobusiness.com.au/2011/06/relying-on-stock-market-averages/ (http://www.macrobusiness.com.au/2011/06/relying-on-stock-market-averages/) and http://www.finsia.com/docs/default-source/jassa-new/jassa-2006/3_2006_equity_returns.pdf?sfvrsn=6 (http://www.finsia.com/docs/default-source/jassa-new/jassa-2006/3_2006_equity_returns.pdf?sfvrsn=6) page 20) show the long-term weighted dividend return average to be over 4%. If someone is only living off these dividends, achieving an effective 4%+ average SWR, and never selling their shares, how can their portfolio fail 6% of the time (Finsia table 5 on page 20) with 100% stocks over 40 years at exactly 4% SWR?

One possibility is that if you retired just when the short-term dividend yield dropped below 4%, you would have to draw down on your capital to maintain the 4% SWR. Perhaps that draw down permanently injures your capital base such that a continued 4% SWR draws it down to nothing, even after dividend yields climb over 4% again. ie the sequence of return monster gets you.

The only area to fail would be if dividends were cut which could mean going to nothing. I'm still paying off my house but I have money in super. I think when we start investing outside of super we will basically invest 100% in the stock market via a low cost etf. Once we reach the base level amount where dividends support a massive part of our living expenses (we might make it 100%) we will then save something on the side in cash/fixed interest/bonds as a buffer.

The only issue I have with what I just posted is that I do like the idea of holding some commodities and re-balancing every so often. I figure that this is a safe way to ensure you buy low and sell high.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: johnnydoe on February 22, 2015, 02:24:40 AM
Car expenses. On the living expenses side of early retirement, for those that need a car, the RACQ releases a yearly guide on what cars have been the cheapest to operate and maintain. I used it to figure out which car would suit my needs, then bought it second hand.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: KiniGula on February 22, 2015, 02:36:44 AM
Excellent idea for a thread. Replying to subscribe. I think you covered most of the points already.

One further that immediately springs to mind is the whole area of Fixed Interest / Cash for saving and defensive investment allocation.

I would say, Australians typically hold less in bonds (?) since online saver accounts can be found with comparable interest rates, there are also competitive term deposits available (analogous to CD's elsewhere), and Australian investors might have more residential property in their portfolio which can also provide relatively fixed income and inflation hedge. So when you see typical portfolios described here eg 60/40 stocks/bonds, an Australian equivalent might also hold this "bonds" chunk in other cash/FI assets and the percentage may be a bit lower if offset by investment property holdings.

That's interesting, because it means that a significant proportion of any Australian asset allocation is pretty much always going to be liquid. With the high interest savings accounts.

Also, when it comes to residential property, are you talking REITs or being landlords?
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: FFA on February 22, 2015, 03:42:29 AM
Also, when it comes to residential property, are you talking REITs or being landlords?
I had landlords in mind, but even if you throw in reits and I believe the asx itself has a higher exposure to property (Westfield holdings et al) than most other indices.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on February 22, 2015, 04:53:59 AM
Put "Australia" in the title and watch all the Aussies jump in lol. But I guess it proves that there is a massive shortage of good information out there, and it makes me wonder how bad it must be for other countries where there is even less information/transparency/etc. 

skyrefuge - thanks for bringing some diversity :-P

  • A 3.5%, not 4%, SWR is a more suitable mid-point target for the Australian investing environment. A 3.5% SWR in Australia with a 50/50 allocation over a 30 year period has historically provided the 95% success rate many aim for. References: http://wpfau.blogspot.com.au/search?q=australia+safe+withdrawal+rate and http://www.finsia.com/docs/default-source/Retirement-Risk-Zone/how-safe-are-safe-withdrawal-rates-in-retirement-an-australian-perspective.pdf?sfvrsn=2 page 21
  • Living off dividends. Entirely practical with Australian stocks as SWR-like dividend rates are easily achievable and franking credits commonly available provide a tax baseline of 30% company tax already paid which significantly reduces, and in some cases eliminates, your personal tax liability.
  • Owning rather than renting your home. Accommodation savings achieved by owning your own home, especially when owned outright, generally exceeds the opportunity cost of investing house capital elsewhere. Also own-home capital gains are tax free and have historically tracked at inflation or better (in many cases much better). Eg. Where I live, $550K can either buy a house that would rent out for $550 per week or be invested to yield $370 a week before tax @ 3.5% SWR. Even after $5K pa overheads (rates, maintenance, insurance) for owning the house, ie. ~ $100 per week, I am still better off by $80 per week by owning.
  • Paying off own-home mortgage. Provides an excellent tax-free ROI due to relatively higher mortgage and personal income tax rates in Australia AND progressively improves the own savings side of the own versus rent equation.
  • Paying off student loans. Student debt amounts for Australian universities are comparably lower than the USA due to government subsidised education. Also, the debt is indexed at CPI, meaning most other debts are more pressing to pay off. As such, paying down student loan is still a priority, just not a high one.
  • Investing in super (retirement) funds. While super is tax effective for now, it isnít accessible to early retirees and, due to likely government manipulation in the near future, is at risk of being more restrictive to access and becoming taxable for future retirees. As such, it is critical to have enough retirement funds outside of super to fund your interim retirement period until preservation age and to mitigate these risks.

You've definitely hit some of the big ones. Apart from the other suggestions so far I would consider adding:

1) high transaction costs for investing. Average $15 trades, with spreads and MERs that make me want to cry. These have come down a lot but they still have a way to go.

2) pitiful bond market.

3) A decent interest rate on savings (but as we are seeing in recent years this is being eroded at the whim of the government. Also I just saw FFA mentioned this, but I don't want to re-number my bullets).

4) lack of tax-free Municipal Bonds ("munis").

5) lowest tax bracket starts at $18,000. That's $36,000 tax free income for a couple.

6) However there are less (different?) loopholes for reducing tax.

7) Less world-class, market-leading companies on the ASX. Also slightly different fundamentals, which makes analysing companies more challenging as a lot of the writing out there is specifically for the US market.

8) Treatment of bequeathed assets (still investigating this).

Regarding renting vs owning, I'm still in Japan at the moment but when I go back as much as I'd like to have my own house I think I'll probably rent as I already have a lot of exposure to the property market by proxy through my parents.

Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 22, 2015, 11:49:38 AM
I have noted a considerable number of Australians now participating in these forums, and quite a few new ones recently at that. I therefore thought it may be worth putting up a post pointing out where Australian and USA mustachian philosophies tend to vary due to country differences that would be worthwhile for Australian forum participants to be aware of. This list is neither exhaustive nor absolute and I encourage others to query and add to what I have put up.

  • A 3.5%, not 4%, SWR is a more suitable mid-point target for the Australian investing environment. A 3.5% SWR in Australia with a 50/50 allocation over a 30 year period has historically provided the 95% success rate many aim for. References: http://wpfau.blogspot.com.au/search?q=australia+safe+withdrawal+rate and http://www.finsia.com/docs/default-source/Retirement-Risk-Zone/how-safe-are-safe-withdrawal-rates-in-retirement-an-australian-perspective.pdf?sfvrsn=2 page 21
  • Living off dividends. Entirely practical with Australian stocks as SWR-like dividend rates are easily achievable and franking credits commonly available provide a tax baseline of 30% company tax already paid which significantly reduces, and in some cases eliminates, your personal tax liability.
  • Owning rather than renting your home. Accommodation savings achieved by owning your own home, especially when owned outright, generally exceeds the opportunity cost of investing house capital elsewhere. Also own-home capital gains are tax free and have historically tracked at inflation or better (in many cases much better). Eg. Where I live, $550K can either buy a house that would rent out for $550 per week or be invested to yield $370 a week before tax @ 3.5% SWR. Even after $5K pa overheads (rates, maintenance, insurance) for owning the house, ie. ~ $100 per week, I am still better off by $80 per week by owning.
  • Paying off own-home mortgage. Provides an excellent tax-free ROI due to relatively higher mortgage and personal income tax rates in Australia AND progressively improves the own savings side of the own versus rent equation.
  • Paying off student loans. Student debt amounts for Australian universities are comparably lower than the USA due to government subsidised education. Also, the debt is indexed at CPI, meaning most other debts are more pressing to pay off. As such, paying down student loan is still a priority, just not a high one.
  • Investing in super (retirement) funds. While super is tax effective for now, it isn’t accessible to early retirees and, due to likely government manipulation in the near future, is at risk of being more restrictive to access and becoming taxable for future retirees. As such, it is critical to have enough retirement funds outside of super to fund your interim retirement period until preservation age and to mitigate these risks.

Many of these points just seem off to me.

Living off dividends.  The typical response to this is "Dividends are mathematically equivalent to selling stock", but no one in the thread pointed this out yet...so I thought I'd investigate.  It seems that while they are mathematically equivalent, they have different tax rates when dealing with dividends from Australian stocks.  A "franking tax credit" of 30% is applied.  Let's see how the math works out on that:

I'm going to assume most Australians are in the 32.5% tax bracket.

(http://i.imgur.com/LKb8vQy.png)

James owns shares in a company. The company pays him a fully franked dividend of $700. His dividend statement says there is a franking credit of $300. This represents the tax the company has already paid. This means the dividend, before company tax was deducted, would have been $1,000 ($700 + $300).

Come tax time, James must declare $1,000 (the $700 dividend plus the $300 franking credit) in his taxable income. If his marginal tax rate was 32.5%, he would have paid $325 tax on the dividend. Because the company has already paid $300 in tax, James will pay the difference, which is $25.  So his total dividend received is $675.

Vanguard's Total Australia Index currently has a dividend yield of 3.9%.  When we include the franking tax credit for someone in the 32.5% income bracket, that's a 3.8% after tax dividend yield.  Ok that's interesting.  Not spectacular, but interesting.  How does this compare to normal capital gains in Australia?

Australia long-term capital gains are taxed at 50% of your income tax bracket.  So 16.25% for our hypothetical investor James.  He would have to sell $806 worth of stock, to receive $675 after paying capital gains taxes.  While dividends are mathematically equal to selling stock, unlike in the US, their Australian after tax return is not equal.  James has to sell $806 of stock to match the $700 dividend, for a $106 difference, or about 15%.  So now for the big question, how much is this benefit worth?

The best information I can find, shows that Australia's cap weight is about 2% of the world:

(http://i.imgur.com/95YN6tk.png)

Australasia includes a few other countries, so let's just go with 2%.  Is it worth overweighting 2% of the world's economy, to gain a 15% boost on a 3.9% dividend?  I don't think so.  The Australian economy is very small, and very concentrated in a few big industries.  Vanguard's Total Australia Index only holds 300 stocks, while their total world funds (VTS and VEU) hold 6,000 stocks combined (Source: https://www.vanguardinvestments.com.au/institutional/jsp/investments/etfs.jsp#etfstab).  People commonly post strategies which have slightly better dividend yields, much less diversification, and overweight specific sectors.  These strategies are almost universally panned here.  I don't think this is any different.  In my opinion, the comparatively small benefit is not worth the risk of having a portfolio which isn't diversified.

A 3.5%, not 4%, SWR is a more suitable mid-point target for the Australian investing environment.  As Skyrefuge points out above, using 50/50 stocks/bonds doesn't get to a 4% safe withdrawal rate in the US either.  And when you up it to 75/25 stocks/bonds, Australia's SWR is actually better than the US.

Owning rather than renting your home.  This point doesn't make much sense to me.  You aren't doing the right comparison.  First you acknowledge your home will only increase at about the level of inflation, but then instead of comparing that number to the expected stock market return on $550,000, you compare it to rental income?  Then compare that rental income to a 3.5% safe return rate?  You seem to be all over the place here.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: burrow on February 22, 2015, 12:39:43 PM
"Come tax time, James must declare $1,000 (the $700 dividend plus the $300 franking credit) in his taxable income. If his marginal tax rate was 32.5%, he would have paid $325 tax on the dividend. Because the company has already paid $300 in tax, James will receive a refund of the difference, which is $25.  So his total dividend received is $725".


Dodge, I think you meant that James would need to pay $25 in tax (the difference between the two), so his total dividend received is $675. His marginal tax rate would need to be less than 30% to receive a refund.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 22, 2015, 01:01:04 PM
"Come tax time, James must declare $1,000 (the $700 dividend plus the $300 franking credit) in his taxable income. If his marginal tax rate was 32.5%, he would have paid $325 tax on the dividend. Because the company has already paid $300 in tax, James will receive a refund of the difference, which is $25.  So his total dividend received is $725".


Dodge, I think you meant that James would need to pay $25 in tax (the difference between the two), so his total dividend received is $675. His marginal tax rate would need to be less than 30% to receive a refund.

Correct!  I thought that sounded weird.  I'll edit the post.  Thanks!
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 22, 2015, 01:51:23 PM
A couple of points that I can see:-

1. Franked dividends will lead to a rebate up to $37k income. Past that income level you will have to pay back a small percentage. So if you earned $40k in dividends you could receive an additional tax rebate every year.
2. Housing in Australia has had really good returns. I'm not sure if you can compare house price rises just to inflation. I'd add that owning your own house adds to a diversified portfolio. In the stock market drops in value you still have your house.
3. I never realized that the 4% rule was a 72/25 stock/bonds asset allocation. This probably means that for anyone contemplating ER they need to have some buffer in there figures somehow. That might mean owning property, getting to a lower WR or having the ability to cut expenses if required. It could also mean going to a 100% stock allocation however my issue with this is twofold. One - if the market tanks you might not be able to ride it out and the drawdown at that point could mean going back to work. Two - I like having some cash in your portfolio in order to re-balance as I think it will help you sell high and buy low even if it is a small percentage of your portfolio.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 22, 2015, 02:23:30 PM
A couple of points that I can see:-

1. Franked dividends will lead to a rebate up to $37k income. Past that income level you will have to pay back a small percentage. So if you earned $40k in dividends you could receive an additional tax rebate every year.
2. Housing in Australia has had really good returns. I'm not sure if you can compare house price rises just to inflation. I'd add that owning your own house adds to a diversified portfolio. In the stock market drops in value you still have your house.
3. I never realized that the 4% rule was a 72/25 stock/bonds asset allocation. This probably means that for anyone contemplating ER they need to have some buffer in there figures somehow. That might mean owning property, getting to a lower WR or having the ability to cut expenses if required. It could also mean going to a 100% stock allocation however my issue with this is twofold. One - if the market tanks you might not be able to ride it out and the drawdown at that point could mean going back to work. Two - I like having some cash in your portfolio in order to re-balance as I think it will help you sell high and buy low even if it is a small percentage of your portfolio.

2.  Expecting a higher than inflation return, from an asset class which over the long term rises only with inflation, is a recipe for disaster.  If the stock market drops in value you still have your stocks.  And your bonds.  Don't trick yourself into thinking your house is an investment.  It's not.  It can act as an inflation hedge, and it can make sense to buy instead of rent in some areas, but it's not part of your investment portfolio.

3.  Why would you need an additional buffer?  When the 4% rule is calculated, there is no additional buffer, and it works out fine.  This is the whole point of the Trinity Study, to determine a worst-case-scenario withdrawal rate.  The vast majority of retirement years can support a higher than 4% withdrawal rate, the 4% is the buffer.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on February 22, 2015, 02:31:53 PM
Hi Dodge - thanks for the post highlighting the difference in returns thanks to dividend franking. I'd only add that there are other reasons for having a slight home bias, eg as a hedge against the case where your home economy is the only economy doing well on the global scale at the time you retire.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 22, 2015, 02:41:34 PM
Hi Dodge - thanks for the post highlighting the difference in returns thanks to dividend franking. I'd only add that there are other reasons for having a slight home bias, eg as a hedge against the case where your home economy is the only economy doing well on the global scale at the time you retire.

The most compelling reason for a home bias, is to avoid currency risk.  When your home country only represents 2% of the world economy, I believe the risks outweigh the benefits.  Any attempt to overweight your home country, because you think it might outperform, is just market timing. 
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 22, 2015, 05:47:02 PM
Living off dividends.  The typical response to this is "Dividends are mathematically equivalent to selling stock", but no one in the thread pointed this out yet...so I thought I'd investigate.  It seems that while they are mathematically equivalent, they have different tax rates when dealing with dividends from Australian stocks.  A "franking tax credit" of 30% is applied.  Let's see how the math works out on that:

I'm going to assume most Australians are in the 32.5% tax bracket.

(http://i.imgur.com/LKb8vQy.png)

James owns shares in a company. The company pays him a fully franked dividend of $700. His dividend statement says there is a franking credit of $300. This represents the tax the company has already paid. This means the dividend, before company tax was deducted, would have been $1,000 ($700 + $300).

Come tax time, James must declare $1,000 (the $700 dividend plus the $300 franking credit) in his taxable income. If his marginal tax rate was 32.5%, he would have paid $325 tax on the dividend. Because the company has already paid $300 in tax, James will pay the difference, which is $25.  So his total dividend received is $675.

Vanguard's Total Australia Index currently has a dividend yield of 3.9%.  When we include the franking tax credit for someone in the 32.5% income bracket, that's a 3.8% after tax dividend yield.  Ok that's interesting.  Not spectacular, but interesting.  How does this compare to normal capital gains in Australia?

Australia long-term capital gains are taxed at 50% of your income tax bracket.  So 16.25% for our hypothetical investor James.  He would have to sell $806 worth of stock, to receive $675 after paying capital gains taxes.  While dividends are mathematically equal to selling stock, unlike in the US, their Australian after tax return is not equal.  James has to sell $806 of stock to match the $700 dividend, for a $106 difference, or about 15%.  So now for the big question, how much is this benefit worth?

The best information I can find, shows that Australia's cap weight is about 2% of the world:

(http://i.imgur.com/95YN6tk.png)

Australasia includes a few other countries, so let's just go with 2%.  Is it worth overweighting 2% of the world's economy, to gain a 15% boost on a 3.9% dividend?  I don't think so.  The Australian economy is very small, and very concentrated in a few big industries.  Vanguard's Total Australia Index only holds 300 stocks, while their total world funds (VTS and VEU) hold 6,000 stocks combined (Source: https://www.vanguardinvestments.com.au/institutional/jsp/investments/etfs.jsp#etfstab).  People commonly post strategies which have slightly better dividend yields, much less diversification, and overweight specific sectors.  These strategies are almost universally panned here.  I don't think this is any different.  In my opinion, the comparatively small benefit is not worth the risk of having a portfolio which isn't diversified.

While most Australians are likely in higher tax brackets during the accumulation phase, thus validating your point, they should drop a bracket or two in the retirement phase. In my case, our dividend paying shares are in my wife's name and she is in the 19c tax bracket. As such, she actually receives an 11% tax credit on the dividends she receives, pushing that 3.9% yield up to 4.3%. When my wife retires too, she will be under the tax free threshold meaning a 30% tax credit giving a 5.1% equivalent yield. In short, the less you earn and the more you can balance your dividends out to favour the most tax-advantage partner in a couple, the more amplified the benefits of franking become.

Your point about Australia only representing about 2% of world stocks is also noted, however currency risk (which you note in a later post), the 'unknown' of international markets and tax implications of capital gains and dividends from international shares deter Aussies from diversifying too much into them. Furthermore, if you are already achieving your desired SWR, and then, some using tax-advantaged dividends from a stock market that is small but has proven to be diversified enough to withstand the world's major financial shocks over the last century, why take on much more risk and complexity than you have to? Sure, past performance doesn't necessarily indicate future performance, but the same can be said for all world stock markets. (FWIW, I hold about 16.5% international shares in my portfolio, compliments of the balanced mix in my super fund, and am comfortable with this)

In summary, I still consider that living off dividends sourced mainly from the Australian share market is a relevant retirement income strategy for Australians.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 22, 2015, 06:36:46 PM
Owning rather than renting your home.  This point doesn't make much sense to me.  You aren't doing the right comparison.  First you acknowledge your home will only increase at about the level of inflation, but then instead of comparing that number to the expected stock market return on $550,000, you compare it to rental income?  Then compare that rental income to a 3.5% safe return rate?  You seem to be all over the place here.
  • If you can rent the same house for $550 a week, that's what you need to be comparing it to.  Renting vs Buying.  Is it better to buy a house for $550,000 and live in it, or rent the same house for $550 a week and invest the difference?  The answer will depend on your mortgage interest, downpayment, property taxes, insurance...etc.  A 20% downpayment alone ($110,000) is expected to compound to about $450,000 after 15 years if you invested it instead.  I don't have all the variables, but it looks like renting comes out way ahead here.
  • Using the safe withdrawal rate to calculate yield doesn't make sense, especially when you're in the accumulation phase, which I suspect you are.  If you have $550,000 invested in a world market, you can expect a yearly average return of somewhere between 9-11%.  In other words, your investment is expected to just about double after 7 years.  Throwing money at an asset which only grows with inflation, is nowhere close to this.  When viewed in isolation, paying 5% mortgage interest to throw money at an asset which only grows with inflation, is just silly.  Do the math and see if it makes sense vs renting, but don't trick yourself into thinking of your home as an investment.  Why your house is a terrible investment (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)

The reason I chose SWR as the opportunity cost 'opponent' was firstly because it removes the ability to cherry pick the best performing part of your portfolio to compare against housing and hence bias the comparison in renting's favour. Secondly, I was primarily considering the retirement phase, where it would be your SWR funding either your rent or, if you owned, your overheads.

Also, it seems I implied that Aussie housing only barely beats inflation. Over the last decade at least, Australian property has actually bettered inflation by more than 3% pa (Reference: http://www.asx.com.au/documents/resources/russell-asx-2014-long-term-investing-report.pdf (http://www.asx.com.au/documents/resources/russell-asx-2014-long-term-investing-report.pdf) page 3 exhibit 1). While I personally believe that this is unsustainable long term, I continue to be proven wrong and therefore cannot ignore the wealth-enhancing impact it has had on Australians.

Re doing the math, I have read that JL Collins webpage and I have had a good play with Australian numbers against those assessment parameters and have found that the Australian owning argument is more favourable than our USA counterparts, hence me posting this point in my list. Let me go back and re-crunch the numbers and have another go at trying to illustrate this with a representative example for  both the accummulation and retirement phases.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: FFA on February 22, 2015, 07:04:11 PM
Hi Dodge - thanks for the post highlighting the difference in returns thanks to dividend franking. I'd only add that there are other reasons for having a slight home bias, eg as a hedge against the case where your home economy is the only economy doing well on the global scale at the time you retire.

The most compelling reason for a home bias, is to avoid currency risk.  When your home country only represents 2% of the world economy, I believe the risks outweigh the benefits.  Any attempt to overweight your home country, because you think it might outperform, is just market timing.
I thought this vanguard paper does a good job of covering home bias and conveniently has a "hypothetical" case of an Australian investor deciding on foreign equity allocation (figure 11). While this is only illustrative, I think the outcome is probably realistic for many people and ends up somewhere in the middle between typical allocation and market proportional.

https://pressroom.vanguard.com/content/nonindexed/6.26.2012_The_Role_of_Home_Bias.pdf (https://pressroom.vanguard.com/content/nonindexed/6.26.2012_The_Role_of_Home_Bias.pdf)

Taking a look at Self Managed Super Fund (SMSF) asset allocations as of sep'14 : 42% Australian shares / 12% international. This data is consistent with Vanguards, showing people are having massive home bias in their super portfolio. And international shares were only 9% in sep'13, so it's actually been improving too (most likely due to AUD depreciation rather than investors intentionally investing more capital into international shares!).
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 22, 2015, 07:11:22 PM
While most Australians are likely in higher tax brackets during the accumulation phase, thus validating your point, they should drop a bracket or two in the retirement phase. In my case, our dividend paying shares are in my wife's name and she is in the 19c tax bracket. As such, she actually receives an 11% tax credit on the dividends she receives, pushing that 3.9% yield up to 4.3%. When my wife retires too, she will be under the tax free threshold meaning a 30% tax credit giving a 5.1% equivalent yield. In short, the less you earn and the more you can balance your dividends out to favour the most tax-advantage partner in a couple, the more amplified the benefits of franking become.

Your point about Australia only representing about 2% of world stocks is also noted, however currency risk (which you note in a later post) and tax implications of capital gains and dividends from international shares deter Aussies from significantly diversifying too much into them. Furthermore, if you are already achieving your desired SWR, and then, some using tax-advantaged dividends from a stock market that is small but has proven to be diversified enough to withstand the world's major financial shocks over the last century, why take on much more risk and complexity than you have to? Sure, past performance doesn't necessarily indicate future performance, but the same can be said for all world stock markets. (FWIW, I hold about 16.5% international shares in my portfolio, compliments of the balanced mix in my super fund, and am comfortable with this)

In summary, I still consider that living off dividends sourced mainly from the Australian share market is a relevant retirement income strategy for Australians.

We'll just have to agree to disagree then :)

Can you name an economy that didn't withstand the world's major financial shocks over the last century?  I don't think that's a very good qualifier.  Looking at how the Australian stock index handled our last financial shock:

(http://i.imgur.com/zb5CXAm.png)

I don't see anything special here.  It fell 50% just like everyone else, but it hasn't caught back up yet.  If the Australian stock index rises 15% this year, it will still only match the pre-crash level.  Had you been invested in a world portfolio, you would have already recovered from the biggest financial shock of our generation back in 2013, and your portfolio would now be seeing record highs.

Australia's economy is very heavily weighted towards a few sectors.  68% of Australia's economy is its Services sector (mostly Finance), while 19% is its Mining sector.  These are very heavy bets, which I wouldn't be comfortable taking, especially for the sake of an extra 1.2 percentage points of dividend.  It doesn't really matter how the returns get to you, dividend or selling stock, does't matter.  It seems you think you're taking the safe route by using dividends, but you couldn't be further from the truth.  Seriously, look through the many threads here with newbies proposing ideas for 100% high-dividend-yield sector-weighted un-diversified dividend stocks for their retirement portfolio.  They are unanimously shut down.  All the same arguments apply here.

Let's examine her situation more closely.  It looks like only 63% of dividends from the Australian Stock Index included Frank credits last year:

(http://i.imgur.com/nYlY6lZ.png)

Source: http://www.watoday.com.au/business/markets/quotes/dividends/VAS/vanguard-australian-shares-index-etf

If she's in the 19% tax bracket, a $700 dividend would end up paying her $810 with a full franking credit, but using the 2014 numbers, the dividend would've been $699 (yes she would've ended up owing $1).  To receive $699 by selling stocks, she'd have to sell $772 worth of stocks.  That's about a 10% boost in dividends.  It looks like I'm going to have to redo the numbers from my previous post!

In my opinion, you are not being compensated for the incredible risk you're taking.  Considering this is an early retirement portfolio, I'd think long and hard before committing to that bet.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 22, 2015, 07:18:39 PM
In summary, I still consider that living off dividends sourced mainly from the Australian share market is a relevant retirement income strategy for Australians.

When you add the possible benefit of franking credits I think its a solid strategy.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 22, 2015, 07:25:18 PM
2.  Expecting a higher than inflation return, from an asset class which over the long term rises only with inflation, is a recipe for disaster.  If the stock market drops in value you still have your stocks.  And your bonds.  Don't trick yourself into thinking your house is an investment.  It's not.  It can act as an inflation hedge, and it can make sense to buy instead of rent in some areas, but it's not part of your investment portfolio.

I don't believe that these comments are really accurate. I'm not sure that housing has returned historically the rate of inflation. Housing has made people rich in Australia.

As for your house not being an investment of course it is. If I sell my house for $1 million dollars does that money count as an investment ? I'm not stating that you count it as part of your FI asset portfolio but its definitely an investment. The question is really how good of an investment is housing. I'm not sure about this however I think owning the house you live in has several advantages over renting. On the flip side I can't see myself ever buying an investment property. I don't believe it makes sense in Australia.

3.  Why would you need an additional buffer?  When the 4% rule is calculated, there is no additional buffer, and it works out fine.  This is the whole point of the Trinity Study, to determine a worst-case-scenario withdrawal rate.  The vast majority of retirement years can support a higher than 4% withdrawal rate, the 4% is the buffer.

This is a tougher one. My understanding from the above posts is that the 4% wr does not provide a 95% or above success for a retirement equal to 40 years if you have a 50/50 stock bond asset allocation. Therefore you need to have an asset allocation of 75% stocks and 25% bonds/cash. Having a different asset allocation increases your risk of some form of failure. For those of use looking to retire for longer than 40 years I think we need some increased buffer. I can see your point on this but I suppose it comes down to how each of us feel with regards to the risk and our retirement portfolio.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 22, 2015, 07:30:05 PM
Owning rather than renting your home.  This point doesn't make much sense to me.  You aren't doing the right comparison.  First you acknowledge your home will only increase at about the level of inflation, but then instead of comparing that number to the expected stock market return on $550,000, you compare it to rental income?  Then compare that rental income to a 3.5% safe return rate?  You seem to be all over the place here.
  • If you can rent the same house for $550 a week, that's what you need to be comparing it to.  Renting vs Buying.  Is it better to buy a house for $550,000 and live in it, or rent the same house for $550 a week and invest the difference?  The answer will depend on your mortgage interest, downpayment, property taxes, insurance...etc.  A 20% downpayment alone ($110,000) is expected to compound to about $450,000 after 15 years if you invested it instead.  I don't have all the variables, but it looks like renting comes out way ahead here.
  • Using the safe withdrawal rate to calculate yield doesn't make sense, especially when you're in the accumulation phase, which I suspect you are.  If you have $550,000 invested in a world market, you can expect a yearly average return of somewhere between 9-11%.  In other words, your investment is expected to just about double after 7 years.  Throwing money at an asset which only grows with inflation, is nowhere close to this.  When viewed in isolation, paying 5% mortgage interest to throw money at an asset which only grows with inflation, is just silly.  Do the math and see if it makes sense vs renting, but don't trick yourself into thinking of your home as an investment.  Why your house is a terrible investment (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)

The reason I chose SWR as the opportunity cost 'opponent' was firstly because it removes the ability to cherry pick the best performing part of your portfolio to compare against housing and hence bias the comparison in renting's favour. Secondly, I was primarily considering the retirement phase, where it would be your SWR funding either your rent or, if you owned, your overheads.

Also, it seems I implied that Aussie housing only barely beats inflation. Over the last decade at least, Australian property has actually bettered inflation by more than 3% pa (Reference: http://www.asx.com.au/documents/resources/russell-asx-2014-long-term-investing-report.pdf (http://www.asx.com.au/documents/resources/russell-asx-2014-long-term-investing-report.pdf) page 3 exhibit 1). While I personally believe that this is unsustainable long term, I continue to be proven wrong and therefore cannot ignore the wealth-enhancing impact it has had on Australians.

Re doing the math, I have read that JL Collins webpage and I have had a good play with Australian numbers against those assessment parameters and have found that the Australian owning argument is more favourable than our USA counterparts, hence me posting this point in my list. Let me go back and re-crunch the numbers and have another go at trying to illustrate this with a representative example for  both the accummulation and retirement phases.

I don't think it's wise to count on the last decade of housing gains, when over the long term it has only risen with inflation.

"Secondly, I was primarily considering the retirement phase, where it would be your SWR funding either your rent or, if you owned, your overheads."

It's still not a valid comparison.  If you own a $550,000 house, the maintenance alone is estimated to be 1-2% ($5,500 - 11,000).  Then you add insurance and property taxes...etc, on top of that.  Do the math, and you'll see that investing the full $550,000 and renting, beats spending $550,000 on a house and finding alternate income to pay for maintenance...etc.  Especially when you consider the portfolio would likely grow much faster than inflation, even with the 4% withdrawals.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: FFA on February 22, 2015, 07:48:12 PM
  • Owning rather than renting your home. .....

A debate that seems to polarise! We own our own home but all the research I have read tends to suggest that residential property is not a good investment long-term, compared to alternatives. I don't count our home as an asset, but then I don't count implied rent as an expense either.

Conversely, security of tenure, the psychological benefits of ownership, family stability, enforced savings (for less well disciplined money managers) and creative license are very good reasons to own.
For the rent vs own, obviously it depends on personal circumstances, marginal tax rate etc as others pointed out.

If we are generalizing, I'd agree with the above points. Pen and paper exercise usually favours renting, but for my own case and if asked by others, I would usually suggest to own for the list of reasons above (IMO enforced savings is the key benefit for most people, it doesn't show up in the pen & paper exercise though!)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 22, 2015, 08:01:35 PM
Owning rather than renting your home.  This point doesn't make much sense to me.  You aren't doing the right comparison.  First you acknowledge your home will only increase at about the level of inflation, but then instead of comparing that number to the expected stock market return on $550,000, you compare it to rental income?  Then compare that rental income to a 3.5% safe return rate?  You seem to be all over the place here.
  • If you can rent the same house for $550 a week, that's what you need to be comparing it to.  Renting vs Buying.  Is it better to buy a house for $550,000 and live in it, or rent the same house for $550 a week and invest the difference?  The answer will depend on your mortgage interest, downpayment, property taxes, insurance...etc.  A 20% downpayment alone ($110,000) is expected to compound to about $450,000 after 15 years if you invested it instead.  I don't have all the variables, but it looks like renting comes out way ahead here.
  • Using the safe withdrawal rate to calculate yield doesn't make sense, especially when you're in the accumulation phase, which I suspect you are.  If you have $550,000 invested in a world market, you can expect a yearly average return of somewhere between 9-11%.  In other words, your investment is expected to just about double after 7 years.  Throwing money at an asset which only grows with inflation, is nowhere close to this.  When viewed in isolation, paying 5% mortgage interest to throw money at an asset which only grows with inflation, is just silly.  Do the math and see if it makes sense vs renting, but don't trick yourself into thinking of your home as an investment.  Why your house is a terrible investment (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)

The reason I chose SWR as the opportunity cost 'opponent' was firstly because it removes the ability to cherry pick the best performing part of your portfolio to compare against housing and hence bias the comparison in renting's favour. Secondly, I was primarily considering the retirement phase, where it would be your SWR funding either your rent or, if you owned, your overheads.

Also, it seems I implied that Aussie housing only barely beats inflation. Over the last decade at least, Australian property has actually bettered inflation by more than 3% pa (Reference: http://www.asx.com.au/documents/resources/russell-asx-2014-long-term-investing-report.pdf (http://www.asx.com.au/documents/resources/russell-asx-2014-long-term-investing-report.pdf) page 3 exhibit 1). While I personally believe that this is unsustainable long term, I continue to be proven wrong and therefore cannot ignore the wealth-enhancing impact it has had on Australians.

Re doing the math, I have read that JL Collins webpage and I have had a good play with Australian numbers against those assessment parameters and have found that the Australian owning argument is more favourable than our USA counterparts, hence me posting this point in my list. Let me go back and re-crunch the numbers and have another go at trying to illustrate this with a representative example for  both the accummulation and retirement phases.

I don't think it's wise to count on the last decade of housing gains, when over the long term it has only risen with inflation.

"Secondly, I was primarily considering the retirement phase, where it would be your SWR funding either your rent or, if you owned, your overheads."

It's still not a valid comparison.  If you own a $550,000 house, the maintenance alone is estimated to be 1-2% ($5,500 - 11,000).  Then you add insurance and property taxes...etc, on top of that.  Do the math, and you'll see that investing the full $550,000 and renting, beats spending $550,000 on a house and finding alternate income to pay for maintenance...etc.  Especially when you consider the portfolio would likely grow much faster than inflation, even with the 4% withdrawals.

It has been far more than a decade that housing gains in Australia have outstripped inflation ie. more like half a century. The capital gains tax free treatment of your own home has gone a long way towards contributing to this. In any case, I use inflation as future house price growth rate in my calculations, as I expect it will one day become a reality.

You need to take your USA hat off when looking at Australian property overhead costs. There are no property taxes on your own home in Australia and maintenance costs being 1-2% of a property value becomes far too high an estimate when housing is just more expensive as a procurement number rather than physically costing that much to maintain. There are not too many people, myself included, who would spend over $5000 TOTAL for all housing overheads in a year for a house around $550K in value they own outright. As I said, I will run some representative calculations to demonstrate my point and post them up later.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 22, 2015, 08:28:17 PM
It has been far more than a decade that housing gains in Australia have outstripped inflation ie. more like half a century. The capital gains tax free treatment of your own home has gone a long way towards contributing to this.

I don't have the stats but I think it must be much more like a 50 year out performance. Expecting the return to be inflation like is unrealistic based on past performance. You may as well state stocks should never outperform inflation.

I'm not really a fan of property investment mainly due to the massive cost involved in purchasing property however I think owning your own home has several advantages. If property continues to perform as it has in the past I think its a great hedge against rising rents.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on February 22, 2015, 08:30:50 PM
I've never really looked into real estate as an investment personally. From what I understand though the Australian property market has been propped up somewhat due to immigration policy over the past several decades. These immigration policies have been forced to the forefront in recent years, but I wouldn't bet on the Australian Government changing anything that would affect the trajectory of housing prices any time soon. The whole thing is massively political. Even something like getting rid of negative gearing, no government would dare suggest it these days.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 22, 2015, 09:12:32 PM
The whole thing is massively political. Even something like getting rid of negative gearing, no government would dare suggest it these days.

Correct. I'd add that even if it is in the interest of the Australia people as a whole for property to decrease in cost and all that was being suggested was to remove some of the financial benefits of owning property that means nothing to the political parties as they don't want to risk losing votes.

Change also might not affect property prices. Immigration plus a cultural bias towards property investment is a hard thing to mitigate against.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 22, 2015, 09:44:13 PM
2.  Expecting a higher than inflation return, from an asset class which over the long term rises only with inflation, is a recipe for disaster.  If the stock market drops in value you still have your stocks.  And your bonds.  Don't trick yourself into thinking your house is an investment.  It's not.  It can act as an inflation hedge, and it can make sense to buy instead of rent in some areas, but it's not part of your investment portfolio.

I don't believe that these comments are really accurate. I'm not sure that housing has returned historically the rate of inflation. Housing has made people rich in Australia.

As for your house not being an investment of course it is. If I sell my house for $1 million dollars does that money count as an investment ? I'm not stating that you count it as part of your FI asset portfolio but its definitely an investment. The question is really how good of an investment is housing. I'm not sure about this however I think owning the house you live in has several advantages over renting. On the flip side I can't see myself ever buying an investment property. I don't believe it makes sense in Australia.

3.  Why would you need an additional buffer?  When the 4% rule is calculated, there is no additional buffer, and it works out fine.  This is the whole point of the Trinity Study, to determine a worst-case-scenario withdrawal rate.  The vast majority of retirement years can support a higher than 4% withdrawal rate, the 4% is the buffer.

This is a tougher one. My understanding from the above posts is that the 4% wr does not provide a 95% or above success for a retirement equal to 40 years if you have a 50/50 stock bond asset allocation. Therefore you need to have an asset allocation of 75% stocks and 25% bonds/cash. Having a different asset allocation increases your risk of some form of failure. For those of use looking to retire for longer than 40 years I think we need some increased buffer. I can see your point on this but I suppose it comes down to how each of us feel with regards to the risk and our retirement portfolio.

Just because something is expensive, and fluctuates in value, doesn't make it an investment.

(http://www.whocrashedtheeconomy.com/realhouseprices1880to2011.gif)

There have been entire decades, multiple decades, where home prices in Australia decreased when taking inflation into account.  One of those "lost decades" just ended in 1999.  The one starting around 1974 lasted almost 2 decades.  The one in 1950 lasted 2 decades, the one from the beginning of the chart lasted at least 80 years...etc.  It looks like the latest boom started right in-line with the last US boom, which has already fallen in-line.  How long until the Australian housing market follows?

You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.  There is no economic reason for a commodity to grow faster than inflation.

Even if someone bought a house in 1975, and held to today, they would only go from 150 to 350 on the chart.  A 2.3x increase.  The inflation adjusted stock market has grown 20x since 1975.

"Having a different asset allocation increases your risk of some form of failure. For those of use looking to retire for longer than 40 years I think we need some increased buffer."

Historically speaking, have a higher stock allocation decreases chances of failure, since the main source of failure for a long retirement (40+ years) is inflation, and stocks are the best way to combat that.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: FFA on February 22, 2015, 10:08:00 PM
You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.
while it's sitting there, it provides shelter which can be contracted for rental income. unlike the gold, that just sits there...
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on February 22, 2015, 10:19:25 PM
Just going to jump in and say that this is EXACTLY the kind of difference in thinking I was hoping we'd see.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 22, 2015, 10:26:10 PM

You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.
while it's sitting there, it provides shelter which can be contracted for rental income. unlike the gold, that just sits there...

Correct. Rentals are investments. Not the house you live in.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 22, 2015, 10:29:42 PM
Just because something is expensive, and fluctuates in value, doesn't make it an investment.

Yes it does. Art can be an investment. Commodities are definitely investments. You don't get to define what is an investment.

There have been entire decades, multiple decades, where home prices in Australia decreased when taking inflation into account.  One of those "lost decades" just ended in 1999.  The one starting around 1974 lasted almost 2 decades.  The one in 1950 lasted 2 decades, the one from the beginning of the chart lasted at least 80 years...etc.  It looks like the latest boom started right in-line with the last US boom, which has already fallen in-line.  How long until the Australian housing market follows?

I have no idea if property will continue to rise. It doesn't even bother me but the same thing can occur in stocks.

You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.  There is no economic reason for a commodity to grow faster than inflation.

I view commodities as investments. I actually like commodities as a hedge against all sorts of financial stresses on the global financial system. Housing though is better because it does produce something. If you live in it it provides shelter. If you rent it out you receive a rental income. Its much more like a stock than it is like a commodity but you can keep your opinion on housing as it doesn't bother me.

Even if someone bought a house in 1975, and held to today, they would only go from 150 to 350 on the chart.  A 2.3x increase.  The inflation adjusted stock market has grown 20x since 1975.

Really. That might be the case for your statistics but its not the case for my parents. They bought their house probably about 1975 (maybe a little later). They purchased it for $20k. Its now worth I would think at least $1mill. That beats stocks no questions. That is just in a standard area of Sydney. I really doubt that they are unusual and I suggest you go back and check your figures. They have spend money on a pool, an extension and upkeep but still the performance of their house must be the best investment they have purchased. Again I bet that they aren't the only ones who have done that.

Historically speaking, have a higher stock allocation decreases chances of failure, since the main source of failure for a long retirement (40+ years) is inflation, and stocks are the best way to combat that.

I get this. My problem with what you are stating is that you aren't taking into account any risk with regards to being 100% stocks over that time period. Once you are 100% allocated to a particular market you face risks with any financial crisis with regards to that market.

I think you have a massive bias towards stock based investment vehicles. I prefer stocks as well but I prefer stocks because they have certain characteristics that other investments don't have and that is mainly based around franked credits and the fact I can invest with much smaller amounts without going into debt (margin included).
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 22, 2015, 10:33:28 PM
Correct. Rentals are investments. Not the house you live in.

Just to clarify this. The rental income less the cost of ownership is exactly what you receive when you own your own house. Plus there are tax benefits with regards to owning your house. Rental income gets taxed. You don't get taxed when you don't pay rental income because you are living in a paid off house.

For instance if I would pay $800 per week rent I am recieveing the benefits of basically paying $40k a year for a rental property. I do have to pay maintenance etc out of that money. If I rented that house out I would receive the same rental income however any profit would be taxed.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: AustralianMustachio on February 22, 2015, 11:16:06 PM
When people think of "property" here they generally mean buying investment property using leverage, and renting it out. And the interest paid on these loans is tax deductible, which is where the benefit mainly lies I think.

Dodge thank you very much for adding a different viewpoint into this thread!

I would like to point out that your chart with the historical performance of the ASX after the GFC doesn't include dividends, which are much higher in Australia than the rest of the world. The accumulation index is higher than the pre GFC high now. Adding franked dividends on top of that, which with a middle tax bracket can bump your returns up considerably, and you can see why Australians love investing in shares so much, as well as property.

In fact I believe in the last 100 years, Australian shares have performed the best in the entire world, or thereabouts. I think I saw this on a Vanguard chart, which I'll try to find. Of course, past performance isn't the same as future, but you see where people are coming from

I think another problem is that bonds in Aus don't get any of that favourable tax treatment that shares (franking) and property (neg gearing) do. So people just want to "live off dividends" instead of actual fixed interest products. However what they don't realise is that with fixed interest you're mostly aiming to preserve your capital, not earn a massive return. An 100% stocks portfolio at retirement isn't dangerous because the income isnt high enough, it's dangerous because of capital value fluctuations.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 22, 2015, 11:26:00 PM
Just because something is expensive, and fluctuates in value, doesn't make it an investment.

Yes it does. Art can be an investment. Commodities are definitely investments. You don't get to define what is an investment.

There have been entire decades, multiple decades, where home prices in Australia decreased when taking inflation into account.  One of those "lost decades" just ended in 1999.  The one starting around 1974 lasted almost 2 decades.  The one in 1950 lasted 2 decades, the one from the beginning of the chart lasted at least 80 years...etc.  It looks like the latest boom started right in-line with the last US boom, which has already fallen in-line.  How long until the Australian housing market follows?

I have no idea if property will continue to rise. It doesn't even bother me but the same thing can occur in stocks.

You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.  There is no economic reason for a commodity to grow faster than inflation.

I view commodities as investments. I actually like commodities as a hedge against all sorts of financial stresses on the global financial system. Housing though is better because it does produce something. If you live in it it provides shelter. If you rent it out you receive a rental income. Its much more like a stock than it is like a commodity but you can keep your opinion on housing as it doesn't bother me.

Even if someone bought a house in 1975, and held to today, they would only go from 150 to 350 on the chart.  A 2.3x increase.  The inflation adjusted stock market has grown 20x since 1975.

Really. That might be the case for your statistics but its not the case for my parents. They bought their house probably about 1975 (maybe a little later). They purchased it for $20k. Its now worth I would think at least $1mill. That beats stocks no questions. That is just in a standard area of Sydney. I really doubt that they are unusual and I suggest you go back and check your figures. They have spend money on a pool, an extension and upkeep but still the performance of their house must be the best investment they have purchased. Again I bet that they aren't the only ones who have done that.

Historically speaking, have a higher stock allocation decreases chances of failure, since the main source of failure for a long retirement (40+ years) is inflation, and stocks are the best way to combat that.

I get this. My problem with what you are stating is that you aren't taking into account any risk with regards to being 100% stocks over that time period. Once you are 100% allocated to a particular market you face risks with any financial crisis with regards to that market.

I think you have a massive bias towards stock based investment vehicles. I prefer stocks as well but I prefer stocks because they have certain characteristics that other investments don't have and that is mainly based around franked credits and the fact I can invest with much smaller amounts without going into debt (margin included).

Investment: An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

Source: http://www.investopedia.com/terms/i/investment.asp

Houses are not expected to appreciate faster than inflation.  So unless it is to be used as a source of rental income, it's not an investment.  The point where we disagree, is that you expect it to appreciate faster than inflation.

Stocks have fundamental reasons to increase in value, things like population growth, productivity growth...etc.  These are not present in houses.  Houses are things.  They don't create or generate anything.

The stats are for the Australian housing market in general.  Just like some penny stocks beat the market, you can get lucky with your house choice as well.  Interestingly enough, they still would have underperformed the market by quite a bit.

(http://i.imgur.com/nYvsKVh.png)

(http://i.imgur.com/bxHV0oh.png)

Note, the number above does not take into account mortgage interest, the pool, the extension, maintenance, upkeep...but it also doesn't take into account rent prices.

Regarding market risks, I'm currently invested in 10,000 unique companies across the globe.  Here's a fun bullet point from Why your house is a terrible investment (http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 22, 2015, 11:28:08 PM
Correct. Rentals are investments. Not the house you live in.

Just to clarify this. The rental income less the cost of ownership is exactly what you receive when you own your own house. Plus there are tax benefits with regards to owning your house. Rental income gets taxed. You don't get taxed when you don't pay rental income because you are living in a paid off house.

For instance if I would pay $800 per week rent I am recieveing the benefits of basically paying $40k a year for a rental property. I do have to pay maintenance etc out of that money. If I rented that house out I would receive the same rental income however any profit would be taxed.

You're forgetting about the opportunity cost of putting the majority of your net worth into an asset which only increases with inflation.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 22, 2015, 11:34:22 PM
When people think of "property" here they generally mean buying investment property using leverage, and renting it out. And the interest paid on these loans is tax deductible, which is where the benefit mainly lies I think.

Dodge thank you very much for adding a different viewpoint into this thread!

I would like to point out that your chart with the historical performance of the ASX after the GFC doesn't include dividends, which are much higher in Australia than the rest of the world. The accumulation index is higher than the pre GFC high now. Adding franked dividends on top of that, which with a middle tax bracket can bump your returns up considerably, and you can see why Australians love investing in shares so much, as well as property.

In fact I believe in the last 100 years, Australian shares have performed the best in the entire world, or thereabouts. I think I saw this on a Vanguard chart, which I'll try to find. Of course, past performance isn't the same as future, but you see where people are coming from

I think another problem is that bonds in Aus don't get any of that favourable tax treatment that shares (franking) and property (neg gearing) do. So people just want to "live off dividends" instead of actual fixed interest products. However what they don't realise is that with fixed interest you're mostly aiming to preserve your capital, not earn a massive return. An 100% stocks portfolio at retirement isn't dangerous because the income isnt high enough, it's dangerous because of capital value fluctuations.

No problem :)

Can you point me towards a historical chart of the ASX which includes dividends?  I couldn't find one.  I felt comfortable with my statement because I was comparing it to a world chart which also didn't include dividends, but including dividends would be ideal.

"An 100% stocks portfolio at retirement isn't dangerous because the income isnt high enough, it's dangerous because of capital value fluctuations."

Correct, which is exacerbated by the portfolio being so un-diversified, focused almost entirely on two sectors in a single country.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 22, 2015, 11:37:54 PM
Investment: An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

Like purchasing a house. That ends that right there.

I get that you don't like property as an investment but lots of people love it. I personally don't like it that much as well but its an investment and some people have done extremely well out of it.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: bigchrisb on February 22, 2015, 11:40:08 PM
Its frustrating how hard it is to get ASX accumulation index data.  I've been keeping the monthly data from the RBA's stats, but its on my home laptop.  If no-one beats me to it, I'll post it when I get home this evening.

If you are interested, the data comes from Table F7 of the RBA's monthly stats package. http://www.rba.gov.au/statistics/tables/pdf/f07.pdf

Starting in 1979, the index with no dividends has increased from 500 to 5588 (11.6 times), while the accumulation index has risen from 1000 to 48685 (48.6 times).  The treatment of franking credits is ignored in the accumulation index, so for an average investor, where franking washes out with the tax payable, you can almost treat this like a post tax number. 
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 22, 2015, 11:42:39 PM
Correct. Rentals are investments. Not the house you live in.

Just to clarify this. The rental income less the cost of ownership is exactly what you receive when you own your own house. Plus there are tax benefits with regards to owning your house. Rental income gets taxed. You don't get taxed when you don't pay rental income because you are living in a paid off house.

For instance if I would pay $800 per week rent I am recieveing the benefits of basically paying $40k a year for a rental property. I do have to pay maintenance etc out of that money. If I rented that house out I would receive the same rental income however any profit would be taxed.

You're forgetting about the opportunity cost of putting the majority of your net worth into an asset which only increases with inflation.

I think its pretty obvious that housing has beaten inflation and I would suggest pretty close to beating stocks (if not beating stocks) over the period that you previously mentioned. Reality says that housing has beaten inflation so that argument is null and void.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 22, 2015, 11:55:26 PM
I just looked this up on the Internet. I haven't completed any massive analysis however its pretty clear that housing is an investment that has provided returns pretty similar to the stock market.

http://observationsandnotes.blogspot.com.au/2012/04/home-real-estate-stock-market.html
http://www.dailyreckoning.com.au/australian-investment-shares-or-property/2009/04/02/
http://www.macrobusiness.com.au/2013/07/australias-huge-property-market-gets-bigger/

This article is interesting and shows how hard it is to pick the market:-

http://www.news.com.au/finance/real-estate/housing-market-will-implode-warns-edward-chancellor/story-e6frfmd0-1225861377051
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 22, 2015, 11:57:33 PM
Investment: An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

Like purchasing a house. That ends that right there.

I get that you don't like property as an investment but lots of people love it. I personally don't like it that much as well but its an investment and some people have done extremely well out of it.

This has nothing to do with emotions.  Look through my posts, you will see no mention of any emotional words (like/dislike, love/hate) on this topic.  Buying a house (and getting into a mortgage) when you're young, is one of the top factors preventing people from accumulating wealth.  It's important for people to understand the alternatives, and not simply sign the papers for a half a million dollar mortgage when they're 25, because "it's what everyone does here" and "house prices only go up!"

It seems the word "hope" is the qualifier in the definition which makes you call it an investment.  I believe that's a slippery slope, as it sounds like the people selling iPhone cases saying you need to "protect your investment", but I guess it counts :)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 23, 2015, 12:00:58 AM
I just looked this up on the Internet. I haven't completed any massive analysis however its pretty clear that housing is an investment that has provided returns pretty similar to the stock market.

http://observationsandnotes.blogspot.com.au/2012/04/home-real-estate-stock-market.html
http://www.dailyreckoning.com.au/australian-investment-shares-or-property/2009/04/02/
http://www.macrobusiness.com.au/2013/07/australias-huge-property-market-gets-bigger/

This article is interesting and shows how hard it is to pick the market:-

http://www.news.com.au/finance/real-estate/housing-market-will-implode-warns-edward-chancellor/story-e6frfmd0-1225861377051

Nothing here contradicts any of my assertions.  Please post something specific, and we can discuss it.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 23, 2015, 12:16:12 AM
Correct. Rentals are investments. Not the house you live in.

Just to clarify this. The rental income less the cost of ownership is exactly what you receive when you own your own house. Plus there are tax benefits with regards to owning your house. Rental income gets taxed. You don't get taxed when you don't pay rental income because you are living in a paid off house.

For instance if I would pay $800 per week rent I am recieveing the benefits of basically paying $40k a year for a rental property. I do have to pay maintenance etc out of that money. If I rented that house out I would receive the same rental income however any profit would be taxed.

Agreed. Back to my earlier example of my $550K house that would rent for $550 per week and has overheads of $5K per year. The house is saving me $28600 in rent, but costs me $5000 in overheads, giving a net saving to me of $23600 per year. This works out to be an equivalent net yield of 4.3% on an inflation-adjusted asset, which is not too shabby for a retirement portfolio being drawn at a lower rate than this.

If I were to rent the same house instead, that $28600 would have to come from my after tax salary. As I am already towards the top of the 32.5% tax bracket in retirement income, the income required to produce this $28600 would push me well into the next tax bracket of 37%. Let's not forget the medicare levy which adds another 2% tax onto these, so let's call it 35% average tax rate + 2% = 37% effective tax rate. If I generously assume this income comes entirely from franked dividends , that's still a 7% tax rate I pay, so I'd need $30753 before tax which works out to be a 5.6% after franking dividend yield on $550K. Not an impossible return in a strong market with a good economic tail wind, but not something I would like to rely upon year in year out over a 40 year retirement phase. For a high income earner in the accumulation phase, like our friend bigchrisb earlier in this thread, the tax penalty on producing this rental income is greater still.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 23, 2015, 12:26:08 AM
It seems the word "hope" is the qualifier in the definition which makes you call it an investment.

I'll try once more for you.

1. The returns from property and stocks have over time been comparable. Stocks might have outperformed but its not clear cut. If you read this article this is fairly clear:- http://observationsandnotes.blogspot.com.au/2012/04/home-real-estate-stock-market.html
2. Property provides rental income (or if you own a house you don't have to pay rental income) as well as capital growth.

Its not a case of stocks are an investment and property isn't. They are both possible investment opportunities.

I hope thats clear to you now.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 23, 2015, 12:32:03 AM

Correct. Rentals are investments. Not the house you live in.

Just to clarify this. The rental income less the cost of ownership is exactly what you receive when you own your own house. Plus there are tax benefits with regards to owning your house. Rental income gets taxed. You don't get taxed when you don't pay rental income because you are living in a paid off house.

For instance if I would pay $800 per week rent I am recieveing the benefits of basically paying $40k a year for a rental property. I do have to pay maintenance etc out of that money. If I rented that house out I would receive the same rental income however any profit would be taxed.

Agreed. Back to my earlier example of my $550K house that would rent for $550 per week and has overheads of $5K per year. The house is saving me $28600 in rent, but costs me $5000 in overheads, giving a net saving to me of $23600 per year. This works out to be an equivalent net yield of 4.3% on an inflation-adjusted asset, which is not too shabby for a retirement portfolio being drawn at a lower rate than this.

If I were to rent the same house instead, that $28600 would have to come from my after tax salary. As I am already towards the top of the 32.5% tax bracket in retirement income, the income required to produce this $28600 would push me well into the next tax bracket of 37%. Let's not forget the medicare levy which adds another 2% tax onto these, so let's call it 35% average tax rate + 2% = 37% effective tax rate. If I generously assume this income comes entirely from franked dividends , that's still a 7% tax rate I pay, so I'd need $30753 before tax which works out to be a 5.6% after franking dividend yield on $550K. Not an impossible return in a strong market with a good economic tail wind, but not something I would like to rely upon year in year out over a 40 year retirement phase. For a high income earner in the accumulation phase, like our friend bigchrisb earlier in this thread, the tax penalty on producing this rental income is greater still.

If you used after tax dollars to buy the $550,000 house, you need to perform the same calculation on the Buy example as well. And if the $28,600 would have to come from your after-tax salary, then you also need to calculate the mortgage interest for the Buy example.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: burrow on February 23, 2015, 12:34:25 AM
Starting in 1979, the index with no dividends has increased from 500 to 5588 (11.6 times), while the accumulation index has risen from 1000 to 48685 (48.6 times).  The treatment of franking credits is ignored in the accumulation index, so for an average investor, where franking washes out with the tax payable, you can almost treat this like a post tax number.

Wow! That means 77% of the gain has been from dividends and only 23% from capital growth.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 23, 2015, 12:45:08 AM

Correct. Rentals are investments. Not the house you live in.

Just to clarify this. The rental income less the cost of ownership is exactly what you receive when you own your own house. Plus there are tax benefits with regards to owning your house. Rental income gets taxed. You don't get taxed when you don't pay rental income because you are living in a paid off house.

For instance if I would pay $800 per week rent I am recieveing the benefits of basically paying $40k a year for a rental property. I do have to pay maintenance etc out of that money. If I rented that house out I would receive the same rental income however any profit would be taxed.

Agreed. Back to my earlier example of my $550K house that would rent for $550 per week and has overheads of $5K per year. The house is saving me $28600 in rent, but costs me $5000 in overheads, giving a net saving to me of $23600 per year. This works out to be an equivalent net yield of 4.3% on an inflation-adjusted asset, which is not too shabby for a retirement portfolio being drawn at a lower rate than this.

If I were to rent the same house instead, that $28600 would have to come from my after tax salary. As I am already towards the top of the 32.5% tax bracket in retirement income, the income required to produce this $28600 would push me well into the next tax bracket of 37%. Let's not forget the medicare levy which adds another 2% tax onto these, so let's call it 35% average tax rate + 2% = 37% effective tax rate. If I generously assume this income comes entirely from franked dividends , that's still a 7% tax rate I pay, so I'd need $30753 before tax which works out to be a 5.6% after franking dividend yield on $550K. Not an impossible return in a strong market with a good economic tail wind, but not something I would like to rely upon year in year out over a 40 year retirement phase. For a high income earner in the accumulation phase, like our friend bigchrisb earlier in this thread, the tax penalty on producing this rental income is greater still.

If you used after tax dollars to buy the $550,000 house, you need to perform the same calculation on the Buy example as well. And if the $28,600 would have to come from your after-tax salary, then you also need to calculate the mortgage interest for the Buy example.

No. The $550000 comes from your after tax money, whether you use that money to buy the house or invest it elsewhere. There is no mortgage interest in this example.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 23, 2015, 12:51:35 AM
Starting in 1979, the index with no dividends has increased from 500 to 5588 (11.6 times), while the accumulation index has risen from 1000 to 48685 (48.6 times).  The treatment of franking credits is ignored in the accumulation index, so for an average investor, where franking washes out with the tax payable, you can almost treat this like a post tax number.

Wow! That means 77% of the gain has been from dividends and only 23% from capital growth.

This is interesting isn't it.

I think a safe way to reach retirement is to complete the following steps:-

1. Pay off your mortgage. This leaves you rent free for life assuming that you don't upgrade your house which I don't intend too.
2. Invest in a low cost ETF within the ASX up to the amount that provides enough dividends to live off for life.
3. Save a certain amount into cash or commodities or a combination of both that provides you with a safety margin.

This won't be the quickest way to get there but it should be fairly robust especially if you combine that with the ability to go back to work or to tighten your spending.

My personal philosophy is that relying on the 4% WR is not the ideal way to ensure that you are FI for life. I do think that its a great goal and as good as you can get generally if you want to become FI. I do track my WR. I won't though completely rely on that number.

In stating all of that if work pisses me off I might just call it quits prior to getting all my ducks lined up.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 23, 2015, 12:53:49 AM
but not something I would like to rely upon year in year out over a 40 year retirement phase. For a high income earner in the accumulation phase, like our friend bigchrisb earlier in this thread, the tax penalty on producing this rental income is greater still.

I think you have to consider these components and its where the details matter.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on February 23, 2015, 01:55:33 AM
Dodge you raise some interesting points and I'm learning a lot.

Off the top of my head, property gives a hedge against high levels of inflation, gives returns via rent and sometimes capital appreciation due to increasing demand. It gives piece of mind that comes with owning something physical, as well as that which comes from never having to fear getting kicked out. It gives you a massive asset that can be leveraged to access more credit. It give you certain tax benefits. It's easy to understand.

I've seen more than a few people make their fortune in Australia through investment property, so it has a track record.

However whether it gives better returns than stocks, whether the reward is worth the risk, whether it (and stocks for that matter) will continue on its current trajectory or whether the bubble will burst, I'll have to defer. But I'm enjoying the discussion.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: johnnydoe on February 23, 2015, 01:57:16 AM
Some house data too for interest: Here's the RBA paper showing Housing in Australia since 1955 has averaged a real return of 2.5% (jump to the conclusion):  http://www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-06.pdf. Philip Soos shows the Australian real house price index from 1880 here: http://www.prosper.org.au/wp-content/uploads/2011/07/PhilipSoosBubblingOver1.pdf.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: redchair on February 23, 2015, 02:03:05 AM
wow, an Australian thread.  I joined just to comment.  You lot seem to argue a lot though.

I the topic of international diversification.  The Australian market is small but its performance is very highly correlated with international (US and Euro) markets.  The extra diversification benefit to be had from investing overseas is marginal.  I take the point that mining is overweight here.  To counter this I hold a collection of individual stocks to try to balance my VAS holding.

It makes perfect sense for any individual investor to be predominantly invested in his or her home currency/economy.  This way you benefit from and suffer from the same inflationary effects.  Having your portfolio predominantly invested in foreign markets is a huge currency risk.  If Australian inflation is 3% and US/Euro inflation is 1%, that's 2% a year you will lose in value over time (in a random market walk), other things being equal.  Foreign markets don't outperform the ASX but, if you are already well diversified, they might actually increase risk.  Having said that, 20% of our portfolio is with VTS and VEU funds, because, hey, I can't predict the future!

Dividends:  Using average market dividends can be misleading (as can using average market returns).  There are growth companies on the ASX that pay no/low dividends which skews the average down.  If you set out to achieve high dividends it is easy to get >4% both historically and in the current market.  If you don't want to select individual stocks, VHY pays 5.8% plus franking and has tracked the market pretty well so far.  I just cannot see how an analysis could conclude a 2.5% SWR when you can easily achieve >5% dividends and never touch your principle.  It would be interesting to see the historical dividend performance of the index that VHY is based on (I don't think it's that old though).

Shit, our rental property yield >7% in gross rent and about 6% after costs (before tax).  The underlying property and the rent should increase with inflation, so theoretically there is no reason I wouldn't be safe to spend the lot.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: FFA on February 23, 2015, 03:03:00 AM
I've seen more than a few people make their fortune in Australia through investment property, so it has a track record.
Lately, I have been trying to back-calc where my NW came from. On the surface, as I have a large AA >50% in property, I think people might naturally assume it was through property investment. While the cap gains and income from these properties has no doubt contributed, I suspect it's a relatively small portion of my NW. I expect moreso these have served as forced savings vehicles to help me achieve a higher savings rate than I otherwise would have over the years... Going to crunch the numbers and see, but just to comment that it might be deceptive if people really made their fortune in property (or if they are more a store of wealth).
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 23, 2015, 03:16:57 AM
  • If you can rent the same house for $550 a week, that's what you need to be comparing it to.  Renting vs Buying.  Is it better to buy a house for $550,000 and live in it, or rent the same house for $550 a week and invest the difference?  The answer will depend on your mortgage interest, downpayment, property taxes, insurance...etc.  A 20% downpayment alone ($110,000) is expected to compound to about $450,000 after 15 years if you invested it instead.  I don't have all the variables, but it looks like renting comes out way ahead here.

Attached is a spreadsheet I put together modelling this scenario under Australian conditions. On the assumptions side, I have set overhead costs, rent and the house price to rise at CPI. As previously discussed, house prices have risen at much more than inflation over last half century in Australia, but let's just assume this maths defying run is close to being over and peg it to CPI. The investment grows at a separate investment rate and is added to at net amount of what would have been made in repayments plus overheads minus actual rent. I've even thrown in home purchase costs for good measure.

I have used Excel's goal seek to determine the break-even point investment rate for own versus rent, which works out to an 8.3% pa after tax investment return being required, which again is certainly possible but fairly optimistic. Indeed, the ASX 2014 long term investing report previously discussed http://www.asx.com.au/documents/resources/russell-asx-2014-long-term-investing-report.pdf (http://www.asx.com.au/documents/resources/russell-asx-2014-long-term-investing-report.pdf) reports a 9.2% before tax return over the last decade. Exhibit 2 on page 4 shows that 9.2% return dwindle to to 7.1% for someone in the highest tax bracket, so even someone in a mid-range tax bracket would be struggling to hit that 8.3% net return from shares. Finally, to be fair to, property came in at 6.1% (or 3.3% above CPI), which swings the result strongly in favour of owning, for that decade at least.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: marty998 on February 23, 2015, 03:20:00 AM

Shit, our rental property yield >7% in gross rent and about 6% after costs (before tax).  The underlying property and the rent should increase with inflation, so theoretically there is no reason I wouldn't be safe to spend the lot.

See here's where everyone has missed the vital stat. Rents and house prices track wage price growth over the long term, not inflation. And historically wages grow quite a bit faster than inflation.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Astatine on February 23, 2015, 05:11:18 AM
Great thread. Posting to follow.

With renting, I think one thing that sways me heavily towards owning vs renting is the hidden costs of renting. Tenancy laws can be pretty sucky for tenants. Being forced to move frequently cos the place is being sold or the landlord wants to move in (or pretends to so they can raise rents) can happen - my friends had to move 5 times in 4 years (they ended up buying to get security of tenure). Moving costs add up, even if you move yourself - paying double rent for at least a week, utility connection costs etc. At least $1k per move. And rental properties tend to have shitty insulation which increases heating and cooling costs. And it's rare that you can garden and grow your own veggies without getting into trouble with the real estate agent. And so on.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 23, 2015, 07:58:35 AM
Starting in 1979, the index with no dividends has increased from 500 to 5588 (11.6 times), while the accumulation index has risen from 1000 to 48685 (48.6 times).  The treatment of franking credits is ignored in the accumulation index, so for an average investor, where franking washes out with the tax payable, you can almost treat this like a post tax number.

Wow! That means 77% of the gain has been from dividends and only 23% from capital growth.

Not quite.  If a dividend is 5%, then it only accounts for 5% of the growth.  I'm going to steal a part of an amazing post by waltworks a few months ago (http://forum.mrmoneymustache.com/investor-alley/understanding-dividends-strategies/msg476335/#msg476335).  Think of it this way:

-If I have a stock that I hold for 100 years that appreciates 1% per year and pays no dividends, after 100 years, I've got $270.
-If I have a stock that I hold for 100 years that appreciates zero, and pays 1% dividends (which I reinvest) and we assume no taxation on those dividends, I also have $270.
-If my stock both appreciates 1% and pays 1% (reinvested) dividends, I have $724.

Now, in that scenario, I would never say that *either* the capital gains or the dividend is mostly responsible for the extra gains, right? In fact, a rational person would say that both are responsible for 50% of the gains.

Let's look at another scenario.
-Capital gains @6% and no dividends. My $100 is now $33,930.
-Dividends @4% and no capital gains. My $100 is $5,050.
-Both added together (as the Bogle example) for a total of 10%/year. $100 becomes $1,378,000!

Now stop for a minute and think. When I added in the dividends, I suddenly had way more money! 97.5% of my gains came because I reinvested them! Dividends are awesome!

BUT - you could just spin it the other way and say that the capital gains accounted for 99.6% of the gains when you start from the default state of an only-dividend scenario.

The point is this: If you are getting 6% from capital gains and 4% from dividends, then 60% of your gains are capital gains. Period. Otherwise over any long time scale, adding in ANY RANDOM FACTOR that boosts the investment yield will "account for" most of your profit.

That's just how exponents work. I could add in a special "magic investor bonus" of 1% on top of that 10% and it would "account for" most of my gains over that time period (in fact, my 1% magic-factor raises my total to a cool $3.4 million - the vast majority of my gains!)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 23, 2015, 08:02:12 AM
Starting in 1979, the index with no dividends has increased from 500 to 5588 (11.6 times), while the accumulation index has risen from 1000 to 48685 (48.6 times).  The treatment of franking credits is ignored in the accumulation index, so for an average investor, where franking washes out with the tax payable, you can almost treat this like a post tax number.

Wow! That means 77% of the gain has been from dividends and only 23% from capital growth.

This is interesting isn't it.

I think a safe way to reach retirement is to complete the following steps:-

1. Pay off your mortgage. This leaves you rent free for life assuming that you don't upgrade your house which I don't intend too.
2. Invest in a low cost ETF within the ASX up to the amount that provides enough dividends to live off for life.
3. Save a certain amount into cash or commodities or a combination of both that provides you with a safety margin.

This won't be the quickest way to get there but it should be fairly robust especially if you combine that with the ability to go back to work or to tighten your spending.

My personal philosophy is that relying on the 4% WR is not the ideal way to ensure that you are FI for life. I do think that its a great goal and as good as you can get generally if you want to become FI. I do track my WR. I won't though completely rely on that number.

In stating all of that if work pisses me off I might just call it quits prior to getting all my ducks lined up.

Dividends are mathematically equivalent to selling stock (besides any small bonus you might get from frank credits).  If you feel a 4% withdrawal rate is risky, but taking 4% dividends is not, you aren't understanding how stocks work.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 23, 2015, 08:11:19 AM
Some house data too for interest: Here's the RBA paper showing Housing in Australia since 1955 has averaged a real return of 2.5% (jump to the conclusion):  http://www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-06.pdf. Philip Soos shows the Australian real house price index from 1880 here: http://www.prosper.org.au/wp-content/uploads/2011/07/PhilipSoosBubblingOver1.pdf.

Yes, this supports the data from the chart I posted.  Of course, they choose the precise moment on the chart where things turned around, thus ignoring the previous 80+ years of declining real value.  It also doesn't take into account the many "lost decades".  It wouldn't be good for your ability to accumulate wealth, if the majority of your net worth were in a house during these many decades of negative real growth.

If even the best time periods only show 2.5% real (after inflation) growth, it's clear why houses have underperformed.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 23, 2015, 08:26:25 AM
wow, an Australian thread.  I joined just to comment.  You lot seem to argue a lot though.

I the topic of international diversification.  The Australian market is small but its performance is very highly correlated with international (US and Euro) markets.  The extra diversification benefit to be had from investing overseas is marginal.  I take the point that mining is overweight here.  To counter this I hold a collection of individual stocks to try to balance my VAS holding.

It makes perfect sense for any individual investor to be predominantly invested in his or her home currency/economy.  This way you benefit from and suffer from the same inflationary effects.  Having your portfolio predominantly invested in foreign markets is a huge currency risk.  If Australian inflation is 3% and US/Euro inflation is 1%, that's 2% a year you will lose in value over time (in a random market walk), other things being equal.  Foreign markets don't outperform the ASX but, if you are already well diversified, they might actually increase risk.  Having said that, 20% of our portfolio is with VTS and VEU funds, because, hey, I can't predict the future!

Dividends:  Using average market dividends can be misleading (as can using average market returns).  There are growth companies on the ASX that pay no/low dividends which skews the average down.  If you set out to achieve high dividends it is easy to get >4% both historically and in the current market.  If you don't want to select individual stocks, VHY pays 5.8% plus franking and has tracked the market pretty well so far.  I just cannot see how an analysis could conclude a 2.5% SWR when you can easily achieve >5% dividends and never touch your principle.  It would be interesting to see the historical dividend performance of the index that VHY is based on (I don't think it's that old though).

Shit, our rental property yield >7% in gross rent and about 6% after costs (before tax).  The underlying property and the rent should increase with inflation, so theoretically there is no reason I wouldn't be safe to spend the lot.

The US market is roughly 50% of the world, but even here the similar argument is almost always shot down, "The S&P500 does half of it's business overseas, that's enough international diversification for me!"  My typical response is, "The dozen large companies in NY state are closely linked to the global economy, why shouldn't I just buy them? GE often follows movements in the S&P 500, why not just own one stock?

If Samsung beats Apple in the multi-billion smartphone business, how much will it help me that Apple also sells phones in South Korea?  Why would I want to own Chevy and Ford and skip Honda and Toyota, or BMW and Mercedes, if you could own them all at low cost?

It is nonsense to think that correlation is always so strong, or that correlation alone is an excuse to not own all stocks in a market. Indexing makes sense globally as much as it makes sense domestically.  The currency risk does not outweigh the diversification benefits."

The general consensus is that US investors should invest internationally.  If those arguments don't fly for the incredibly diverse 50% of the world US market, you can be sure they don't fly for the 2 sector 2% of the world Australian market.

Regarding dividends, dividends are equivalent to selling stock (except the small franking bonus for Australian investors).  Making your portfolio even less diverse, for the sake of capturing more dividend stocks, in your early retirement portfolio shows a grave misunderstanding of how stocks work.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 23, 2015, 09:29:05 AM
  • If you can rent the same house for $550 a week, that's what you need to be comparing it to.  Renting vs Buying.  Is it better to buy a house for $550,000 and live in it, or rent the same house for $550 a week and invest the difference?  The answer will depend on your mortgage interest, downpayment, property taxes, insurance...etc.  A 20% downpayment alone ($110,000) is expected to compound to about $450,000 after 15 years if you invested it instead.  I don't have all the variables, but it looks like renting comes out way ahead here.

Attached is a spreadsheet I put together modelling this scenario under Australian conditions. On the assumptions side, I have set overhead costs, rent and the house price to rise at CPI. As previously discussed, house prices have risen at much more than inflation over last half century in Australia, but let's just assume this maths defying run is close to being over and peg it to CPI. The investment grows at a separate investment rate and is added to at net amount of what would have been made in repayments plus overheads minus actual rent. I've even thrown in home purchase costs for good measure.

I have used Excel's goal seek to determine the break-even point investment rate for own versus rent, which works out to an 8.3% pa after tax investment return being required, which again is certainly possible but fairly optimistic. Indeed, the ASX 2014 long term investing report previously discussed http://www.asx.com.au/documents/resources/russell-asx-2014-long-term-investing-report.pdf (http://www.asx.com.au/documents/resources/russell-asx-2014-long-term-investing-report.pdf) reports a 9.2% before tax return over the last decade. Exhibit 2 on page 4 shows that 9.2% return dwindle to to 7.1% for someone in the highest tax bracket, so even someone in a mid-range tax bracket would be struggling to hit that 8.3% net return from shares. Finally, to be fair to, property came in at 6.1% (or 3.3% above CPI), which swings the result strongly in favour of owning, for that decade at least.

Indeed, if these are your numbers, buying can make sense.  The biggest flaw here, however, is that you're using numbers from this part of the chart:

(http://i.imgur.com/T5culQ7.png)

Since your housing number is so high, growing with inflation gives a lot of growth.  For example, if you decrease the house price to $250,000, the new break even stock growth rate is 6.25%.  Also, surprised that repairs + insurance + everything else really total to less than 1% of the housing value.  When the parts that make up the house are so cheap to replace, relative to the price of the house as a whole, it really starts to look like a bubble.  But I won't pretend to be able to predict the future.  It all comes down to risk.

(http://i.imgur.com/jeol4rll.png)

Stocks had no problem beating 8.3% for most of the periods on record, but let's ignore that for now.

Leveraging into such an expensive item, tied to one country/state/city/neighborhood is very risky compared to a diversified world portfolio.  Your numbers show that leveraging over half a million dollars on owning a single item, only breaks even with putting 0 leverage into a portfolio which owns 6-10,000 unique companies across the globe.  Even taking the bubble into account, the risk-adjusted returns are sub-par.  I personally know people who bought their house at the peak of the US housing market.  They will never recapture that lost wealth over their lifetimes.  There has never been a time in history where this could be said of the stock market.  The amount of risk is just not in-line with the possible gains. 
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 23, 2015, 02:02:31 PM
Dividends are mathematically equivalent to selling stock (besides any small bonus you might get from frank credits).  If you feel a 4% withdrawal rate is risky, but taking 4% dividends is not, you aren't understanding how stocks work.

I understand that technically what you are stating might be considered correct however my take on it is different to yours. If I only utilize dividends than my stash should last forever.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on February 23, 2015, 02:09:15 PM
The international analysis of Australian housing has tended to came up with one of two responses - yes there is a bubble, and no - there is not a bubble because the housing market in Australia is very constrained. Dodge is arguing the bubble case, so I will talk about the other.

Australia is one of the most urbanised countries in the world. As a result of our land tenure regulations, lnd available for housing is very restricted. There is little impetus to change the availability of land, and therefore housing is validly high cost. There is also a very high latent demand because houses are not being built fast enough to meet population growth - partly because of immigration.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 23, 2015, 02:09:29 PM
I personally know people who bought their house at the peak of the US housing market.  They will never recapture that lost wealth over their lifetimes.

You never know. Plus just to clarify that you are talking about the US market.

There has never been a time in history where this could be said of the stock market.  The amount of risk is just not in-line with the possible gains.

This is another statement where you are amending the data and coming to your own conclusions. I have no issues with your belief system however I think you should recognize its all an opinion and that your opinion is not backed up via the data. My parents generation for instance have become rich via property. That might change in my generation and in my children's generation however this is predicting the future.

Housing in Australia has historically been an extremely good investment. It has certain advantages over other investment classes. It also has several disadvantages. I think focusing on the advantages and the disadvantages is a better way to discuss each investment class.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 23, 2015, 02:13:54 PM
The international analysis of Australian housing has tended to came up with one of two responses - yes there is a bubble, and no - there is not a bubble because the housing market in Australia is very constrained. Dodge is arguing the bubble case, so I will talk about the other.

Australia is one of the most urbanised countries in the world. As a result of our land tenure regulations, lnd available for housing is very restricted. There is little impetus to change the availability of land, and therefore housing is validly high cost. There is also a very high latent demand because houses are not being built fast enough to meet population growth - partly because of immigration.

I'm not sure that Dodge is just arguing that Australia has a housing bubble. He appears to be arguing that:-

1. Housing is never an investment unless its a rental property.
2. Housing only provides returns equal to inflation.

I think that these two points are factually incorrect and have been proven to be factually incorrect within this thread.

If we are talking about a housing bubble I think that there is a valid argument that we have a housing bubble however the question is will that bubble remain and will it in fact increase. I can't predict the future and so I find it hard to judge. I posted a link to an article that was gloom and doom 5 years ago. That is a long time for the bubble to remain and in fact increase. People are still buying and the cost of housing is still going up.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on February 23, 2015, 02:14:43 PM
Dividends are mathematically equivalent to selling stock (besides any small bonus you might get from frank credits).  If you feel a 4% withdrawal rate is risky, but taking 4% dividends is not, you aren't understanding how stocks work.

I understand that technically what you are stating might be considered correct however my take on it is different to yours. If I only utilize dividends than my stash should last forever.
As someone who is retired this works for me - income from dividends is all I need. The tax implications of capital gains make it beneficial not to sell but to use the income from dividends instead. As my needs to not require all my dividends, rebalancing can easily be done with the remaining dividends.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on February 23, 2015, 02:19:28 PM
People are still buying and the cost of housing is still going up.
Some of the latest figures show there are only a couple of markets that are still going up, and others are going down. However, this is probably stagnation rather than a bubble burst. I think that stagnation is a more likely scenario.

The trouble is that the US and Australian markets are fairly different. Because our houses are bigger, there is an economy of scale in maintenance costs. Because our land is more expensive, the proportion of the cost that is land is higher, which also reduces maintenance costs.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 23, 2015, 02:28:20 PM
Indeed, if these are your numbers, buying can make sense.  The biggest flaw here, however, is that you're using numbers from this part of the chart:

In the last sentence, where I clearly differentiate this, yes but for the model as attached no; house growth is set to inflation.

Since your housing number is so high, growing with inflation gives a lot of growth.  For example, if you decrease the house price to $250,000, the new break even stock growth rate is 6.25%.

Maybe so, but that's where house prices are in Australia right now so wishing for a halving in value to improve the share investment's result is, well, wishing.

Also, surprised that repairs + insurance + everything else really total to less than 1% of the housing value.  When the parts that make up the house are so cheap to replace, relative to the price of the house as a whole, it really starts to look like a bubble.

It is not so much that house parts are cheap to replace here in Australia, it's more that our houses tend to be of much better build quality than USA houses and hence don't require maintenance as often. I have lived in both the USA (for 7 years) and Australia, so have experienced this first hand.

Stocks had no problem beating 8.3% for most of the periods on record, but let's ignore that for now.

Maybe from a USA perspective, but back here in Australia investing in our share market has beaten investing in world share markets in our currency, as shown in that ASX report, and achieving an 8.3% post tax return has been barely achievable.

Leveraging into such an expensive item, tied to one country/state/city/neighborhood is very risky compared to a diversified world portfolio.  Your numbers show that leveraging over half a million dollars on owning a single item, only breaks even with putting 0 leverage into a portfolio which owns 6-10,000 unique companies across the globe.  Even taking the bubble into account, the risk-adjusted returns are sub-par.  I personally know people who bought their house at the peak of the US housing market.  They will never recapture that lost wealth over their lifetimes.  There has never been a time in history where this could be said of the stock market.  The amount of risk is just not in-line with the possible gains.

No, my numbers show that if I ignore the last 50 years of inflation-beating house price performance and peg it to inflation instead, the resulting Australian dollar share market performance level required to equal housing's handicapped performance is achievable only if I'm in a middle or lower tax bracket. If I invested more broadly in world share markets, the resultant performance is worse (after tax and currency adjustments). If I remove that housing handicap, as I could reasonably do because past housing returns should count as equally as past share market returns, owning soundly beats renting.

Are you seriously proposing we Aussies all sell up our houses, put 2% of our stash into the Aussie share market and the rest spread across world share markets? And the resultant increased portfolio volatility, currency risk and greater tax liability is less risky than diversifying some of your money into an asset that has a reasonable implied ROI at the time of purchase and puts a roof over your head for the rest of your life, regardless of what happens to its value in future? Maybe it's just me but are there any Aussies out there who would actually follow dodge's recommended strategy?

In short, the amount of risk with what you propose as an alternative is just not in-line with the possible gains.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: happy on February 23, 2015, 03:24:13 PM
Thanks Dodge for  prodding us to evaluate our perspective. I don't agree with you on all points, but the exercise deepens my  understanding and is valuable.

I also agree with Deborah's latest remark.

The Sydney market which I know best, continues to surprise me. A couple of years ago I was sure it had topped out, but nay off she goes again. Just for the exercise I evaluated a couple of Sydney properties I have owned. Home unit I bought 28 years ago for $72k - almost identical unit sold for $450k recently - a net gain of 6.5% per year. House I bought 23 years ago for 220000, would be worth just under a million - again a net increase of 6-6.5%. Nothing special about these properties, they were "median" prices in average Sydney suburbs. The data for my parents house build in the early 1960s works out at 8-9% per annum. I'm not saying I'm convinced this will go on forever, and if anything I think it must top out, if not drop.

Ozstache has run figures on Buy vs Rent, a second set of numbers to crunch would be Own (without a mortgage) vs Rent ( and invest the capital). In this instance as Bigchrisb has said,  it will depend on your income. If you are in 37% or 47% marginal tax rates, assuming you rent a property of similar value, and in a rising market, its cheaper to own because of the tax implications.  If you have  a low marginal tax rate, renting starts to come out ahead. If you are accumulating in a high marginal tax bracket, and have purchased, but are retiring on an income in a low marginal bracket theoretically you could sell rent and invest and come out ahead. This ignores the other benefits of home ownership of course, and emotionally having grown up with over 40years indoctrination of "always stay in a rising real estate market" I have to admit I would find this  notion personally challenging.

The taxation system is substantially different to the US and is what makes home ownership more of a proposition in spite of higher housing prices.  This is really based on a tax free capital gain for PPOR, and higher income tax rates than US and an assumption that this  capital gain will continue. Of course Bogles index investing strategy is based on an assumption that the stock market will always continue to go up also. Its the same notion either way.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on February 23, 2015, 04:03:39 PM
Also, surprised that repairs + insurance + everything else really total to less than 1% of the housing value.  When the parts that make up the house are so cheap to replace, relative to the price of the house as a whole, it really starts to look like a bubble.

It is not so much that house parts are cheap to replace here in Australia, it's more that our houses tend to be of much better build quality than USA houses and hence don't require maintenance as often. I have lived in both the USA (for 7 years) and Australia, so have experienced this first hand.

Maybe it's just me but are there any Aussies out there who would actually follow dodge's recommended strategy?

In short, the amount of risk with what you propose as an alternative is just not in-line with the possible gains.
Another part of the cheaper maintenance is that Australia tends to be a kinder climate. While we have terrible storms and fires, we also don't have snow and ice. This means that most vintage and veteran cars come from Australia, where they have had an easier life. I suspect that the same would hold for houses.

Over my investing years I have mainly owned Australian shares. In fact for the first 10 years I only owned BHP shares - because I was an employee and they had a scheme where you paid 10%, the shares were gradually paid off with dividends over 10 years and then you paid any residual. Before coming to MMM I had thought I was too localised, and since I have decided that I really need to diversify. However, I have yet to work out a plan. Anyway, the lack of international holdings hasn't really been an issue, as my portfolio has done better than expected over the years.

In some ways I have been very lucky. I was retrenched from BHP, and sold some shares at that stage to fully fund the others. After that BHP shares went down, so friends who stayed in BHP, and had to sort out their employee shares after I left (when that section of BHP was sold), had to sell their shares at a loss. Later I was employed by NAB for a short time and participated in their employee share plan.

I also learnt a bit about the share system and the money market while I was at BHP because some of my work was related to them. The ASX was only a block away, and they ran some really good courses on different aspects of investing. I think they are available as online webinars now.

I am trying to work out a strategy for changing over to ETFs and increasing my international exposure. I am not really happy about the weight of sectors in ETFs because the Australian market is overweight in resources and banks, so I am not sure that they are entirely the way to go in an Australian context, and think that some individual share holdings may be necessary to get the weighting I would prefer.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 23, 2015, 04:11:42 PM
Looking at how the Australian stock index handled our last financial shock:

(http://i.imgur.com/zb5CXAm.png)

I don't see anything special here.  It fell 50% just like everyone else, but it hasn't caught back up yet.  If the Australian stock index rises 15% this year, it will still only match the pre-crash level.  Had you been invested in a world portfolio, you would have already recovered from the biggest financial shock of our generation back in 2013, and your portfolio would now be seeing record highs.

You need to compare apples with apples. On a total return basis, the ASX200 index you reference does not include the substantial dividends returns that occurred during the GFC, which more than make up for the lower performance of this index compared to world markets. Quoting from here: https://www.vanguardinvestments.com.au/retail/ret/articles/insights/smart-investing/The-power-of-dividends-compounding-and-time.jsp (https://www.vanguardinvestments.com.au/retail/ret/articles/insights/smart-investing/The-power-of-dividends-compounding-and-time.jsp)

Five years ago on July 16, 2009, the S&P/ASX200 closed at 3995.6 points with further to fall in the depths of the GFC. Move forward to July 16, 2014 when this index closed at 5518.9 points - a rise of 38 per cent.

By contrast on July 16, 2009, the S&P/ASX200 Accumulation Index closed at 27,332.5. And move forward again to July 16, 2014, this index closed at 47,043.6 - a rise of 72 per cent.

In short, the accumulation index passed its pre-GFC high almost a year ago and hit an all-time high this month. Meanwhile, the S&P/ASX200 (price only) is still way below its pre-GFC high.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: urbanista on February 23, 2015, 05:29:47 PM
Houses are not expected to appreciate faster than inflation. 

The houses maybe not. But the land should be expected to appreciate faster than inflation. It should appreciate in line with average wages increase as least, which has been faster than inflation in Australia.

Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: urbanista on February 23, 2015, 05:39:26 PM
Are you seriously proposing we Aussies all sell up our houses, put 2% of our stash into the Aussie share market and the rest spread across world share markets? And the resultant increased portfolio volatility, currency risk and greater tax liability is less risky than diversifying some of your money into an asset that has a reasonable implied ROI at the time of purchase and puts a roof over your head for the rest of your life, regardless of what happens to its value in future? Maybe it's just me but are there any Aussies out there who would actually follow dodge's recommended strategy?

In short, the amount of risk with what you propose as an alternative is just not in-line with the possible gains.

I can live with the portfolio volatility risk. I can live with the currency exchange risk. I can even live with the greater tax liability if that means higher net ROI.

What I can't live with is the requirement to move my family within 30 days at the whim of the landlord. Try finding a 4 bedroom house rental in a very small geographic area that would have 2 separate living areas and be within your price range. Try doing this every couple of years.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 23, 2015, 06:33:33 PM
Are you seriously proposing we Aussies all sell up our houses, put 2% of our stash into the Aussie share market and the rest spread across world share markets? And the resultant increased portfolio volatility, currency risk and greater tax liability is less risky than diversifying some of your money into an asset that has a reasonable implied ROI at the time of purchase and puts a roof over your head for the rest of your life, regardless of what happens to its value in future? Maybe it's just me but are there any Aussies out there who would actually follow dodge's recommended strategy?

In short, the amount of risk with what you propose as an alternative is just not in-line with the possible gains.

I can live with the portfolio volatility risk. I can live with the currency exchange risk. I can even live with the greater tax liability if that means higher net ROI.

If you google Australia versus international shares returns, you'll find that over the very short term ie. the last two years, as the Aussie dollar has dropped and USA share have soared, International shares have well outperformed the Australian share market. However, for at least the 33 years before that, in Australian currency terms, the Australian share market has outperformed international shares over the long term eg. here's a chart from one of the webpages found:

(http://lewis.clientcommunity.com.au/uploaded/level/1/Image/2009/OI29_01.jpg)

International may all look pretty good to dodge given most of these shares are in his home currency and from companies in his own country, but over the long term from an Aussie perspective it seems you do not get the better ROI you expect from international shares and get greater volatility, amplified by currency movements, and less favourable tax treatment for your trouble. About the only thing going for them is greater portfolio diversity, which is why I am happy to hold some in my stash, but I can also achieve diversity through property, like owning your own home as we have be otherwise discussing in this thread.

What I can't live with is the requirement to move my family within 30 days at the whim of the landlord. Try finding a 4 bedroom house rental in a very small geographic area that would have 2 separate living areas and be within your price range. Try doing this every couple of years.

I did! I was in the military for 30 years and moved pretty much every two years. Not having to move ever again is one of those enjoyable intangible benefits of home ownership.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: AustralianMustachio on February 23, 2015, 07:11:52 PM
I can live with the portfolio volatility risk. I can live with the currency exchange risk. I can even live with the greater tax liability if that means higher net ROI.

What I can't live with is the requirement to move my family within 30 days at the whim of the landlord. Try finding a 4 bedroom house rental in a very small geographic area that would have 2 separate living areas and be within your price range. Try doing this every couple of years.

Ah but this isn't a renters problem globally, this is an Australian problem due to the shitty arrangements we have where landlords literally lord it over renters.

In European countries where long term renting is the norm, they commonly have 5 year rental agreements. And after you sign the house is pretty much yours and you can do what you want with it in terms of aesthetics, gardening, etc.

In fact, maybe that's why real estate has been such a good investment in Australia historically - we have laws that totally favour the land lords here. Of course in Australia, home ownership is common and a source of pride, and used to be much more affordable. So its undestandable where it has all come from. With the rising prices, I'm not sure how realistic it will be forever.

Since for me the balance is strongly in favour of renting, I for one hope the trend changes to be more in line with the rest of the world, and renters have better long term rights and agreements.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: bigchrisb on February 23, 2015, 07:33:29 PM
What a heated thread!

I think its evident that there are many views on the property vs shares debate, and that its probably not going to be resolved within this thread.  Personally, I'm in the invest in shares camp, and will have the bulk of my investments there.  None the less, a PPOR stacked up for me, when I was able to buy it outright, and while I have a high marginal tax rate.  Its the tax concessions for primary places of residence (no GCT, no tax on imputed rent) that tipped the balance on paper for me.  The intangibles (security of tenure, home pride etc) were a significant bonus.

Perhaps we all need to agree to disagree on the property vs shares debate, as I think there are a lot of other bits of value to be drawn from this thread?

On currency risk and home bias, I've taken the view that I want enough income from foreign investments that I can fund my overseas purchases in perpetuity.  This includes the obvious things like overseas travel, but also includes electronics, vehicles, and a lot of day to day expenditure that is not AUD denominated  (think imported clothing, media, outdoors equipment, transport fuels).  The main items that I consume that are AUD exposed are:
- Housing
- Fresh food
- Health
- Education
- Financial services (accounting, brokerage, MER etc)
Of those, I'm in the process of buying my house (capitalized that expense), I've finished most of my education (but may have kids to consider), am in my early 30's, so at this stage fairly healthy, so the main cash expense that is AUD exposed is fresh food and financial services.

Hence, to preserve my real purchasing power, I've got a target to increase my international asset exposure, as a large portion of my cost of living is effectively denominated in foreign currency.   I'd argue that the quantity of import in our expense bases means that we should have a higher degree of insulation from the value of the AUD.

Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: AustralianMustachio on February 23, 2015, 09:09:53 PM
^^ Very interesting points bigchrisb about being exposed to international currencies for international purchasing power. So I guess if one intends to live overseas, they should have a greater proportion of international denominated investments, would you say?

I must say if I had the amount of assets you currently have, seeya later I would be overseas on a massive travelling romp in a minute ;)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: bigchrisb on February 23, 2015, 09:20:34 PM
^^ Very interesting points bigchrisb about being exposed to international currencies for international purchasing power. So I guess if one intends to live overseas, they should have a greater proportion of international denominated investments, would you say?

Agree 100%.

However, even staying in Australia, a large part of my ongoing expenses are foreign currency denominated.   If I take out housing (by buying a house in AUD), about 60% of my remaining costs are non AUD (albeit indirect). I suspect similar would be true for most Australians.  Hence I suspect that having exposure to non AUD assets reduces volatility in real purchasing power, even if it results in increased volatility in nominal AUD terms.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: urbanista on February 23, 2015, 09:21:40 PM
Since for me the balance is strongly in favour of renting, I for one hope the trend changes to be more in line with the rest of the world, and renters have better long term rights and agreements.

Mmm... by "the rest of the world" and "Europe" you mean which countries exactly? Because I know for sure that in Russia and Ukraine the situation with renting is much worse then in Australia. Basically, written agreements are non-existent. The landlord can ask the renter to vacate the property almost immediately.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: mostlyeels on February 23, 2015, 09:22:53 PM
  • Investing in super (retirement) funds. While super is tax effective for now, it isnít accessible to early retirees and, due to likely government manipulation in the near future, is at risk of being more restrictive to access and becoming taxable for future retirees. As such, it is critical to have enough retirement funds outside of super to fund your interim retirement period until preservation age and to mitigate these risks.

How do people think the government (not this one in particular, but really any government) could or would change the way super works?  My stache isn't in super, but I'll hit the current preservation age within 25 years, so super and then aged benefits will provide a nice lift -- assuming they still work the same way.  Will they just cut the tax benefit for new contributions, or on withdrawal?  Or will they move the preservation age a little more?
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: AustralianMustachio on February 23, 2015, 09:35:27 PM
Since for me the balance is strongly in favour of renting, I for one hope the trend changes to be more in line with the rest of the world, and renters have better long term rights and agreements.

Mmm... by "the rest of the world" and "Europe" you mean which countries exactly? Because I know for sure that in Russia and Ukraine the situation with renting is much worse then in Australia. Basically, written agreements are non-existent. The landlord can ask the renter to vacate the property almost immediately.

Germany, the Netherlands, other northern European countries I guess.

Don't know anything about Russia and Ukraine
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: MsRichLife on February 23, 2015, 09:44:17 PM
I've seen more than a few people make their fortune in Australia through investment property, so it has a track record.
Lately, I have been trying to back-calc where my NW came from. On the surface, as I have a large AA >50% in property, I think people might naturally assume it was through property investment. While the cap gains and income from these properties has no doubt contributed, I suspect it's a relatively small portion of my NW. I expect moreso these have served as forced savings vehicles to help me achieve a higher savings rate than I otherwise would have over the years... Going to crunch the numbers and see, but just to comment that it might be deceptive if people really made their fortune in property (or if they are more a store of wealth).

This is an interesting point. I feel like we've done very well with property over the years. We bought 7 properties in the early 2000's, before the latest boom, and have been selling them off over the last few years. We now have two rentals left and a house that will be our home during FIRE.

I always considered that I'd 'made my fortune' in property, and the boom has certainly contributed. But I've just come to the realisation that it was actually the aggressive pay down of the mortgages associated with those houses that really catapulted my net worth. I do wonder if I would have been saving as aggressively if I didn't have that debt reduction there as a Big Hairy Audacious Goal (BHAG)!
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 23, 2015, 10:25:47 PM
I think its evident that there are many views on the property vs shares debate, and that its probably not going to be resolved within this thread.  Personally, I'm in the invest in shares camp, and will have the bulk of my investments there.  None the less, a PPOR stacked up for me, when I was able to buy it outright, and while I have a high marginal tax rate.  Its the tax concessions for primary places of residence (no GCT, no tax on imputed rent) that tipped the balance on paper for me.  The intangibles (security of tenure, home pride etc) were a significant bonus.

I have come to the exact same conclusions. Owning my PPOR works for me but past that point I will not invest in real estate.

Perhaps we all need to agree to disagree on the property vs shares debate, as I think there are a lot of other bits of value to be drawn from this thread?

I have no issues with that. Its just when people state property isn't an investment or the returns have and will only ever meet inflation is where I think it goes astray. My parents bought there standard house for $20k and it is now worth over a $1mill. That is a good investment compared to anything,

Hence, to preserve my real purchasing power, I've got a target to increase my international asset exposure, as a large portion of my cost of living is effectively denominated in foreign currency.   I'd argue that the quantity of import in our expense bases means that we should have a higher degree of insulation from the value of the AUD.

Fair points. Personally I'm not sure how much I will invest in OS stock markets.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 23, 2015, 10:38:28 PM
Maybe from a USA perspective, but back here in Australia investing in our share market has beaten investing in world share markets in our currency, as shown in that ASX report, and achieving an 8.3% post tax return has been barely achievable.

The report looks at a 10 year period, where stocks had the biggest dip in generations, and it still beat 8.3%.  If this worst case scenario was able to do it, I don't think this qualifies as "barely achievable".

past housing returns should count as equally as past share market returns

This shows a gross misunderstanding of the fundamentals of economics.  Using past returns to predict future results, especially on a commodity, simply makes no sense.  The recency bias (https://www.bogleheads.org/wiki/Behavioral_pitfalls#Recency_bias) is evident.  We don't expect stocks and bonds to appreciate because of past returns, we expect them to appreciate, because of things like population growth, productivity, and production.  Your house doesn't do any of that.  It does not grow and multiply.  It cannot compound on itself.  Let's look at the long term housing chart again, this time stopping at the year 2000:

(http://i.imgur.com/b6XSCLR.png)

I'd caution not to ignore the black line.  This represents at least 80 years where the value of your home would be steadily declining.  Definitely not where you'd want the majority of your net worth to be.

Now let's look at the green line.  Had you bought in 1950, and held 50 years, you would have seen less than a 1% real return yearly on the value of your home.  Had you bought in 1953, it'd be about a 1.5% real yearly return.  During this span of 50 years, the first two decades would have seen a large drop, then a break even.  0 appreciation.  Starting in 1970, you would have seen 0 appreciation for 18 years.  Starting in 1988, you would have seen 0 appreciation for 10 years.

This is what we expect from a commodity.  The only reason anyone here is even debating this, is because of this part of the graph:

(http://i.imgur.com/NSrBLXl.png)

This is speculation, not investing.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 23, 2015, 10:45:18 PM
Dividends are mathematically equivalent to selling stock (besides any small bonus you might get from frank credits).  If you feel a 4% withdrawal rate is risky, but taking 4% dividends is not, you aren't understanding how stocks work.

I understand that technically what you are stating might be considered correct however my take on it is different to yours. If I only utilize dividends than my stash should last forever.

This is not a "take".  It's simply how stocks and dividends work.  If you had $1,000 in stock A, a dividend stock that pays 4% a year, and $1,000 in stock B, which appreciates at 4% a year, but pays no dividend, they are mathematically the same.  You can either collect the 4% dividend from stock A, or sell 4% of your holdings in stock B each year.

Either way you will never run out of money.  I made an excel sheet that shows this:

(http://i.imgur.com/F2cBD75.png)

Never take a less diversified portfolio, simply for dividends.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 23, 2015, 10:57:22 PM
If you google Australia versus international shares returns, you'll find that over the very short term ie. the last two years, as the Aussie dollar has dropped and USA share have soared, International shares have well outperformed the Australian share market. However, for at least the 33 years before that, in Australian currency terms, the Australian share market has outperformed international shares over the long term eg. here's a chart from one of the webpages found:

(http://lewis.clientcommunity.com.au/uploaded/level/1/Image/2009/OI29_01.jpg)

International may all look pretty good to dodge given most of these shares are in his home currency and from companies in his own country, but over the long term from an Aussie perspective it seems you do not get the better ROI you expect from international shares and get greater volatility, amplified by currency movements, and less favourable tax treatment for your trouble. About the only thing going for them is greater portfolio diversity, which is why I am happy to hold some in my stash, but I can also achieve diversity through property, like owning your own home as we have be otherwise discussing in this thread.

If I found a US fund which held 75% financial stocks, and 25% mining stocks, it would look similar to the Australia stock line on that chart.  The fluctuations in currency had a negligible impact here.  Allowing past returns to dictate which sectors you choose to invest in, isn't a wise move. 
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on February 23, 2015, 11:01:58 PM
  • Investing in super (retirement) funds. While super is tax effective for now, it isnít accessible to early retirees and, due to likely government manipulation in the near future, is at risk of being more restrictive to access and becoming taxable for future retirees. As such, it is critical to have enough retirement funds outside of super to fund your interim retirement period until preservation age and to mitigate these risks.

How do people think the government (not this one in particular, but really any government) could or would change the way super works?  My stache isn't in super, but I'll hit the current preservation age within 25 years, so super and then aged benefits will provide a nice lift -- assuming they still work the same way.  Will they just cut the tax benefit for new contributions, or on withdrawal?  Or will they move the preservation age a little more?

Every single "philosophy difference" raised in this thread so far deserves its own thread.

In answer to your question, I think "all of the above, and more" is probably the correct answer. Cutting tax benefits and changing the preservation age have both benefits and costs to government and society.

Also it's not necessarily a downhill slippery slope. If you look at Superannuation's short history you can see changes that have worked out well for some people and badly for others.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 23, 2015, 11:04:48 PM
All this talk about commodities, I can't help but think about gold.  Indeed, the inflation-adjusted graph looks similar:

(http://i.imgur.com/lVgfXxD.png)

About 80 years of negative real growth, then a spike.  Unfortunately, gold is a commodity (it just sits there, not producing anything), so it couldn't hold those high prices.  It's speculation, not investing.  If I crop the image a bit, it looks almost like the commodity we're all talking about, today's Australian housing market.

(http://i.imgur.com/tV3RrWI.png)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: frozzie on February 23, 2015, 11:11:09 PM
This is speculation, not investing.

Bring on the popcorn, this thread is great !

One "little" thing that could explain our politicians willingness to value the "house prices are going up, everyone gets rich!" moto :
http://www.macrobusiness.com.au/2014/08/aussie-politicians-300m-property-portfolio/ (http://www.macrobusiness.com.au/2014/08/aussie-politicians-300m-property-portfolio/)

Personally I like the perceived safety of owning the roof over my head (or renting to the bank) but the current increase clearly outperforms inflation/salary increase by a long shot ... clearly not sustainable.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 23, 2015, 11:13:19 PM
There has never been a time in history where this could be said of the stock market.  The amount of risk is just not in-line with the possible gains.

This is another statement where you are amending the data and coming to your own conclusions. I have no issues with your belief system however I think you should recognize its all an opinion and that your opinion is not backed up via the data. My parents generation for instance have become rich via property. That might change in my generation and in my children's generation however this is predicting the future.

There is no opinion in that statement.  There has never been a time in history where holding stocks over about 15 years would have resulted in a negative real return.  This can not be said of the housing market.  Your parents generation buying property has no relevance to that statement.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 23, 2015, 11:24:05 PM
You raise some interesting points in this thread dodge, but when you repeatedly keep ignoring some of the facts presented to you and use historical data only when it suits your argument then it is no longer a constructive discussion. A bigcrisb suggests, it is time to move on and just agree to disagree.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on February 24, 2015, 12:00:48 AM
Hi Dodge

This shows a gross misunderstanding of the fundamentals of economics.  Using past returns to predict future results, especially on a commodity, simply makes no sense.  The recency bias (https://www.bogleheads.org/wiki/Behavioral_pitfalls#Recency_bias) is evident.  We don't expect stocks and bonds to appreciate because of past returns, we expect them to appreciate, because of things like population growth, productivity, and production.  Your house doesn't do any of that.  It does not grow and multiply.

Regarding appreciation due to population growth, this also affects housing though as you point out it's more akin to a commodity in that it is driven by supply/demand. But it doesn't necessarily follow that appreciation due to population growth doesn't exist nor that it implies a bubble.

The challenge is in working out the respective coefficients for capital appreciation due to population growth for stocks vs property. If, for example, a government was committed to only zoning land for residential use to the extent that prices continued to increase over time then whether you agree with the policy or not the price will continue to increase.

(edit: please feel free to ignore if you think this conversation has run its course)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on February 24, 2015, 12:03:00 AM
I am not sure that people in general in this thread have been arguing for or against stocks/investment property. Most (if not all) appear to be biased in their actual investments toward stocks.

There appears also to be a general consensus that people in this thread prefer to own a PPOR rather than rent - and most (if not all) appear to be doing this. Whether this is best use of your financial resources appears to be queried by some people.

I think dodge has poor understanding of the breadth of the changes in the Australian financial system which occurred around the time of the Hawke/Keating governments. As a result, it is difficult to compare shares, property and banking over the whole period dodge specified. These changes include the introduction of foreign banks, imputation credits, credit cards, negative gearing, superannuation... Housing in particular also changed incredibly because of the immigration policies brought in by Robert Menzies after the second world war. Before that there were very few migrants, and since then we have become a country where 49% of people were born overseas. The housing chart that dodge includes vividly shows the difference that these changes have made - almost to the year, you can see each change.

This is a fantastic thread, and I am really enjoying it! Thanks for continuing to steer it Ozstache.

To me, current discussion about superannuation changes tend to be concentrating on what to do when the superannuation is in pension phase, how to stop people with $2m in super getting the pension, and whether people deserve to get "free" superannuation money when they take it out. This all can be put together as - "the government should balance the budget by raiding super" - or some other phrase depending upon your point of view.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: HappierAtHome on February 24, 2015, 12:21:48 AM
This is a fantastic thread, and I am really enjoying it! Thanks for continuing to steer it Ozstache.

+1. Thanks Ozstache.

Commenting to follow.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: marty998 on February 24, 2015, 12:35:23 AM
  • Investing in super (retirement) funds. While super is tax effective for now, it isnít accessible to early retirees and, due to likely government manipulation in the near future, is at risk of being more restrictive to access and becoming taxable for future retirees. As such, it is critical to have enough retirement funds outside of super to fund your interim retirement period until preservation age and to mitigate these risks.

How do people think the government (not this one in particular, but really any government) could or would change the way super works?  My stache isn't in super, but I'll hit the current preservation age within 25 years, so super and then aged benefits will provide a nice lift -- assuming they still work the same way.  Will they just cut the tax benefit for new contributions, or on withdrawal?  Or will they move the preservation age a little more?

I think you'll see the reintroduction of a 15% tax on pension earnings, or at least a 10% tax. The calls for a cut in concessions are just getting too loud. It's almost as if the government has deliberately ruled out everything else and tried to steer the debate here, without explicitly saying so, so they cannot be slammed in the polls for it.

I don't believe any government will go back to the days of Reasonable Benefits Limits and the like. Good times for accountants, not so much for anyone else. Horrendously complex system.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: FFA on February 24, 2015, 01:43:18 AM
I've seen more than a few people make their fortune in Australia through investment property, so it has a track record.
Lately, I have been trying to back-calc where my NW came from. On the surface, as I have a large AA >50% in property, I think people might naturally assume it was through property investment. While the cap gains and income from these properties has no doubt contributed, I suspect it's a relatively small portion of my NW. I expect moreso these have served as forced savings vehicles to help me achieve a higher savings rate than I otherwise would have over the years... Going to crunch the numbers and see, but just to comment that it might be deceptive if people really made their fortune in property (or if they are more a store of wealth).

This is an interesting point. I feel like we've done very well with property over the years. We bought 7 properties in the early 2000's, before the latest boom, and have been selling them off over the last few years. We now have two rentals left and a house that will be our home during FIRE.

I always considered that I'd 'made my fortune' in property, and the boom has certainly contributed. But I've just come to the realisation that it was actually the aggressive pay down of the mortgages associated with those houses that really catapulted my net worth. I do wonder if I would have been saving as aggressively if I didn't have that debt reduction there as a Big Hairy Audacious Goal (BHAG)!
Hi MsRichLife, yup I am having this same realization. Seems we have followed a similar path, we also bought a handful of properties since late 90's. Have not yet offloaded any... I have been planning to in the coming years to stagger CGT, but the main challenge is where to reinvest the funds, since everything seems expensive nowadays !

Looking at my numbers so far, less than a quarter of our net worth came from the property CG and net income over past 15 years. At least two thirds of NW came from wages/salary. Will post details on blog in more detail when time allows... But reinforces my view the key factors for FI are 1) saving rate, 2) earning rate. Investment returns (as much as we all like to enhance them) are a distant third.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: redchair on February 24, 2015, 07:32:50 AM
Quote
The US market is roughly 50% of the world, but even here the similar argument is almost always shot down, "The S&P500 does half of it's business overseas, that's enough international diversification for me!"  My typical response is, "The dozen large companies in NY state are closely linked to the global economy, why shouldn't I just buy them? GE often follows movements in the S&P 500, why not just own one stock?

If Samsung beats Apple in the multi-billion smartphone business, how much will it help me that Apple also sells phones in South Korea?  Why would I want to own Chevy and Ford and skip Honda and Toyota, or BMW and Mercedes, if you could own them all at low cost?

It is nonsense to think that correlation is always so strong, or that correlation alone is an excuse to not own all stocks in a market. Indexing makes sense globally as much as it makes sense domestically.  The currency risk does not outweigh the diversification benefits."

The general consensus is that US investors should invest internationally.  If those arguments don't fly for the incredibly diverse 50% of the world US market, you can be sure they don't fly for the 2 sector 2% of the world Australian market.

Regarding dividends, dividends are equivalent to selling stock (except the small franking bonus for Australian investors).  Making your portfolio even less diverse, for the sake of capturing more dividend stocks, in your early retirement portfolio shows a grave misunderstanding of how stocks work.

Diversification provides a diminishing marginal benefits. Without taking into account correlations, betas, etc (which in practice are not very useful anyway as they are historical), holding two stocks is twice as diversified as one, three is 50% more diversified than two, and so on.  Holding the ASX50 gives you >99% of the diversification of the ASX200. But yes international diversification gives you an extra benefit again, but,if you already hold a diversified ASX portfolio, that benefit is not huge.  I suggest people do hold international index funds.  it is the proportion that you suggest that I disagree with.

The reason to hold more of your home currency's market is because that is where you spend your money, not because it is big or important from any objective perspective.  Earning money in one currency and spending in aother is a very risky proposition.  Many, many businesses learnt this during Australia's high interest rate period in the 90s.  The banks offered yen denominated loans at very low japanese interest rates.  When the A$ fell against tthe yen, businesses earning in A$ and spending in Yen were doomed.

Even in an open economy like Australia, about 80% of spending is on Australian goods and services.  Probably more if you are living a Mustachian lifestyle, so it is safest to earn about 80% of your income in A$.  In the relatively rare situation that the AU market tanks while OS markets grow, that 20% or so exposure will give you the diversification required.  However in the event of high AU inflation and low US/Euro inflation, you will doubly suffer if you hold majority OS income producing assets.  of course there is no magic number but I urge you to consider whetehr you may be overexposed to curency risks based uon your *spending* currency.

I apreciate your point that dividends and capital growth are equivalent.  Superficially I agree, but I think it is far more nuanced than that.  There are good reasons to prefer cash dividends to company profit statements in many companies. Also,in AU, the franking benefit is pretty huge.  But I also hold growth companies in my portfolio that pay no dividend at all.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: aspiringnomad on February 24, 2015, 11:45:38 AM
Some exposure to real estate, particularly for the tax and intangible benefits already mentioned here is certainly appropriate. But Dodge is right that some folks here are exhibiting recency bias in their expected returns from owning their home. My favorite measure of whether you should buy or rent is the price to rent ratio. Obviously this varies by submarket within each country but overall in Australia it is currently well above the historical norm (it's even worse in NZ and Canada). That signals to me that the housing market has deviated from fundamental value and that there is some large segment of the market basing purchase decisions solely on expectations of future price growth above inflation. If so, that's speculation and I'd be very wary of buying into it.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 24, 2015, 01:46:53 PM
But Dodge is right that some folks here are exhibiting recency bias in their expected returns from owning their home.

I don't believe that this is the case at all. I think the median poster on this thread has said the following:-

1. In general we like to own our PPOR.
2. After that point we prefer to diversify into stocks.

I don't think that anyone is stating that the investment returns on property are better than stocks or that we believe that housing prices will continue to increase as per the past.

I also think that a key point was made above in that most peoples wealth comes from saving money and not from trying to eek out a little higher returns via stocks over housing.

I personally don't believe that the path that I have chosen is the quickest path to FI and ER but its a path that I am comfortable with. If I wanted to make my path quicker I don't believe that investing in stocks over my PPOR would make a significant difference. To make it a quicker path I have options such as being more frugal, moving overseas to a lower COL country or moving to a lower COL area in Australia.

My favorite measure of whether you should buy or rent is the price to rent ratio. Obviously this varies by submarket within each country but overall in Australia it is currently well above the historical norm (it's even worse in NZ and Canada). That signals to me that the housing market has deviated from fundamental value and that there is some large segment of the market basing purchase decisions solely on expectations of future price growth above inflation. If so, that's speculation and I'd be very wary of buying into it.

This is a separate debate. I think it is though very much like picking the stock market in that it is hard to do. I think property in Australia is over valued as well however I've been stating that for years and in that time property has increased in value. I bought a house say 5 years ago and it has been a good investment. If the market crashes I think it will still be a good investment because my mortgage is close to paid off and I can hold my house for a long time.

Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 24, 2015, 02:49:11 PM
But Dodge is right that some folks here are exhibiting recency bias in their expected returns from owning their home.

If you are referring to me, please reread my posts to see that while I discuss previously healthy housing market returns I do not propose using anything greater than inflation in future house growth rate calculations, as I don't believe the current trend is sustainable.


Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 24, 2015, 11:23:23 PM
Holding the ASX50 gives you >99% of the diversification of the ASX200. But yes international diversification gives you an extra benefit again, but,if you already hold a diversified ASX portfolio, that benefit is not huge.

In order to measure how diversified you are, you must first consider the lens you're looking through.  The state of Texas has a bigger economy than all of Australia, I don't think anyone would consider themselves diversified if they only owned Texas stocks.  87% of Australia's economy is made up of two sectors.  If a US investor owns 100% stock, with 50% in REITS and 50% in Healthcare, they would have just about as many stocks as are in the ASX200, a much better dividend yield than the overall market, and they even would've beat the market (blue line) over the last 20 years:

(http://i.imgur.com/aEJmAB1.png)

Does anyone think owning 100% stock, in a retirement portfolio, containing only two sectors, is diversified?

I understand you suggest people own international stock, but I'm using this example to make a larger point.  It seems the only reason the Australian's in this thread are against further diversification, is to avoid currency risk.  This is a valid concern, but as yet hasn't been quantified.  Let's see if we can quantify it.  Here's the AUD/USD exchange rate from 2000-2015:

(http://i.imgur.com/LppBMJZ.png)

When the AUD/USD goes up, international stocks in terms of the AUD will fall.  When the AUD/USD goes down, international stocks in terms of the AUD will rise.  In other words, if you're living in Australia and invested internationally, your portfolio profits as the AUD/USD declines.  Let's see how that played out in actual stock returns.  First I will show the Gross Returns chart for the MSCI World portfolio in AUD, then the same chart in USD (Green line in both charts):

(http://i.imgur.com/UdiydT6.png)

(http://i.imgur.com/JmAwHwd.png)

AUD portfolio annual performance:

(http://i.imgur.com/RDohHL8.png)

USD portfolio annual performance:

(http://i.imgur.com/nQdfyX5.png)

Sources:
http://www.msci.com/resources/factsheets/index_fact_sheet/msci-world-ex-australia-index-aud-gross.pdf
http://www.msci.com/resources/factsheets/index_fact_sheet/msci-world-ex-usa-index.pdf

What do we see?

If these currency fluctuations concern you, there are a few things to consider:

Hopefully this helps remove any concerns of currency risk on your portfolio.  While it might be hard to see from these charts how international diversification can help the Australian investor, please consider this 25 year Japan chart before making any final decisions..

(http://s16.postimg.org/p8au4iqat/portfoliovals1989_2014.gif)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on February 25, 2015, 12:34:34 AM
  • Investing in super (retirement) funds. While super is tax effective for now, it isnít accessible to early retirees and, due to likely government manipulation in the near future, is at risk of being more restrictive to access and becoming taxable for future retirees. As such, it is critical to have enough retirement funds outside of super to fund your interim retirement period until preservation age and to mitigate these risks.

How do people think the government (not this one in particular, but really any government) could or would change the way super works?  My stache isn't in super, but I'll hit the current preservation age within 25 years, so super and then aged benefits will provide a nice lift -- assuming they still work the same way.  Will they just cut the tax benefit for new contributions, or on withdrawal?  Or will they move the preservation age a little more?

Every single "philosophy difference" raised in this thread so far deserves its own thread.

In answer to your question, I think "all of the above, and more" is probably the correct answer. Cutting tax benefits and changing the preservation age have both benefits and costs to government and society.

Also it's not necessarily a downhill slippery slope. If you look at Superannuation's short history you can see changes that have worked out well for some people and badly for others.

FYI, there was some discussion on this earlier in the thread. See: http://forum.mrmoneymustache.com/investor-alley/australiausa-mustachian-philosophy-differences/msg564052/#msg564052 (http://forum.mrmoneymustache.com/investor-alley/australiausa-mustachian-philosophy-differences/msg564052/#msg564052)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: AustralianMustachio on February 25, 2015, 04:14:20 AM
Thanks once again everyone for all the stimulating discussion.

Thank you Dodge for your external viewpoint and all your research and charts! Im curious, from your perspective, within an indexed stock portfolio, what allocation would you have to Australia vs the rest of world, if you were an Australian investor?
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: redchair on February 25, 2015, 07:17:42 AM
Hang on Dodge, didn't you argue that the very high correlation of the ASX with major international markets was a poor reason to regard international diversification benefit as marginal?  But high correlation of a world index denominated in two differnt currencies is good evidence that currency risk is not signifcant?

I concede that in the accumulation phase it is not as important to invest in your own currency because you are earnng your spending money and any A$ rises mean you can buy more OS shares that will (hopefully) recover in A$ terms before you need to sell them - this is what your data shows is possible (but is does not prove that it will happen). 

But I want to structure my protfolio fairly closely to the drawdown phase structure because making changes later is likely to be very expensive, especially due to CGT.  During draw down these currency fluctuations can cause enormous damage.  There is a value change of about 120% shown in the decade of A$/US$ exchange rate you show!  I am not comfortable with the possibility of having to draw down at double my planned rate, potentilly for periods of years. Or more than doube - I can't predict the future very well.

I think I can achieve sufficient diversification while keepig currency risk managanle.  Sufficient diversification is not perfect; but sufficient is enough.  The size of the economy is not important in this regard (if I earn a million US$ in Fiji it's still worth the same).

There are more than just mining and finance companies on the ASX.  One is not bound to the index; A dollar earnt in a mid cap is indistuinguishable from one earned from BHP.  I hold telco, retail, health care, education, IT and non mining energy companies.  I think I need more but I am getting there slowly.  The index is mining and finance heavy but that (and VHY) is my only exposure to these sectors.  I am light on AU manufacturing but I get major manufacturers in my US and EU indexes and I prefer to buy companies that are likely to make profits :)

I agree that hedging defeats much of the value of international diversificaion and usually adds to costs producing worse returns.  I don't think you're necessarily wrong, I just dont think you can bee so certain you are right.  And even if you are I would not feel comfortable with the currency risk of majority foreign holdings.  Parachuting is probably safer than driving, but do not want to parachute down to the shops!
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on February 26, 2015, 06:25:25 PM
Here's another quick one:

Australian: budget deficit = economy is in the shitter (maybe 95% of Australians believe this)
American: budget deficit = government is fixing the economy (maybe 60% of Americans believe this)

This affects the investment choices of Australians, as well as political/fiscal policy of the government.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: aspiringnomad on February 26, 2015, 10:49:24 PM

This is a separate debate. I think it is though very much like picking the stock market in that it is hard to do.

I just read back through the thread and it's true that I cherry picked the optimism on house prices from one or two posters. Not the majority here. Apologies.

As for the statement quoted above, I think valuing real estate is very different from timing the stock market. Real estate prices should at least roughly reflect their fundamental value, i.e., rent. When that relationship gets completely out of whack, as has happened in Australia, then you have to at least consider the possibility of a bubble when buying into it. Stock prices are much more difficult to pin down because of varying market opinions on future productivity and earnings growth. Innovation doesn't do much for a house. But it does a lot for shares of innovative companies. Dodge has already explained much more convincingly and eloquently why stocks are a more dynamic marketplace than real estate.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 27, 2015, 12:45:50 AM

This is a separate debate. I think it is though very much like picking the stock market in that it is hard to do.

I just read back through the thread and it's true that I cherry picked the optimism on house prices from one or two posters. Not the majority here. Apologies.

As for the statement quoted above, I think valuing real estate is very different from timing the stock market. Real estate prices should at least roughly reflect their fundamental value, i.e., rent. When that relationship gets completely out of whack, as has happened in Australia, then you have to at least consider the possibility of a bubble when buying into it. Stock prices are much more difficult to pin down because of varying market opinions on future productivity and earnings growth. Innovation doesn't do much for a house. But it does a lot for shares of innovative companies. Dodge has already explained much more convincingly and eloquently why stocks are a more dynamic marketplace than real estate.

I don't buy this. Bubbles happen everywhere and its because sentiment comes into the picture. It happens to art, stocks, tulips, houses, gold and probably lots of other stuff. Predicting where we are at is really hard. I trade foreign currency. I now tend to look for something looking like it has gone too far one way. I then buy in the opposite direction and ignore it for a longish time.

Basically I think that predicting the future is hard and that markets no matter what they are based upon have the human element in them and that is what causes booms and busts.

At this point in the housing market I think its a big call to state that the market will definitely fall. It could but the demand is still there and the economy is still strong. Even if the economy does tank everyone needs a house to live in so as long as you aren't over leveraged and you have an income coming in you should be fine.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: andystkilda on February 27, 2015, 06:57:47 AM

I don't buy this. Bubbles happen everywhere and its because sentiment comes into the picture. It happens to art, stocks, tulips, houses, gold and probably lots of other stuff. Predicting where we are at is really hard. I trade foreign currency. I now tend to look for something looking like it has gone too far one way. I then buy in the opposite direction and ignore it for a longish time.

Basically I think that predicting the future is hard and that markets no matter what they are based upon have the human element in them and that is what causes booms and busts.

At this point in the housing market I think its a big call to state that the market will definitely fall. It could but the demand is still there and the economy is still strong. Even if the economy does tank everyone needs a house to live in so as long as you aren't over leveraged and you have an income coming in you should be fine.

I agree with these sentiments.

We've made a play on oil because our time horizon for holding is quite open (1 week - 3 years), so we're happy to wait and we're confident the market will recover at some point in that time.

Regarding the housing market, I also agree. We only look to buy properties in areas with very low rental vacancy rates, and always with at least a 20% deposit. This makes if very unlikely for a property to be more than slightly negatively geared - meaning we would be able to hold these properties and ride out even a lengthy downturn (if that happens in the near future).
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 27, 2015, 11:36:42 PM
Thanks once again everyone for all the stimulating discussion.

Thank you Dodge for your external viewpoint and all your research and charts! Im curious, from your perspective, within an indexed stock portfolio, what allocation would you have to Australia vs the rest of world, if you were an Australian investor?

I'm not sure.  It's hard to go wrong copying Vanguard, and their LifeStrategy fund for Australia is 50% domestic 50% international:

(http://i.imgur.com/8DSuxQd.png)

https://www.vanguardinvestments.com.au/retail/ret/investments/funddetailHIG.jsp

I'd consider that the baseline, I wouldn't do any less international than 50%.  But 50% in Australia is 25x higher than the 2% it actually represents, that's a lot of risk in a single country with a comparatively tiny economy.  The only reason to hold a less diverse portfolio like this, is to reduce currency risk.  But if you can effectively eliminate currency risk with Vanguard's Hedged International ETF (https://www.vanguardinvestments.com.au/institutional/jsp/investments/etf-detail/etfdetailVGADHE.jsp), I'm having trouble seeing a strong reason to not cap-weight equities, and stay at 2% Australia.  Or maybe use the international hedged fund for 49% of my equities, the normal international fund for 49%, and the Australia stock fund for the last 2%.

Either way 20% of my portfolio would be in Australian bonds, so that's a substantial amount of AUD exposure there.  Not to mention the job/emergency fund/savings account/house, and the all-important super (retirement) fund.  So I think I'd be comfortable with that.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 27, 2015, 11:44:52 PM
Hang on Dodge, didn't you argue that the very high correlation of the ASX with major international markets was a poor reason to regard international diversification benefit as marginal?  But high correlation of a world index denominated in two differnt currencies is good evidence that currency risk is not signifcant?

I didn't use the charts to show high correlation, I used the charts to show the impact of currency risk.  AUD/USD doubled, dropped about 40%, rose back up, then dropped about 35%.  What impact did that make on the MSCI world index returns had you held in either AUD or USD?  Not much.  This is not evidence that currency risk isn't significant, it's evidence that relatively large currency swings can have a negligible difference.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 27, 2015, 11:57:38 PM
But I want to structure my protfolio fairly closely to the drawdown phase structure because making changes later is likely to be very expensive, especially due to CGT.  During draw down these currency fluctuations can cause enormous damage.  There is a value change of about 120% shown in the decade of A$/US$ exchange rate you show!  I am not comfortable with the possibility of having to draw down at double my planned rate, potentilly for periods of years. Or more than doube - I can't predict the future very well.

The 15 years shown had about a 1% difference in return.  The previous 10 years had a 0.05% difference in return.  The previous 21 years had a 0.27% difference in return.  This is all within the range of expected stock returns over the long term.  If this type of fluctuation makes you uncomfortable, you might need a high allocation of bonds to help smooth the ride, and at that point it won't really mater how much international stocks you have.  The number will be too low to make a difference.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on February 28, 2015, 01:52:31 AM
Hang on Dodge, didn't you argue that the very high correlation of the ASX with major international markets was a poor reason to regard international diversification benefit as marginal?  But high correlation of a world index denominated in two differnt currencies is good evidence that currency risk is not signifcant?

I didn't use the charts to show high correlation, I used the charts to show the impact of currency risk.  AUD/USD doubled, dropped about 40%, rose back up, then dropped about 35%.  What impact did that make on the MSCI world index returns had you held in either AUD or USD?  Not much.  This is not evidence that currency risk isn't significant, it's evidence that relatively large currency swings can have a negligible difference.

What about if you're DCA over that period?
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: FFA on February 28, 2015, 08:47:05 AM
Thanks once again everyone for all the stimulating discussion.

Thank you Dodge for your external viewpoint and all your research and charts! Im curious, from your perspective, within an indexed stock portfolio, what allocation would you have to Australia vs the rest of world, if you were an Australian investor?

I'm not sure.  It's hard to go wrong copying Vanguard, and their LifeStrategy fund for Australia is 50% domestic 50% international:

(http://i.imgur.com/8DSuxQd.png)

https://www.vanguardinvestments.com.au/retail/ret/investments/funddetailHIG.jsp

I'd consider that the baseline, I wouldn't do any less international than 50%.  But 50% in Australia is 25x higher than the 2% it actually represents, that's a lot of risk in a single country with a comparatively tiny economy.  The only reason to hold a less diverse portfolio like this, is to reduce currency risk.  But if you can effectively eliminate currency risk with Vanguard's Hedged International ETF (https://www.vanguardinvestments.com.au/institutional/jsp/investments/etf-detail/etfdetailVGADHE.jsp), I'm having trouble seeing a strong reason to not cap-weight equities, and stay at 2% Australia.  Or maybe use the international hedged fund for 49% of my equities, the normal international fund for 49%, and the Australia stock fund for the last 2%.

Either way 20% of my portfolio would be in Australian bonds, so that's a substantial amount of AUD exposure there.  Not to mention the job/emergency fund/savings account/house, and the all-important super (retirement) fund.  So I think I'd be comfortable with that.
FWIW... Im doing 50/50 domestic / int.
 and the international part split 25 hedged/75 unhedged....
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on February 28, 2015, 12:02:20 PM
Hang on Dodge, didn't you argue that the very high correlation of the ASX with major international markets was a poor reason to regard international diversification benefit as marginal?  But high correlation of a world index denominated in two differnt currencies is good evidence that currency risk is not signifcant?

I didn't use the charts to show high correlation, I used the charts to show the impact of currency risk.  AUD/USD doubled, dropped about 40%, rose back up, then dropped about 35%.  What impact did that make on the MSCI world index returns had you held in either AUD or USD?  Not much.  This is not evidence that currency risk isn't significant, it's evidence that relatively large currency swings can have a negligible difference.

What about if you're DCA over that period?

According to my calculations, someone adding $100 a year to the USD MSCI World from Jan 2000 to Jan 2015, would end up with $2,608.

Someone adding $100 a year to the AUD MSCI World from Jan 2000 to Jan 2015, would end up with $2,434.

A difference of about 7% total, or about 0.48% annualized.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on February 28, 2015, 04:49:01 PM
According to my calculations, someone adding $100 a year to the USD MSCI World from Jan 2000 to Jan 2015, would end up with $2,608.

Someone adding $100 a year to the AUD MSCI World from Jan 2000 to Jan 2015, would end up with $2,434.

A difference of about 7% total, or about 0.48% annualized.

This is a funny one though considering that the USD has just gained significantly over the AUD. I wonder how much of these returns are FX related rather than stock related. If so that changes the picture considerably. The best way to diversify may be to leverage the FX market.

The details are always important. You need to make sure that you aren't just cherry picking results to make out that your approach is right.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on February 28, 2015, 07:05:23 PM
Hi Dodge  - sorry mate I didn't mean to use you as my personal calculator but appreciate you taking the time.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on February 28, 2015, 07:12:40 PM
There's an interesting article in Fairfax today - http://www.canberratimes.com.au/comment/surge-expected-of-older-people-buying-their-first-home-20150228-13qjdh.html - about renting vs owning in retirement. The author assumes the younger person of today has a reasonable amount in super and rents. When she reaches retirement age, it makes sense to become a home owner, so that she receives the pension and is much better off.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on February 28, 2015, 07:48:29 PM
LOL oops!
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on March 01, 2015, 01:35:36 AM
The Gratton Institute is putting out a book on Australian Cities tomorrow - how they are broken and what can be done to fix them. The article I read about it in http://www.canberratimes.com.au/victoria/melbournes-planning-disaster-jobs-boom-in-cbd-while-affordable-housing-grows-ever-outwards-in-suburbs-20150301-13oksj.html has a few maps of where jobs are in Melbourne, where people live... very interesting stuff. It tends also to show some reasons why Australian house prices are so high.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on March 02, 2015, 07:22:26 AM
One other difference that is worth noting is the aged pension. This has provisions that allow you to get a pension while you are living overseas. The provisions have recently changed in a lot of ways, however you basically need to be an Australian resident when you apply, and to have lived for 35 years in Australia (although if it is less there is a pro-rata). The problem for early retirees is that you may not qualify for residency, as they take a dim view of people coming back just to qualify for residency, according to Ron Bennetts.
Title: .
Post by: This_Is_My_Username on March 11, 2015, 05:08:24 AM
subscribing
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: qwerty8675309 on March 11, 2015, 05:43:31 AM
Subscribing too!
Title: Re: Australia/USA Mustachian Philosophy Differences
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Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Murdoch on March 12, 2015, 04:02:47 AM
Just read the whole thread. Great discussion. Thanks to those who have contributed.
I read Bogle's book, along with the 4 Pillars of Investing, and then spent about a year or more on the Bogleheads forum before finding MMM and eventually this forum here. Only this forum has enough Aussie input/involvement to provide meaningful and interesting Aussie related posts and threads such as this one, for which I am grateful.

Murdoch
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: misterhorsey on March 12, 2015, 04:50:59 AM
I'm subscribing too!
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: This_Is_My_Username on March 14, 2015, 05:28:13 AM
(http://www.whocrashedtheeconomy.com/realhouseprices1880to2011.gif)

There have been entire decades, multiple decades, where home prices in Australia decreased when taking inflation into account.  One of those "lost decades" just ended in 1999.  The one starting around 1974 lasted almost 2 decades.  The one in 1950 lasted 2 decades, the one from the beginning of the chart lasted at least 80 years...etc.  It looks like the latest boom started right in-line with the last US boom, which has already fallen in-line.  How long until the Australian housing market follows?

You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.  There is no economic reason for a commodity to grow faster than inflation.

I think this is false, and the reason is:

"housing" is really just land.  Think 50 years ahead, the building will be a hovel but the land will not have changed. 

And land is not a commodity because it is not fully fungible.  Particularly inner-ring land in Sydney, Melbourne, Hong Kong, London, New York, etc.   

An ounce of gold in Manhattan is identical to an ounce of gold in a rural town. 
An acre of land in Manhattan is a thousand times different to an acre of land in a rural town. 

The graph quoted above is too broad, because it is for a whole country.  There is no such thing as the median australian parcel of land, it has no address. 

The economic reason for inner-ring land to grow faster than inflation is supply and demand.   Australia's population is becoming more concentrated in its cities.  Immigration is increasing and immigrants (moreso than locals) want to live in a major city.   Australian jobs are becoming more concentrated in the city centre.   Population is increasing at a greater rate in inner ring suburbs than outer ring suburbs.   the ratio of house prices from inner ring to outer ring is increasing and the rate of increase is increasing.   Inner ring land has higher growth than outer ring land, and that growth gap is increasing. 

That is why the price of inner-ring land increases faster than inflation.  Because the gap between supply and demand is greater than 2.5% per year.  There is no prospect of demand waning any time in the medium term. 

That said, I am still racist against real property as an investment.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on March 15, 2015, 09:07:26 PM
(http://www.whocrashedtheeconomy.com/realhouseprices1880to2011.gif)

There have been entire decades, multiple decades, where home prices in Australia decreased when taking inflation into account.  One of those "lost decades" just ended in 1999.  The one starting around 1974 lasted almost 2 decades.  The one in 1950 lasted 2 decades, the one from the beginning of the chart lasted at least 80 years...etc.  It looks like the latest boom started right in-line with the last US boom, which has already fallen in-line.  How long until the Australian housing market follows?

You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.  There is no economic reason for a commodity to grow faster than inflation.

I think this is false, and the reason is:

"housing" is really just land.  Think 50 years ahead, the building will be a hovel but the land will not have changed. 

And land is not a commodity because it is not fully fungible.  Particularly inner-ring land in Sydney, Melbourne, Hong Kong, London, New York, etc.   

An ounce of gold in Manhattan is identical to an ounce of gold in a rural town. 
An acre of land in Manhattan is a thousand times different to an acre of land in a rural town. 

The graph quoted above is too broad, because it is for a whole country.  There is no such thing as the median australian parcel of land, it has no address. 

The economic reason for inner-ring land to grow faster than inflation is supply and demand.   Australia's population is becoming more concentrated in its cities.  Immigration is increasing and immigrants (moreso than locals) want to live in a major city.   Australian jobs are becoming more concentrated in the city centre.   Population is increasing at a greater rate in inner ring suburbs than outer ring suburbs.   the ratio of house prices from inner ring to outer ring is increasing and the rate of increase is increasing.   Inner ring land has higher growth than outer ring land, and that growth gap is increasing. 

That is why the price of inner-ring land increases faster than inflation.  Because the gap between supply and demand is greater than 2.5% per year.  There is no prospect of demand waning any time in the medium term. 

That said, I am still racist against real property as an investment.

Let's compare Sydney to New York City:

Sydney population in 1981: 3,204,696
Sydney population in 2010: 4,575,532
Sydney current population density: 980/sq mile

NYC population in 1980: 7,071,639
NYC population in 2013: 8,405,837
NYC current population density: 27,778.7/sq mile

NYC population growth, in terms of people added, was roughly the same during this time period, 1.3 million.  With a much higher population density, I think it would be fair to say that land is at a much higher premium in NYC.  How did the recent housing bubble affect NYC prices?  Here's an inflation adjusted chart (red line):

(http://i.imgur.com/5iIFCNn.png)

And here is Sydney:

(http://www.macrobusiness.com.au/wp-content/uploads/2013/10/ScreenHunter_09-Oct.-09-07.32.gif)

Source: http://www.macrobusiness.com.au/2013/10/sqm-sydney-prices-to-the-moon/

So the NYC housing market, and the Sydney housing market, both had about the same raw number of population growth, both boomed in 2000 (when all the housing markets were booming), but the NYC market already came back down, where the Sydney market just kept going.  From 2000-now, NYC had a 1.4% inflation-adjusted return, while Sydney is enjoying a 3.6% inflation-adjusted return.  NYC is currently sitting at 30% off it's inflation-adjusted high, while Sydney is still climbing at an increasing pace.

NYC has all the same population/land/density issues (more so), why didn't it keep rising?  Why did the same housing boom give the Sydney housing market 2.5 times the return?  Are we to believe that NYC had lower demand for housing during this period?  Maybe NYC was an outlier, let's find another population/land/density area and see how they handle housing booms.  How about Tokyo?

(http://i.imgur.com/nh61STi.png)

I'm reading "A Random Walk Down Wall Street", which has an interesting quote on this very issue:

"The bursting of the bubble destroyed the myth that Japan was different, and that it's housing prices would always rise.  The financial laws of gravity know no geographic boundaries."

I recommend against putting the majority of your net-worth into such a speculative asset.  I strongly urge those intending to leverage into such an asset (mortgage) to first consider the consequences.  I have many friends my age who say they, "signed my life away to a mortgage", and the bubble in Australia is much worse than it was here.  Like all previous speculative bubbles, no matter the asset class, prices will fall in-line.  Inflation-adjusted prices on commodities even-out over time.  It happened in the NYC, it happened in Tokyo, and it will happen in Sydney.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on March 15, 2015, 09:23:41 PM
Dodge, as I understand it, there are many more regulations limiting the availability and use of land in the Australian market. When those regulations are eased, the housing market will ease. When we start building more houses than are needed per year rather than less, the housing market will ease. Unfortunately our politicians are not talking about easing the regulations or expanding the building rate. They are talking about making superannuation available for buying housing, which is only going to increase rather than decrease the price.

Until you realise the fundamentals underlying the Australian property market, you don't understand the nature of the "bubble". If it is eventually eased by an increase in building rates, it will very slowly deflate. If the rules change overnight, it might deflate quickly, but it won't, because the rules will change slowly because of nimby (the basic reason the regulations exist and are gradually getting worse rather than better).
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: nonsequitur on March 15, 2015, 10:01:10 PM


Thank you all for the stimulating discussion.  I have found this thread incredibly enlightening. 
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on March 15, 2015, 10:41:15 PM
There's an interesting article in Fairfax today - http://www.canberratimes.com.au/comment/surge-expected-of-older-people-buying-their-first-home-20150228-13qjdh.html - about renting vs owning in retirement. The author assumes the younger person of today has a reasonable amount in super and rents. When she reaches retirement age, it makes sense to become a home owner, so that she receives the pension and is much better off.

This article is very bad.  It doesn't calculate the additional cost of maintenance, it doesn't calculate the Age Pension's "Rent Assistance" payment...this leaves much to be desired.  I did some research on Age Pensions, which led me to Australia's official government website:

http://www.humanservices.gov.au/customer/services/centrelink/age-pension

Which then led me to an official Age Pension calculator:

https://www.centrelink.gov.au/RateEstimatorsWeb/publicUserCombinedStart.do

I filled it out with the the "current information" of a renter paying $576 a week in rent, with $900,000 invested in shares.  Then I choose a "proposed" situation with someone owning a $750,000 property (which doesn't get counted as an asset for the Age Pension), and $150,000 invested in shares:

(http://i.imgur.com/x7zCUqB.png)

(http://i.imgur.com/fUipcrv.png)

Here are the results, per person (so times this by 2 since both situations are a married couple):

(http://i.imgur.com/XzJMkRj.png)

(http://i.imgur.com/5AWW3Nd.png)

It looks like they're using a 3.4% withdrawal rate to calculate the "Non-Centrelink Income", so let's ignore that.  According to the calculator, you are much better off renting, but we still haven't taken into account the recurring costs of owning.  This website estimates you might have $60,000 of extra expenses in year 1, after buying a $400,000 house:

http://www.yourmortgage.com.au/article/tallying-up-all-the-costs-of-buying-a-home-79472.aspx

Another website estimates the yearly maintenance costs might be closer to 2%:

http://www.retirement-communities.com.au/retirement-village-guide/cost-of-maintaining-a-home/

Let's split the difference and call it a 1.5% yearly cost.  Which ends up being $432 fortnightly.  We haven't removed the renting cost from this yet either, which is $576 weekly.  So in total:

Renting = $353.75 (Age Pension income) x 2 (# of people) + $1384 (4% rule)  - $1,152 (rent fortnightly) = $939.50 fortnightly income

Owning = $644 (Age Pension income) x 2 (# of people) + $230 (4% rule) - 432 (maintenance and other fees) = $1086 fortnightly income

So yes, under these assumptions, owning can give you a slight advantage if you're old enough to take advantage of the Age Pension, which is currently 65 years of age.  This does, however, come at a cost.  Since the market will grow much faster than this small difference in pension income, over the years your net worth will very likely suffer.  Putting these numbers into the NYTimes Buy/Sell calculator, (http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=3&abt=0002&abg=0) the breakeven point is much larger than the $576 weekly ($2,500 monthly) rent:

(http://i.imgur.com/PoDG4VA.png)

This calculates out to a $2,307,347 higher net worth with renting after 25 years.  Of course, assuming the housing market doesn't crash...
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on March 15, 2015, 10:48:01 PM
Dodge, as I understand it, there are many more regulations limiting the availability and use of land in the Australian market. When those regulations are eased, the housing market will ease. When we start building more houses than are needed per year rather than less, the housing market will ease. Unfortunately our politicians are not talking about easing the regulations or expanding the building rate. They are talking about making superannuation available for buying housing, which is only going to increase rather than decrease the price.

Until you realise the fundamentals underlying the Australian property market, you don't understand the nature of the "bubble". If it is eventually eased by an increase in building rates, it will very slowly deflate. If the rules change overnight, it might deflate quickly, but it won't, because the rules will change slowly because of nimby (the basic reason the regulations exist and are gradually getting worse rather than better).

I'd be careful with the "but this time is different" argument.  Every bubble in recorded history has heard that argument...it has a 0% success rate ;)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: deborah on March 15, 2015, 11:32:28 PM
The trouble is that it is not different, and the people in control all know how to get prices down. There is just a lack of willingness to take the appropriate action. I agree prices are very high. However, a bubble is usually speculation rather than regulation which people can't get around.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on March 17, 2015, 07:11:02 PM
http://www.smh.com.au/comment/negative-gearing-the-economic-reasons-why-government-must-kill-this-sacred-cow-20150317-1m14s4.html

Not sure how it will play out. I think there is enough noise around negative gearing now that you should only purchase a house if you could continue to afford it even if the policy was repealed. And if it wasn't repealed then it should just be treated as a nice bonus.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: frozzie on March 18, 2015, 06:19:14 PM
I think there is enough noise around negative gearing now.
Enough Noise that's for sure : The Project on the 17th https://youtu.be/vqBrXP_gHQA (https://youtu.be/vqBrXP_gHQA)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: JLR on March 24, 2015, 04:25:00 AM
Subscribing in the hope this thread sees more action. :)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: vagon on April 15, 2015, 08:02:50 PM
Also in to see any updates as they arise.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: aspiringnomad on April 15, 2015, 10:20:14 PM
I can't say this any more eloquently or convincingly than Dodge, but before any Australian friend of mine buys a house, I would want them to see the attached graph. Again, fundamental value for property, barring permanent government or foreign investor intervention, should reflect the cost to rent that property over the long term. (The blue line is the US, 100 represents a price-to-rent ratio equal to 1). This time is unlikely to be different.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: bigchrisb on April 15, 2015, 11:15:17 PM
Can't say I disagree on the comments about Aus housing being over-valued.  However, I've been saying that for the last 10 years.  For me, its been a bit of a case of Keynes, with "the market remaining irrational longer than you can remain solvent".   I'm very stock focused in my investments, and am close enough to FI at 33.  However, I probably would have been better off buying a house 10 years ago.  I capitulated and bought one last year (at which point, it was less than 50% of my liquid net worth).  This means I'm now neutral the AUS property market (as opposed to short).

Australian's seem to have an irrational love affair with bricks and mortar.  I think there are a few reasons this is particularly the case here, being:

- Minimal taxation on owner occupied housing. From what I have read, property/land taxes in the US are higher than those in AUS (really only.
- Addiction to negative gearing. Probably talked about enough already.
- Traditionally high fee financial products, vs DIY fees on residential property.
- Poor tenancy rights compared to some juristictions, making "renting" appear a low socioeconomic choice / class in much of the public's eyes.
- Lack of recessions in our economic memory (over 20 years since the last one), mean that the downside risks, or what happens with high unemployment rates are not in Australian's awareness.
- Ability to access lower finance rates against property - I was using margin loans, but now use a loan against this property for the same purpose, with a better interest rate.  (If leverage is ever a good idea is another debate).

Plenty of people have made their wealth in property, plenty of people in shares.  Of those who currently own Aus property (myself now included), we have had some very fortunate timing! 

I figured I was ok buying in, as I'm prepared to hold this property in perpetuity, and probably live in it for a significant portion of the time, and rent it if I'm travelling elsewhere.



Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: vagon on April 16, 2015, 06:49:49 PM
Can't say I disagree on the comments about Aus housing being over-valued.  However, I've been saying that for the last 10 years.  For me, its been a bit of a case of Keynes, with "the market remaining irrational longer than you can remain solvent".   I'm very stock focused in my investments, and am close enough to FI at 33.  However, I probably would have been better off buying a house 10 years ago.  I capitulated and bought one last year (at which point, it was less than 50% of my liquid net worth).  This means I'm now neutral the AUS property market (as opposed to short).

Australian's seem to have an irrational love affair with bricks and mortar.  I think there are a few reasons this is particularly the case here, being:

- Minimal taxation on owner occupied housing. From what I have read, property/land taxes in the US are higher than those in AUS (really only.
- Addiction to negative gearing. Probably talked about enough already.
- Traditionally high fee financial products, vs DIY fees on residential property.
- Poor tenancy rights compared to some juristictions, making "renting" appear a low socioeconomic choice / class in much of the public's eyes.
- Lack of recessions in our economic memory (over 20 years since the last one), mean that the downside risks, or what happens with high unemployment rates are not in Australian's awareness.
- Ability to access lower finance rates against property - I was using margin loans, but now use a loan against this property for the same purpose, with a better interest rate.  (If leverage is ever a good idea is another debate).

Plenty of people have made their wealth in property, plenty of people in shares.  Of those who currently own Aus property (myself now included), we have had some very fortunate timing! 

I figured I was ok buying in, as I'm prepared to hold this property in perpetuity, and probably live in it for a significant portion of the time, and rent it if I'm travelling elsewhere.

I agree Chris - like you I am both in the housing market and bearish on the housing market. The fundamentals are all horribly wrong.

I wanted to add one more thing around leverage - property gives you a higher LVR than shares.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: slothman on April 17, 2015, 09:13:09 AM
Could we take a moment to talk about Australian taxes?

From what I've read, for Americans "a married couple can have $19,500 a year in income AND $70,700 in investment income, TAX FREE"
http://www.gocurrycracker.com/never-pay-taxes-again/

In Australia, as far as I know, there's no separate allocation for tax-free investment income. Rather, all income (regardless of earned income vs investment income) gets taxed at income tax rates. Therefore we only qualify for roughly $20K a year in income tax free as a resident.

Additionally, I've been investigating what will happen to my tax residency status should I decide to 'retire early' overseas. From what I can tell I'll become a non-resident for tax purposes and as such, investment property rental income will be taxed at 32.5% (no tax free threshold) and dividends will be subject to withholding tax of 15% (tax treaty rates).

Why do Americans get it so sweet?
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Ozstache on April 17, 2015, 04:14:52 PM
In Australia, as far as I know, there's no separate allocation for tax-free investment income.

What about super?
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: marty998 on April 17, 2015, 05:39:46 PM
Yes infinite tax free income through super when you're over 60 sounds like a good deal to me?
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: slothman on April 17, 2015, 06:37:15 PM
Looking to retire by my mid 30s so super isn't really a factor for me...
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: potm on April 17, 2015, 06:46:28 PM
Americans don't get franking credits remember. If you earned 70k of fully franked dividends, you will still get a refund from your tax.

Also if you no longer become an Australian resident then you can invest anywhere in the world apart from Australia and your Australian citerzenship won't impact anything. Not so much for Americans.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: slothman on April 17, 2015, 07:07:48 PM
Americans don't get franking credits remember. If you earned 70k of fully franked dividends, you will still get a refund from your tax.

Also if you no longer become an Australian resident then you can invest anywhere in the world apart from Australia and your Australian citerzenship won't impact anything. Not so much for Americans.

Could you please run me through the numbers for an Australian resident? I hadn't considered the effect of franking credits.

I did learn that if I become a non-resident I won't be able to claim franking credits and will need to pay 10% withholding tax on any franked dividends, or 15% if non-franked. Note: this is dependent on the relevant tax treaty.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: slothman on April 17, 2015, 07:36:49 PM
Been reading up on franking credits and playing around on the ATO tax calculator. Can anyone critique my numbers to see if they look correct?

Assumptions: Australian tax resident
Stache $750,000 in Australian diversified share portfolio
Dividends Received    $30,000 (assume 4% dividend yield) (no other income)
Franking Credits    $12,857  (assume fully franked dividends) (Franking Credits = Dividend * ( 3 / 7))
Taxable Income    $42,857

Based on tax calculator (http://calculators.ato.gov.au/scripts/axos/AXOS.asp):
Tax on taxable income    $5,476
less low income tax offset    $357
Tax payable    $5,118
   
plus Medicare levy    $643
Total tax payable    $5,761
   
less franking tax offset    $12,857
Net refund    $7,096
   
Total Income (After-Tax)    = $30,000 + net refund = $37,096
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: potm on April 17, 2015, 08:26:11 PM
Assuming the tax calculator is correct, then that is right. You've gotten the franking credit part right.
Time to sell all your IPs and go all in? :P
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: slothman on April 17, 2015, 08:43:43 PM
Assuming the tax calculator is correct, then that is right. You've gotten the franking credit part right.
Time to sell all your IPs and go all in? :P

Thanks potm! Who spilled the beans on my IPs?!?! :P

I still firmly believe property has a way to go before the boom is over. I've stopped adding to my portfolio as of last year and have since been borrowing against equity to purchase LICs/ETFs.

When I transition into retirement I will start selling down part of my portfolio to clear some debt.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on May 14, 2015, 09:25:59 PM
http://news.domain.com.au/domain/real-estate-news/the-mother-of-all-housing-bubbles-20150515-gh24hv.html

Quote
In 1991 the value of housing debt divided by disposable household income was 35 per cent. Today it is more than 140 per cent, and climbing daily. Australia has never had to contend with home loan rates of less than 4.3 per cent.

A little over 12 months ago I remember people scoffing at analysts predicting the Sydney housing market was "10 percent undervalued." Yet here we are, 10% up from last year, and analysts are still predicting it has another 10% to go over the next 12 months.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Interest Compound on May 14, 2015, 09:41:14 PM
http://news.domain.com.au/domain/real-estate-news/the-mother-of-all-housing-bubbles-20150515-gh24hv.html

Quote
In 1991 the value of housing debt divided by disposable household income was 35 per cent. Today it is more than 140 per cent, and climbing daily. Australia has never had to contend with home loan rates of less than 4.3 per cent.

A little over 12 months ago I remember people scoffing at analysts predicting the Sydney housing market was "10 percent undervalued." Yet here we are, 10% up from last year, and analysts are still predicting it has another 10% to go over the next 12 months.

Everyone knows market timing is a horrible idea in the stock market.  Yet people are excited to market time with leverage in a commodity (Real Estate)?  This is such a bad idea, I'm genuinely shocked that people on this forum aren't universally panning it.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: marty998 on May 15, 2015, 02:31:15 AM
http://news.domain.com.au/domain/real-estate-news/the-mother-of-all-housing-bubbles-20150515-gh24hv.html

Quote
In 1991 the value of housing debt divided by disposable household income was 35 per cent. Today it is more than 140 per cent, and climbing daily. Australia has never had to contend with home loan rates of less than 4.3 per cent.

A little over 12 months ago I remember people scoffing at analysts predicting the Sydney housing market was "10 percent undervalued." Yet here we are, 10% up from last year, and analysts are still predicting it has another 10% to go over the next 12 months.

Everyone knows market timing is a horrible idea in the stock market.  Yet people are excited to market time with leverage in a commodity (Real Estate)?  This is such a bad idea, I'm genuinely shocked that people on this forum aren't universally panning it.

For a long time most Australians really only had 2 choices when it came to investments - shares or real estate, and most people still think shares are a lottery.

Property is so ingrained in the culture that you would be hard pressed to convince the average person it's a bad idea.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: slothman on May 15, 2015, 02:53:47 AM
Just started reading Peter Thornhill's motivated money and beginning to see the light.

Ive made a plan to diversify more into shares and rotate out of property.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Interest Compound on May 15, 2015, 10:20:03 AM
http://news.domain.com.au/domain/real-estate-news/the-mother-of-all-housing-bubbles-20150515-gh24hv.html

Quote
In 1991 the value of housing debt divided by disposable household income was 35 per cent. Today it is more than 140 per cent, and climbing daily. Australia has never had to contend with home loan rates of less than 4.3 per cent.

A little over 12 months ago I remember people scoffing at analysts predicting the Sydney housing market was "10 percent undervalued." Yet here we are, 10% up from last year, and analysts are still predicting it has another 10% to go over the next 12 months.

Everyone knows market timing is a horrible idea in the stock market.  Yet people are excited to market time with leverage in a commodity (Real Estate)?  This is such a bad idea, I'm genuinely shocked that people on this forum aren't universally panning it.

For a long time most Australians really only had 2 choices when it came to investments - shares or real estate, and most people still think shares are a lottery.

Property is so ingrained in the culture that you would be hard pressed to convince the average person it's a bad idea.

Are the people in this thread considered average?  If I talked in this thread about making investing decisions based on the following statement, I'd immediately and unanimously be told it's a horrible idea:

A little over 12 months ago I remember people scoffing at analysts predicting the stock market was "10 percent undervalued." Yet here we are, 10% up from last year, and analysts are still predicting it has another 10% to go over the next 12 months.

I don't think many Australians in this thread think the stock market is a lottery, why is it easy to bypass one cultural misconception (shares are a lottery), but not the other?
Title: .
Post by: This_Is_My_Username on May 17, 2015, 04:26:16 AM
australians on the MMM forum are not average
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: dungoofed on May 17, 2015, 07:42:25 AM
Hi Interest Compound - You're not the only one who has tried to show Australians the folly of our ways in this thread and others : )

And there is no shortage of Australians on this site who think property in Australia *shouldn't* be returning as much as stocks, consistently, for almost a century.

Personally I think a lot of people get into property in Australia because they have seen their own parents build wealth over 40 years through property, seen the security it has brought them and their family. It's hard to tell these people they are making the "wrong" decision by leveraging themselves to the gills, and if nothing changes then things will turn out fine for them.

Also, is real estate really a commodity? I could see it more like running a business, providing income streams for retirees across the nation. Hadn't really thought of it as something like gold that just sits there, but now you've got me thinking.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Dodge on May 17, 2015, 10:51:59 AM
And there is no shortage of Australians on this site who think property in Australia *shouldn't* be returning as much as stocks, consistently, for almost a century.

But that's the thing, it hasn't been consistent, and it hasn't been returning as much as stocks:
Inflation-adjusted stocks since 1950:

(http://4.1m.yt/GdzVkz0Md.png)

(Unfortunately I can't find any long term, inflation-adjusted, and dividends included Australian or World stock market charts.  An Australian investor should be investing internationally anyway, and the US market is about half the world, so I think it's close enough)

Personally I think a lot of people get into property in Australia because they have seen their own parents build wealth over 40 years through property, seen the security it has brought them and their family. It's hard to tell these people they are making the "wrong" decision by leveraging themselves to the gills, and if nothing changes then things will turn out fine for them.

Now this I understand.  When speaking to these people, I'd remind them that it's not the last almost century of gains, or even the last 40 years which brought them incredible wealth, it's this part of the chart that gets them excited:

(http://i.imgur.com/NSrBLXl.png)
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: vagon on May 17, 2015, 06:19:46 PM
I honestly don't understand the obsession with property in these forums.
Why does anyone think property returns the same as the stock market over the long term?

The fact people are saying that sort of thing makes me think we're definitely in a bubble. The question then becomes how long do you ride it out.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: slothman on May 17, 2015, 10:23:36 PM
I honestly don't understand the obsession with property in these forums.

Not sure why it deserves so much flak. It's still a legitimate asset class to invest in, an asset class that isn't dominated by investors, unlike shares which is dominated by institutional investors.

I'm almost finished reading Peter Thornhill's book on shares (he's 100% pro shares), and in the book, he provides an example of building wealth by borrowing against property equity to purchase shares and using share dividends to help pay down the property debt. So the two can co-exist and mutually benefit each other to deliver a superior result.

Property in my eyes is just a means to get cheap leverage. I don't believe it has the ability to overperform shares in the long-run.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: vagon on May 18, 2015, 01:11:04 AM
Not sure why it deserves so much flak. It's still a legitimate asset class to invest in, an asset class that isn't dominated by investors, unlike shares which is dominated by institutional investors.

As an asset class I dont think it does get flak, most people would suggest a portion of an asset allocation to be invested in real estate.
As investment in a single property or small group of properties it should get flak.
Institutional investment is not by default a negative trait of the stock market.

I'm almost finished reading Peter Thornhill's book on shares (he's 100% pro shares), and in the book, he provides an example of building wealth by borrowing against property equity to purchase shares and using share dividends to help pay down the property debt. So the two can co-exist and mutually benefit each other to deliver a superior result.

Property in my eyes is just a means to get cheap leverage. I don't believe it has the ability to overperform shares in the long-run.

I agree with this wholeheartedly and do it myself - debt recycling.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: marty998 on May 18, 2015, 01:32:38 AM
I honestly don't understand the obsession with property in these forums.
Why does anyone think property returns the same as the stock market over the long term?

The fact people are saying that sort of thing makes me think we're definitely in a bubble. The question then becomes how long do you ride it out.

I thought my place was worth $500k. Half hour ago a local agent rings me up and says "you know that unit in your block you were sticky-beaking on Saturday? We've got an offer on it for $570k. Still interested in it?

Me: "Wonderful world we live in, isn't it?"

Her: "We can help you, as you can see it's a great time to sell your place!"

I give up. Boom on baby, boom on.

This boom is going so far that if it busts it we'll still be filthy rich. Just not super duper filthy rich.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: johnnydoe on May 18, 2015, 03:42:04 AM
This is a good chart on Australian house prices over 100 years:

(http://www.macrobusiness.com.au/wp-content/uploads/2013/02/ScreenHunter_68-Feb.-13-07.23.gif)

Source: http://www.macrobusiness.com.au/2013/02/the-history-of-australian-property-values/
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Interest Compound on May 18, 2015, 10:11:46 AM
This boom is going so far that if it busts it we'll still be filthy rich. Just not super duper filthy rich.

Tell that to the entire generation of people who will buy at $570,000, then watch as the price of their home drops to $250,000 within the span of a year, slowly slides down to $150,000 over a decade, and stays at $150,000 (0 appreciation) for another decade.

That wouldn't be abnormal, or even crazy.  That's simply what housing markets do.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: agent_clone on May 19, 2015, 03:01:14 AM
This boom is going so far that if it busts it we'll still be filthy rich. Just not super duper filthy rich.

Tell that to the entire generation of people who will buy at $570,000, then watch as the price of their home drops to $250,000 within the span of a year, slowly slides down to $150,000 over a decade, and stays at $150,000 (0 appreciation) for another decade.

That wouldn't be abnormal, or even crazy.  That's simply what housing markets do.
A tour guide I had for a tour around Tokyo in Japan in 2011 bought before the market crash there (the early 90's one).  His home is still worth less than it was prior to his purchase.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: AustralianMustachio on May 19, 2015, 03:21:28 AM
Yes, to those who are invested beforehand, bubbles can be very profitable. Later investors, less so
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Interest Compound on May 19, 2015, 10:42:44 AM
Yes, to those who are invested beforehand, bubbles can be very profitable. Later investors, less so

The biggest problem with participating in housing bubbles, is that people never get out!  It's not uncommon to see people cashing out when they feel the stock market is too high, or in a bubble.  But if someone buys a house and it rises significantly in price, they typically either borrow against it, or sell and buy an even BIGGER house.  Instead of getting out, people double down and increase their leverage.  I don't know anyone who sold their house at the market peak, and decided to rent for the next 10 years.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: plainjane on May 19, 2015, 10:55:40 AM
Yes, to those who are invested beforehand, bubbles can be very profitable. Later investors, less so
I don't know anyone who sold their house at the market peak, and decided to rent for the next 10 years.

I used to work with someone who got out of the Toronto housing market 3-4 years ago and went into gold, waiting for the real-estate bubble to burst.  So didn't manage to hit the market peak on the housing sale, but I fear he was pretty close to the peak on gold.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: AustralianMustachio on May 20, 2015, 06:07:33 AM
Kerr Nielson, head of what appears to be one of Australia's most successful funds*, on this exact issue:

"The key take-away is that after years of great domestic returns, Australian investors should surely now be asking, have things changed and whether they have enough foreign share exposure."

https://www.platinum.com.au/Journal/Views/Investing-Sept-2014/

*I know we're all about indexes here. But really quite exceptional returns. They've outperformed every equivalent market. Completely smashed most of them. Their broad fund has more than doubled the international MSCI index over the last twenty years. Who knows if they can continue of course.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: bob999 on January 15, 2018, 01:34:02 AM
Hi All,

Great thread. I don't think that property vs shares debate is ever going to be resolved. I was property PRO over the last 15 years but am now PRO shares. It was a difficult transition (took 5 years of reading MMM) to make for someone who thought 'shares = gambling' at a point in my life.

Anyhow, I have tried to 'balance' my portfolio towards shares by investing money into index funds from savings. Still holding onto rental properties (in Australia). However, now I am wondering if it is worth selling at least one of the investment properties.

Reasons for selling:

Reasons for keeping the property:


So any recommendations, pointers, books, suggestions that you think would help me make a more informed decision that I wouldn't regret?

Thanks
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Little Aussie Battler on January 15, 2018, 03:25:27 AM
Interesting thread.  Thanks for digging it up!
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: happy on January 15, 2018, 03:43:28 AM
Your post is lacking some useful details e.g. how many rentals, approx location and context of the one you are thinking of selling, how much is it worth, how much debt do you have on it and overall, hard numbers re rent etc  and how much are you thinking of spending on a house etc etc etc .

So in general terms : There are 2 ways property make you ROI - rental yield and capital growth.  Sound like this one does neither.  Therefore thus far it hasn't been good investment. It does depend on where  it is: e.g. if it were in Sydney and you've had very little capital gain in the last 10 years - holy smoke its a dud, or you paid way too much in the first place. But on the other hand Perth market was booming and has now died off, so over 10 years you only have yield, not capital gain and thats normal for that area.  And from what you are saying you don't even have yield. That being said, overall I'm not sure it makes ever sense to hold a poorly performing rental, its an investment.  Are there actual specifics that make you think  something remarkable will change with this rental in the near future? Or are you just telling yourself you'd kick yourself if it did after you sold it?   To be honest, we can all say that about uncle bobs coin collection, our childhood stamp collection, that old ceramics vase that might turn out to be Ming dynasty, and so on : I shouldn't sell it, coz it might be worth a lot of money one day.

If your reason for selling is that you wish to use the proceeds to buy a PPOR, then this is a lifestyle decision  and you should own it as such. Even if you don't benefit financially from this, in investment terms, at least you will get some perceived improvement in quality of life (happy wife= happy life) from the capital. At the moment its not helping you, just generating more paperwork.

Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: happy on January 15, 2018, 03:46:21 AM
@Little Aussie Battler

Hopefully enough time has passed that it can be revived without another bomb attack stalemating discussion.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: steveo on January 15, 2018, 04:26:56 AM
How much have house prices increased in the last 2 years. I love that it was a bubble in about 2008. I bought up then or soon after. The price of property has doubled.

I haven't read the whole thread but geez I prefer shares over property. Easy to get in and out. No debt. No hassles.

My plan involves being able to sell our 4 bedroom Sydney house and move to a LOC area. We might not do that but it's a great back-up plan.
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: Eucalyptus on January 15, 2018, 05:21:36 AM
I and my family were absolutely in the property investment camp for a long time. I never really got into it myself (studying forever). My parents are close to retirement and have a few investment properties. All helped to aquire by the Property Investment Club. Unfortunately, in the last few years or so when most were aquired, growth hasn't been that great. If they were lucky, and went against most of the advice they were given by "experts" and bought in parts of Sydney and Melbourne that have still continued to go up, they would be doing great. Instead they bought in other cities. Oh well. They haven't gone backwards. There own house and probably a cheap country one will end up being paid off, they'll get a few $k a year in rent. They'll mostly live off Dad's super, which he is going hard at over the next 3-4 years so that he can retire.


I have friends that are actually accountants and work in finance for large companies, that raved at how they knew what they were doing, and bought houses in Adelaide's northern suburbs. I didn't think it was a very good idea based on population growth and large amounts of land and development opening up...little demand, heaps of supply. One friend bought a place about ten years ago now. For I think $250k. Its now worth, ten years later, $250k. So its tracked backwards with inflation and against wages/salary growth. To be honestly I secretly laughed... which is a bit cruel. What would I know about investing when I queried them when they were talking about making these decisions? Hmmm.


Property as individual properties is inherently risky, and while probably less risky than picking random non-blue chip shares, is a hell of a lot more risky than picking a diversified ETF. You can be lucky. You can also be pretty unlucky. It can also take a LOT of work and effort. Taxation, picking houses, working on them, ongoing management, etc, even with a good property manager, tax agent, etc, is a pain! Its not worth it for most people. Much easier to spend your time trying to work out how to keep a steady income from your job, and, how to increase your savings % to stick in ETFs (which could include a bit of REIT). The effort is out of proportion vs any potential extra reward I think. Its also really hard to buy part of a house. This makes it hard to invest a small bit on one house, and a small bit in another, etc. You have to buy a whole house. You have to sell a whole house. Its a pain.


Its not the kind of pain I want. Dealing with legacy family investment and PPOR houses when the time comes is more than enough!


I have bought my own small, cheap PPOR though. For me, locking in a living expense like that is totally worth it at my age (early 30s with a long time to live).
Title: Re: Australia/USA Mustachian Philosophy Differences
Post by: stashgrower on January 15, 2018, 06:31:34 AM
I tend to agree that the current tax shelter is not going to exist for much longer, but my conclusion is a bit different. If I was in my early career now and earning a reasonable amount, I would put 50/50 inside/outside super as per Burrow - or more probably 30/70 - depending on how soon I was retiring. This would enable me to have it in the current tax haven for longer, and could mean that proportion of my super would remain in a better environment (if changes to super grandfather what is already there). When the new scheme came in, I would revise this. It would mean that if I had a windfall, and retired even sooner, or started to have more expenses (eg. kids), I could reduce (or 0) the amount I was putting into super and it would just get bigger.

Deborah, would your ideas for that split include an early careerist who hadn't bought a house yet?

ETA: oops, sorry, I just saw the date!! (Thought this was a new thread but really it was just resurrected.)