Australia - Selling and Switching Portfolios for better Cash Distribution

[lush]

Hi everyone, hoping you might be able to clarify my thinking - get your feedback....

Here is my situation:

•  I am 45 years old and I earn $230k per year.  My Partner is 48 years old and has stopped working temporarily, but will look to part-time work probably in about 12 months.
•   I own an Investment property with no loan owing (meaning loan still there but filled up the offset account to have zero interest payments) makes me about $10k after taxes, etc. per year.
•   We have $360k in Vanguard Australian Shares (VAS) & $1M Vanguard Balanced Fund. We have had both funds for about 3 years.
•   I pay around $15K in additional taxes due to Vanguard distributions & rent return.  Partner pays about another $10k in taxes.
We require $60k per year to pay for our expenses. We both want to work part-time (2 -3 days per week – low incomes) within the next 12-24 months.
•   What problem am I trying to solve: Our Vanguard Australian Shares (VAS) Fund has been outperforming the Vanguard Balanced Fund significantly in terms of cash distributions. I have calculated / reviewed cash distribution returns over the past 10 years and the average quarterly return across the Balanced fund has been $10k approx., vs VAS which has been $15k approx. Over a 10 year period the difference in distribution returns is about a $170k. Since our focus in the very near future will be increasingly on cash distributions, in order to move towards part-time work, it makes sense to me to sell our Balanced Portfolio and move these funds over to VAS and accept the CGT impact today, for future benefits.


As I see it my choices are:
•   Do nothing and accept the lower performing results of the Balanced Fund
•   Sell the Balanced Portfolio now whilst it can return a profit and accept the CGT impacts (approx. $30k)
•   Sell only part of the Balanced Portfolio Fund to try to spread out the CGT impacts across Financial Years – however would have to accept the risk of the fund value dropping between sell off’s and therefore may not make the same amount of profit –it at all – might be a loss at the time of selling.
•   Once the Balanced Portfolio is sold then funds either go directly into VAS or an LIC.
•   VAS is appealing due to the franking credits,  but an LIC also seems to have very good tax advantages because of their fully franked credits – however I have not been able to do the maths here to determine which is better in that regard. Has anyone been able to do this?

Reasons for such a dramatic decision: Cash and Bonds makes up 50% of the Balanced Portfolio both of which have crashed and I don’t see them recovering for many years. The performance of cash distributions over the last few years reflect this downturn in rates/bond returns.

I am very nervous of course of making an error here and hence why I have come to this forum to see what reactions I would get to making such a decision.

For the record, yes I have reached out to my accountant for guidance (as I have many times in the past with Financial advisors) but as always I don’t find their advice very helpful at all. Am I the only one?

Also yes I understand that my assets allocation will be entirely on the Australian Market and stocks - I have become comfortable taking those risks.

So what are your thoughts? 

Thank you.

[mjr]

There's nothing "wrong" with what you're suggesting, but I suspect that you're chasing last year's winner.

Yes, VAS has out-performed the balanced index fund.  With the markets behaving as they have, it was always going to.  So why were you in the balanced fund ?  Because of its asset allocation ?  If so and you're tired of its lagging VAS, you could well find find that you switch right before a correction and then you'll not get the benefit of the defensive assets you've been holding.

If you want to change your asset allocation, that's fine, but do so knowing the risk you'd be taking, not just chasing the higher returns of VAS.

Likewise with your asset allocation, is being all in Australian equities what you want ?  Don't do it just for franking credits.  As well as the Australian market has done over the last years, the US market has left it in the shade.  Also, don't focus overly on cash distributions, total return is what you want to look for.   If you have to sell some shares to get access to the returns, the 50% CGT discount makes them much more efficient tax-wise than taking cash distribuitions/dividends.

Again, if you decide your asset allocation is to be 100% Aust equities, fine, but do that knowing that you're deliberately ruling out having US/international exposure.  There's no guarantee that the US market will out-perform Australia over the next few years, but it's a salient reminder that it certainly could.

[happy]

Firstly , add Aus or Aussie or sumit to your title so you attract some Australian posters, because the US opinion is not going to be helpful.

I mostly agree with mjr in this instance.

Really, best to work out your investment policy statement, and stick with it from now on: DCA and invest regularly and stick with it.  That might be 100% Aussie stocks, or, something like 50% Aussie/ 50% international. 

The market is currently some would say, overvalued, so there is some risk involved switching now.  I would say you've committed to that asset allocation previously for whatever reason, and if you want to switch, wait until there is a correction, otherwise as mjr says you risk losing out with your more conversative allocation if/when there is a correction.

[lush]

There's nothing "wrong" with what you're suggesting, but I suspect that you're chasing last year's winner.

Yes, VAS has out-performed the balanced index fund.  With the markets behaving as they have, it was always going to.  So why were you in the balanced fund ?  Because of its asset allocation ?  If so and you're tired of its lagging VAS, you could well find find that you switch right before a correction and then you'll not get the benefit of the defensive assets you've been holding.

If you want to change your asset allocation, that's fine, but do so knowing the risk you'd be taking, not just chasing the higher returns of VAS.

Likewise with your asset allocation, is being all in Australian equities what you want ?  Don't do it just for franking credits.  As well as the Australian market has done over the last years, the US market has left it in the shade.  Also, don't focus overly on cash distributions, total return is what you want to look for.   If you have to sell some shares to get access to the returns, the 50% CGT discount makes them much more efficient tax-wise than taking cash distribuitions/dividends.

Again, if you decide your asset allocation is to be 100% Aust equities, fine, but do that knowing that you're deliberately ruling out having US/international exposure.  There's no guarantee that the US market will out-perform Australia over the next few years, but it's a salient reminder that it certainly could.

Thanks MJR for your thoughts. We bought into the Balanced fund without really understanding how conservative it is. Given our age and that we could easily live to 90, we now recognise that we could certainly take on more risk, especially if can have say 2-3 years worth of savings set aside for market turn downs.

In regards to selling down part of the portfolio for income, we really did not want to do that for at least 5 more years, so hence the distributions has become a focus - if possible. However I take your point about growth and the benefits of gaining income when required via selling and the discounted CGT.

Upon reflection, yes the 100% VAS might not be the correct approach. So we are now tossing up between keeping say $500k in Balanced, or some other diversified portfolio, maybe High Growth. So I will look to re-work what that asset allocation looks like. 

In terms of should we hold off selling now - isn't that the million dollar question? :)  If we did sell now - we would make a profit, but I am worried if we don't make the move now then we may sell at a loss and might paralyse us from making the move to re-set our asset allocation to something more age appropriate.

[lush]

Firstly , add Aus or Aussie or sumit to your title so you attract some Australian posters, because the US opinion is not going to be helpful.

I mostly agree with mjr in this instance.

Really, best to work out your investment policy statement, and stick with it from now on: DCA and invest regularly and stick with it.  That might be 100% Aussie stocks, or, something like 50% Aussie/ 50% international. 

The market is currently some would say, overvalued, so there is some risk involved switching now.  I would say you've committed to that asset allocation previously for whatever reason, and if you want to switch, wait until there is a correction, otherwise as mjr says you risk losing out with your more conversative allocation if/when there is a correction.

Thanks Happy for your response. I have now added 'Australia'.

Can you spell out DCA for me - sorry I don't know what that is. Hope it's not a dumb question.

I think now that  we have had a few years to actually understand investing a bit more, I am certain that after these asset allocation changes are made we will sit tight and forget about them for a very long time - hoping at least 10 years. We are now considering maybe High Growth and VAS combo, rather than just VAS - but mainly VAS.

Regarding the correction - I am not sure what to do here, like everyone else I guess. As noted in my response to MJR - I like the idea of at least selling part of the portfolio now whilst we can make a gain from it.

[marty998]

Have you thought of "manufacturing" income by partially selling the Balanced Fund (say $60k a year)?

Such a path is more tax efficient because the capital gains are taxed at half the rate of your VAS distributions (and much of the "proceeds" are simply returning your own capital which is tax free).

[mjr]

Can you spell out DCA for me - sorry I don't know what that is. Hope it's not a dumb question.

Dollar Cost Average

[lush]

Have you thought of "manufacturing" income by partially selling the Balanced Fund (say $60k a year)?

Such a path is more tax efficient because the capital gains are taxed at half the rate of your VAS distributions (and much of the "proceeds" are simply returning your own capital which is tax free).

Hi Marty, I get the tax efficient bit, but I don't know if I quite understand what you mean about the income by selling off $60k a year. Can you provide a little more detail around this? Thank you.

[mjr]

He means liquidating capital in the balanced fund where necessary to get the withdrawals up to $60k/year

[marty998]

He means liquidating capital in the balanced fund where necessary to get the withdrawals up to $60k/year

Funny how ingrained the mentality of "never selling capital" is in Australia. Like its taboo or some such.

[lush]

He means liquidating capital in the balanced fund where necessary to get the withdrawals up to $60k/year

Funny how ingrained the mentality of "never selling capital" is in Australia. Like its taboo or some such.

Ok thanks guys. Yes must say that I wouldn’t want to sell the capital in the portfolio for at least another 7 years if possible, after then I will start to try to swap funds over slowly into super so by the time a reach legal retirement age, then hopefully most of it will be coming from a tax free super fund.