Author Topic: Wanting advice on investing in ETFs in high stockmarket (NZ)  (Read 974 times)

wotstheguts

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Wanting advice on investing in ETFs in high stockmarket (NZ)
« on: October 08, 2019, 11:20:05 PM »
Hi all, newcomer here, but have been following MMM on and off for years, love the guy! I have a question regarding moving investments from one asset class to another.

Up until recently, 100% of my investments have been in real estate (industrial and residential property). Although this strategy has worked well for me, I understand the folly in having all one's investments in a single asset class.

In addition, I'm at a bit of a turning point in life and crave more freedom to travel to countries I haven't seen yet, do extended hikes in remote areas with no internet access, and so on - without having to worry about issues cropping up with maintenance, tenants, etc.

So basically my goals are:

1. Passify my income stream.
2. Diversify my investments.

I've recently sold one property and I'm about to sell another, and should end up with about $800,000 to invest. I'm considering investing this money into a few ETFs - here in New Zealand there are some good high-dividend ETFs (for example, gross dividends of about 4.75% or 3.5%), and probably I'd include other ETFs with exposure to overseas stockmarkets.

The trouble is, our little stockmarket here in NZ has experienced massive gains over the last few years and is sitting pretty high, and of course there are murmers floating around of major crashes and economic downturns. So I'm loathe to invest a significant sum of money all at once and then see it possibly plummet in value during the next correction. I know, markets almost always recover eventually, nevertheless it would be a tough thing to watch!

So I'm reaching out to those with more experience in this area - what's the best approach? Should I put in say $200K initially then drip-feed the rest in over the next year or two to take advantage of dollar-cost averaging?

Many thanks in advance!

Pete.
« Last Edit: October 09, 2019, 09:07:13 PM by wotstheguts »

marty998

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Re: Wanting advice on investing in ETFs in high stockmarket
« Reply #1 on: October 09, 2019, 06:10:25 AM »
Sending a batsignal to @gooki

@wotstheguts - you might get more relevant responses if you put "NZ" in the title of your post. Especially with regards to tax.

Was under the impression you guys don't have a capital gains tax but one might have recently been introduced?

habanero

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Re: Wanting advice on investing in ETFs in high stockmarket
« Reply #2 on: October 09, 2019, 06:19:32 AM »
You don't know your loss / risk tolerance before you have experienced a significant drop in value.

If you want to diversify, buy a global index fund / ETF, not a domestic one. Local bias is one of the more common mistakes to make. It kind of makes sense in the US as the US is like 60% of the world's equity market, but for a small country? Nhet. Go global.

And there is nothing magical about dividends. You should look into the tax implications, it can be much more tax efficient to get the "dividends" as capital gains or have a fund automatically reinvest the dividends.


fire100xz

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Re: Wanting advice on investing in ETFs in high stockmarket
« Reply #3 on: October 09, 2019, 06:26:58 AM »
For lump sums, drip feed in to market vs put in lump sum is a question I have too

habanero

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Re: Wanting advice on investing in ETFs in high stockmarket
« Reply #4 on: October 09, 2019, 06:50:12 AM »
For lump sums, drip feed in to market vs put in lump sum is a question I have too

The math says lump sum works out best. The main risk, however, is if you lump sum, then some time down the road the market tanks and you do something stupid - like panicking and selling and then miss out on a lot of the recovery that generally follows after some time. It's important to realize that many have never experienced a proper market crash and the more money you have in the market the bigger your nominal losses (and gains) get when the market moves. You don't know how you will react until it actually happens.


35andFI

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Re: Wanting advice on investing in ETFs in high stockmarket
« Reply #5 on: October 09, 2019, 06:52:44 AM »
For lump sums, drip feed in to market vs put in lump sum is a question I have too

Statistically speaking, you are better off lump sum investing than dollar cost averaging.

There are several studies on this. I believe Vanguard and Charles Schwab each did at least one.

Does this apply world wide or just to the US? I suspect that it would apply across the board but I'm not sure.

Here's a good one from Charles Schwab:
https://www.schwab.com/resource-center/insights/content/does-market-timing-work

maizefolk

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Re: Wanting advice on investing in ETFs in high stockmarket
« Reply #6 on: October 09, 2019, 08:46:55 AM »
For lump sums, drip feed in to market vs put in lump sum is a question I have too

Statistically speaking, you are better off lump sum investing than dollar cost averaging.

Better off is a bit too squish a word for my taste.

Statistically speaking you get the best average return by lump sum investing. (The average return many different people who invested a lump sum at different times would have received.)

Dollar cost averaging results modestly lower average returns but modestly higher worst case returns (if you look at many different people investing in the market at different times, the least lucky lump sum investors will be worse off than the least lucky DCAs).


35andFI

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Re: Wanting advice on investing in ETFs in high stockmarket
« Reply #7 on: October 09, 2019, 10:19:57 AM »

Statistically speaking, you are better off lump sum investing than dollar cost averaging.

Better off is a bit too squish a word for my taste.

Fair enough.

Quote
you get the best average return by lump sum investing.
This is what I consider to be "better off".
I prefer to word my responses in a way that is clearly understood, even if it doesn't cover all possible scenarios.
This tends to help people who are new get a better understanding of the fundamentals without getting confused by all of the nuances.

Also, I'm not that great with putting my thoughts into words so there's that...

Quote
Dollar cost averaging results modestly lower average returns but modestly higher worst case returns (if you look at many different people investing in the market at different times, the least lucky lump sum investors will be worse off than the least lucky DCAs).

Agreed, but I can see sentences like this making people consider DCA over lump sum investing.

I think that it is important for people to understand that successful investing is just a numbers game, those who play the game that offers the highest probability of success over the long run will likely have the highest returns and therefore be better off in the end.

maizefolk

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Re: Wanting advice on investing in ETFs in high stockmarket
« Reply #8 on: October 09, 2019, 10:30:56 AM »
I think that it is important for people to understand that successful investing is just a numbers game, those who play the game that offers the highest probability of success over the long run will likely have the highest returns and therefore be better off in the end.

Again I think this is misleading because success can also mean different things to different people.

For some people success can mean the achieving the highest possible return, for others avoiding the worst.

For people who are talking about retiring early, success is often as simple as "did my portfolio let me spend 4% (or 5% or 3.5%) per year without me running out of money before I died", which is a success criteria that leads folks to think of success in terms of minimizing the severity of worst case scenarios rather than improving the average outcome.

So if you just say a person is better off lump sum investing because it provides the highest probability of success (without explaining what better off and success mean to you) you're going to mislead a significant chunk of the people who read what you write.

wotstheguts

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Re: Wanting advice on investing in ETFs in high stockmarket (NZ)
« Reply #9 on: October 10, 2019, 09:44:19 PM »
Thanks all for your replies, much appreciated.

marty998, our current government recently tried to introduce quite a punitive capital gains tax regime, but failed miserably. So still no capital gains tax in NZ unless you are considered a "trader" - actively buying and selling investments - or if your intention at the time of buying was to make a capital gain (vague, I know).

habaneroNorway, thanks for the good advice re diversifying. Limited number of local ETFs here buying into international funds - there's one that invests in Vanguard S&P 500, but terrible dividend yield compared with local ETFs. And I guess there's currency fluctuations to be mindful of?

I don't want to be regularly taking income from value growth because then I'll be classified as a trader and have to pay CGT. Should have mentioned I'm 50, FIREd 15 years ago and want to maximise current income, growth is secondary.

Excellent point about lump sum being better mathematically but having to account for the psychological factor - not knowing how averse and panicked one might feel when the market loses a big chunk of value. I'll try a risk profile calculator. Many years ago I had a portfolio of individual stocks and definitely panic-sold one of those when it plummeted. I like to think I've matured and chilled since then but who knows.

Thanks for the link 35andFI, have looked up a few more studies and this conclusion seems very consistent.

It's a tricky decision. For  many years I've had a nice consistent 5%+ net yield from my properties and lovely capital gain, feels very dicey to put these gains in the stockmarket - but I no longer want the responsibility and hassle of multiple investment properties. I do plan to keep one for now, the one that generates about 55% of my income.

Thanks again! :-)

habanero

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Re: Wanting advice on investing in ETFs in high stockmarket (NZ)
« Reply #10 on: October 11, 2019, 12:29:33 AM »

habaneroNorway, thanks for the good advice re diversifying. Limited number of local ETFs here buying into international funds - there's one that invests in Vanguard S&P 500, but terrible dividend yield compared with local ETFs. And I guess there's currency fluctuations to be mindful of?


The MSCI world index (which is what most/all global ETFs/mutual funds track) has a divident yield of 2,5% so that's what you gonna get if you buy a global equity fund (of which most dont pay dividends but reinvest them for you). You, as I, live in a small economy so your local banks will probably offer you to buy mutual funds on an FX hedged basis - it's a very standard product. The empirical evidence says that currency fluctuations matter a lot in the short run but very little in the long run - but noone knows what the future will bring of course.

And don't just look at ETFs - the universe for mutual funds is probably bigger (at least that's the case over here). I can get Global, US only, Europe only, emerging markets only, domestic only, regional only, US technology and what not so I will be very surprised if you can't get a similar mutual fund universe. Funds over here don't pay any dividends out - which makes sense as it's tax inefeective for the investors.

fire100xz

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Re: Wanting advice on investing in ETFs in high stockmarket (NZ)
« Reply #11 on: October 11, 2019, 11:24:01 PM »
Read the links too.  As Habanero says, looks like the key is the ability to keep funds invested in 20 year+ periods, and not panicking during market drops

wotstheguts

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Re: Wanting advice on investing in ETFs in high stockmarket (NZ)
« Reply #12 on: October 12, 2019, 06:56:42 PM »
Thanks heaps for the advice Habanero, I'll investigate.

fire100xz, yes the tricky thing is knowing in advance how one is likely to react to a massive paper loss.