Investment Policy Statement
Updated 11/02/2015
1. Investment Objectives
Objective 1: To retire before age 50 (currently 33)
Objective 2: fund retirement sustainably and independently without reliance on government assistance
Objective 3: Maintain an Emergency Fund with a minimum of 6 months living expenses.
Objective 4: follow John Bogle’s investment strategy of buy and hold long-term using low cost index funds
2. Strategy
Investments outside of Superannuation
These investments will account for roughly half of my total retirement funds. These funds will allow me to retire before my Superannuation Preservation Date and reduce the effect of any future changes to Preservation Dates made by the government.
During the period of retirement where I am retired but my Superannuation is not accessible I will be drawing on these investments. During this time the SWR of 4% will still be used however this will be based off my total (Superannuation & Non-superannuation) investments rather than just this investment amount.
Superannuation
These investments will account for the other half of my total retirement funds. By contributing additional funds to Superannuation I will be able to take some advantage of the tax benefits available. These investments will also ensure I have a safety net that would provide adequate funds for my old age retirement in the case my investments outside of Superannuation failed.
Emergency Fund
Maintain a minimum of six months living expenses. These funds are to be only accessed for emergency needs, eg in the case of a loss or employment, injury, etc. These funds are only to be used to cover essential living expenses, eg Bills, Mortgage, Groceries, etc.
3. Funds and accounts
Investments outside of Superannuation
These investments will primarily use low cost index ETF products for both Stocks and Bonds. No additional individual stock purchases should be made. Additional contributions should be made using a minimum sum of $2500 to minimise the effect of brokerage costs.
Superannuation
Ensure superannuation is consolidated into a minimal number of low cost accounts while still allowing required levels of diversification of investment. The target for total fees for these investments is less than 0.5%. Once a minimum balance of $200K is met a Self Managed Super Fund or Wrap Account should also be investigated (this is the ATO recommended minimum amount due to fees).
Emergency Fund
Where a mortgage on our Primary Place of Residence still exists the emergency fund should be placed in an account to offset the mortgage interest (effectively a tax free investment at the current mortgage interest rate). In the case where there is no mortgage then a high interest savings account or similar with good liquidity should be used.
4. Target Allocation
Investments outside of Superannuation
Maintain an 80:20 stocks to bonds ratio during majority of the accumulation phase (> year 2025). A more conservative profile can be considered in the future, either towards the end of the accumulation stage, or once the draw down phase begins (example: 60:30:10 stocks, bonds and cash ratio).
The Australian stock market only equates to 3% of the G20 Economies. To ensure diversification on the world market and avoid an overly heavy home country bias an equal allocation of Australian to international stocks should be maintained.
The US stock market equates to 42% of the G20 Economies. To match market capitalisation a roughly equal allocation of US to other international stocks should be maintained.
Summary of Asset Allocation
• 40% Australian Share Market (VAS)
• 40% International Shares (50% US, 50% world EX US)(VTS,VEU)
• 20% Fixed Interest (VAF)
Superannuation
Maintain an 80:20 stocks to fixed interest ratio during the majority of the accumulation phase (> year 2035). During the accumulation phase the amount of cash in the fixed interest portion of this investment should be minimised, target less than 5%.
A more conservative profile can be considered in the future at the end of the accumulation stage, or once the draw down phase begins (example: 60:30:10 stocks, bonds and cash ratio).
5. Review
Investments outside of Superannuation
Investment performance will be recorded monthly, the monthly record shall include the following: current value, monthly contribution, total contributions and the current investment allocations as a percentage.
A review of the index fund market to be conducted at 24 month intervals to ensure the current products are competitive and whether new contributions should be made to an alternative index fund. Unless there a significant financial benefit otherwise, any existing investments should not be changed to new products.
Superannuation
Review performance quarterly, the quarterly review shall include the following: current value, quarterly contribution, total contributions and the current investment allocations as a percentage.
A review of products at 24 month intervals.
6. Rebalancing
Wherever possible rebalancing should be performed using additional contributions.
Investments outside of Superannuation
During the monthly reporting where a balance is greater than 5% outside its target allocation this will be flagged. If this balance is not brought back within 5% in the following 12 months then a rebalance event will occur. When a rebalance event occurs only those asset allocations greater than 5% outside of its target will be rebalanced.
Superannuation
Rebalance annually where a balance is greater than 5% outside its allocation.