Author Topic: Australian Investing Thread  (Read 2583192 times)

jaysee

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Re: Australian Investing Thread
« Reply #4500 on: May 27, 2019, 04:51:54 PM »
Hey everyone,

I bought the Vanguard High Growth Index Fund about a year ago, with a management fee of 0.29%.

That seemed cheap at the time, but now, looking at what some of you are paying for ETFS - around 0.1x% and $9.50 p/trade through SelfWealth, I'm starting to wonder if I should move everything over to ETFs.

Do you think 0.29% is a bit pricey and going to eat into my growth? Would you switch to lower-cost ETFs if you were in my shoes?

I guess I also have to take into account that there will be potential taxation if I switch, so I might lose a bit money in any case, but possibly I'll lose less in the long-term by switching.

I did also notice that the high growth fund includes some higher-priced funds such as the International Small Companies Index Fund, so perhaps that explains the 0.29% overall fee. So perhaps it's worth it to keep my current fund, as those slightly more expensive small-cap funds might be good for diversification and they might grow faster than the larger-cap funds.

Gremlin

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Re: Australian Investing Thread
« Reply #4501 on: May 27, 2019, 05:46:47 PM »
conwy, what sort of $$ are you talking here?  Both in terms of total invested and the capital gain you have unrealised.

Andy R

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Re: Australian Investing Thread
« Reply #4502 on: May 27, 2019, 07:02:00 PM »
Yeah Gremlin is on point.
I normally consider costs based on a portfolio of 1M, so in that regard the 2bps of the ETF vs managed fund is $200/yr.
If there was some sort of benefit, I would consider that a fair price, but for the long term investor with multiple decades ahead and low one-off brokerage cost, the benefit of more frequent transactions doesn't seem to have almost any value.

The other option is a DIY version. If you leave out bonds (most appear to prefer to do their bonds themselves), it would be basically

VAS 40%
VGS 33%
VGAD 15%
VGE 6%
VISM 6%

This will have an MER of around 0.20, and for a $1M portfolio, that is 2k every year vs 3k every year. Not insignificant IMO.

The upsides
• More tax efficient in drawdown as you sell only the winners
• Cheaper (1k every year is nothing to scoff at!)
• You can adjust the weights. I would make VAS 20-30% Max and adjust VGAD based on my total assets (property, bonds, shares) such that total AUD ratio meets my target of 50-75%

The downsides
• You can adjust the weights. You may respond to market noise and end up selling based on information that turns out to be rubbish as most of it is, whereas having an all-in-one, you can't screw it up, and screwing it up is the most costly part of investing, showing a long term loss of much more money than the 0.7% MER that you will save over VDHG.
• Have to rebalance yourself (not a big deal)

If you do split it up
• There is a lot of ambiguous research showing whether small caps out performs on a risk adjusted basis, plus it has a higher correlation with the rest of the market anyway, so I think it's reasonable to fold VISM and VGE into a single 10% VGE slice, giving you a fairly simple 4 fund portfolio.

Beware the downside I mentioned, nobody thinks they will mess it up and change allocations based on everyone saying the Australian market is good or bad, or that they will stop rebalancing into the laggard, but it is human nature to do so. For many, this alone will make it better to go with the all-in-one even at the slightly higher fee.

lush

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Re: Australian Investing Thread
« Reply #4503 on: May 27, 2019, 08:42:12 PM »
Ok I am going to ask something here that I should be able to answer, but I haven’t been able to work out.

I currently have savings in Ubank that has been increasing over the last 2-3 years and is my emergency fund. Currently it receives 1.81% interest rate. I have just discovered AMP is offering a 3% pa honeymoon rate for 4 months and a happily ever after 2.1% pa ongoing variable rate after that.  I am debating whether to move my savings over to AMP or if I should stick with Ubank because my money has been compounding there over the last few years.

mspym

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Re: Australian Investing Thread
« Reply #4504 on: May 27, 2019, 09:34:08 PM »
Ok I am going to ask something here that I should be able to answer, but I haven’t been able to work out.

I currently have savings in Ubank that has been increasing over the last 2-3 years and is my emergency fund. Currently it receives 1.81% interest rate. I have just discovered AMP is offering a 3% pa honeymoon rate for 4 months and a happily ever after 2.1% pa ongoing variable rate after that.  I am debating whether to move my savings over to AMP or if I should stick with Ubank because my money has been compounding there over the last few years.
If you have a linked ubank transactional account and it has $200 a month put in there, then you get another 1.06% interest so that's 2.87%

lush

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Re: Australian Investing Thread
« Reply #4505 on: May 27, 2019, 09:55:56 PM »
Ok I am going to ask something here that I should be able to answer, but I haven’t been able to work out.

I currently have savings in Ubank that has been increasing over the last 2-3 years and is my emergency fund. Currently it receives 1.81% interest rate. I have just discovered AMP is offering a 3% pa honeymoon rate for 4 months and a happily ever after 2.1% pa ongoing variable rate after that.  I am debating whether to move my savings over to AMP or if I should stick with Ubank because my money has been compounding there over the last few years.
If you have a linked ubank transactional account and it has $200 a month put in there, then you get another 1.06% interest so that's 2.87%

Unfortunately once you hit $200k (it counts all your ubank accounts)  it drops to 1.8% regardless of the monthly contribution amount.

Juan Ponce de León

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Re: Australian Investing Thread
« Reply #4506 on: May 28, 2019, 03:33:56 AM »
Ok I am going to ask something here that I should be able to answer, but I haven’t been able to work out.

I currently have savings in Ubank that has been increasing over the last 2-3 years and is my emergency fund. Currently it receives 1.81% interest rate. I have just discovered AMP is offering a 3% pa honeymoon rate for 4 months and a happily ever after 2.1% pa ongoing variable rate after that.  I am debating whether to move my savings over to AMP or if I should stick with Ubank because my money has been compounding there over the last few years.
If you have a linked ubank transactional account and it has $200 a month put in there, then you get another 1.06% interest so that's 2.87%

Unfortunately once you hit $200k (it counts all your ubank accounts)  it drops to 1.8% regardless of the monthly contribution amount.

Wouldn't you just move it over to AMP for the hunnybunny rate and then move less than 200K back.  Put rest of it somewhere else.  If your interest rate drops once you're over 200k, easy just don't go over 200k at that bank.

mspym

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Re: Australian Investing Thread
« Reply #4507 on: May 28, 2019, 04:22:03 AM »
Really silly question: why are you storing 200k in a bank? House deposit?

But yeah, at that amount switch over to AMP for the intro offer and then at some point move <200k back if you feel like it

lush

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Re: Australian Investing Thread
« Reply #4508 on: May 28, 2019, 04:22:29 PM »
The savings of over 200k  is for emergency funds / required house renovations. I am on the conservative side.

All good advice about moving the funds over / but my question was in relation to compounding interest, my hesitation for moving the savings is because I thought there might be a “loss” of some sort due to how long the funds have been in the savings account  - the compounding calculation factor….or I might be just dead wrong.

mspym

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Re: Australian Investing Thread
« Reply #4509 on: May 28, 2019, 05:51:00 PM »
The savings of over 200k  is for emergency funds / required house renovations. I am on the conservative side.

All good advice about moving the funds over / but my question was in relation to compounding interest, my hesitation for moving the savings is because I thought there might be a “loss” of some sort due to how long the funds have been in the savings account  - the compounding calculation factor….or I might be just dead wrong.

For most banks it's [Principal*InterestRate]/365, calculated daily and paid at the end of the month. I can't remember if any do daily accrual. That's often for TDs only but worth checking with your bank. Regardless, change over at the start of the new month and you will have been paid out all interest for that month.

lush

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Re: Australian Investing Thread
« Reply #4510 on: May 28, 2019, 09:25:06 PM »
The savings of over 200k  is for emergency funds / required house renovations. I am on the conservative side.

All good advice about moving the funds over / but my question was in relation to compounding interest, my hesitation for moving the savings is because I thought there might be a “loss” of some sort due to how long the funds have been in the savings account  - the compounding calculation factor….or I might be just dead wrong.

For most banks it's [Principal*InterestRate]/365, calculated daily and paid at the end of the month. I can't remember if any do daily accrual. That's often for TDs only but worth checking with your bank. Regardless, change over at the start of the new month and you will have been paid out all interest for that month.

Thanks - that's what I was trying to work out. I will move money over the coming week, so will miss the exact start of the month by about a week, but I think that still works out better mathematically then leaving  it where it is.

Juan Ponce de León

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Re: Australian Investing Thread
« Reply #4511 on: May 29, 2019, 02:33:10 AM »
The savings of over 200k  is for emergency funds / required house renovations. I am on the conservative side.

All good advice about moving the funds over / but my question was in relation to compounding interest, my hesitation for moving the savings is because I thought there might be a “loss” of some sort due to how long the funds have been in the savings account  - the compounding calculation factor….or I might be just dead wrong.

Yep dead wrong mate.  You're earning interest daily when it's in the bank and you stop when you take it out of the bank.  Just keep under 200k in there and the rest elsewhere.

lush

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Re: Australian Investing Thread
« Reply #4512 on: June 04, 2019, 09:16:26 PM »
The savings of over 200k  is for emergency funds / required house renovations. I am on the conservative side.

All good advice about moving the funds over / but my question was in relation to compounding interest, my hesitation for moving the savings is because I thought there might be a “loss” of some sort due to how long the funds have been in the savings account  - the compounding calculation factor….or I might be just dead wrong.

Yep dead wrong mate.  You're earning interest daily when it's in the bank and you stop when you take it out of the bank.  Just keep under 200k in there and the rest elsewhere.

thanks all - have sorted it out and moved the funds :)

Evasion

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Re: Australian Investing Thread
« Reply #4513 on: June 20, 2019, 06:09:57 PM »
Opinions on FAIR ETF from Betashares? I'm thinking of buying a chunk to mix with the VESG I got, but not convinced by the 0.59 ER and it doesn't seem that diversified.. I would also like to see more renewable energy in there rather than lots of property and Telecom's.
Interested in your thoughts!

Alchemisst

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Re: Australian Investing Thread
« Reply #4514 on: June 22, 2019, 01:50:07 PM »
I like Jim Collins' 2 fund strategy and would like to try to replicate this, unfortunately it's a bit difficult in Australia with currency risk etc, I have held off buying VTS for the currency risk, however I don't really want to pay higher fees for hedges either... Is it better to just accept the currency risk if you are long term and stick with VTS/ VGS? Is the only issue with the non Australian domiciled funds the W8 form?

mjr

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Re: Australian Investing Thread
« Reply #4515 on: June 22, 2019, 04:44:34 PM »
There's enough issues with VTS.  The AUD is hopefully about as low as it's going to go and if that's the case,  there's only downside there.

You can claim foreign tax credits, but once you hit $1000 in foreign tax credits other restrictions may kick, depending on how much Australian income you have.

If you cark it, your executor may have some fun trying to get the shares transferred, Medallion Signature Guarantees are a hassle and I still can't work out whether or not it'd be needed.

But yes, the W-8 form is really the only extra form you need.

Despite this, I have many hundreds of thousands in VTS and over the last couple of years, hasn't it paid off handsomely....  I'm happy to get my international exposure that way.

BRAFRA

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Re: Australian Investing Thread
« Reply #4516 on: June 22, 2019, 07:28:54 PM »
You can claim foreign tax credits, but once you hit $1000 in foreign tax credits other restrictions may kick, depending on how much Australian income you have.
To calculate the tax credits for VTS, do you use the Non-resident withholding tax and the Currency Conversion Rate of each dividend statements? Anything else?

Edit: And declare the gross amount of the dividends?
« Last Edit: June 22, 2019, 07:30:42 PM by BRAFRA »

mjr

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Re: Australian Investing Thread
« Reply #4517 on: June 22, 2019, 07:35:25 PM »
Yes, I declare the gross dividends.

The tax is 15% if the W-8BEN form has been lodged.  The currency exchange rate to be used is supplied on the dividend statement, as is the tax.
« Last Edit: June 22, 2019, 07:38:31 PM by mjr »

Andy R

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Re: Australian Investing Thread
« Reply #4518 on: June 22, 2019, 08:04:52 PM »
I like Jim Collins' 2 fund strategy and would like to try to replicate this, unfortunately it's a bit difficult in Australia with currency risk etc, I have held off buying VTS for the currency risk, however I don't really want to pay higher fees for hedges either... Is it better to just accept the currency risk if you are long term and stick with VTS/ VGS? Is the only issue with the non Australian domiciled funds the W8 form?

To help with currency risk, it takes 1 more fund - VGAD which is the AUD hedged version of VGS.
So it would become a 3 fund portfolio

Bonds
VGS
VGAD

Optional modifications

1. If you wanted some franking credits (even though they are mostly priced in), you could switch out some VGAD for VAS, but it comes with concentration risk of investing a higher proportion in the concentrated Australian market.

2. You could swap out 10% of VGS for VGE - emerging markets is a great diversifier.

Coco

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Re: Australian Investing Thread
« Reply #4519 on: June 22, 2019, 10:02:21 PM »
Currency risk has been on my mind a bit recently. I currently hold VAS+VGS+VGE, but am considering adding VGAD into the mix as well. Am I correct in thinking that one should look at all of their assets when deciding what proportion of their ETF portfolio should be hedged? For example:

* If you owned Australian property, VGAD would be less useful in your ETF portfolio because the property already gives you a high exposure to AUD.
* If you owned US assets (e.g. shares in a US company), VGAD would be more useful in your ETF portfolio because the US shares give you a high exposure to USD.

I've seen 50:50 mentioned as a good default ratio for local:overseas currency exposure. My current ratio is more like 20:80, which I'm now realising is rather risky. I'm thinking I'll direct my leftover income into VGAD for a while to balance this out. Seem like a sensible approach?

mjr

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Re: Australian Investing Thread
« Reply #4520 on: June 22, 2019, 10:50:55 PM »
Just don't forget that there are no free lunches.  Hedging swaps performance for lower volatility.  If your timeframe is short(er) or volatility makes you weak in the knees, then hedge.  But you're in it for the long term and don't have the inside scoop that AUD is going to significantly appreciate against other currencies like the UDS,  then hedging is likely to cost you in reduced performance.

Andy R

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Re: Australian Investing Thread
« Reply #4521 on: June 23, 2019, 03:10:01 AM »
Currency risk has been on my mind a bit recently. I currently hold VAS+VGS+VGE, but am considering adding VGAD into the mix as well. Am I correct in thinking that one should look at all of their assets when deciding what proportion of their ETF portfolio should be hedged? For example:

* If you owned Australian property, VGAD would be less useful in your ETF portfolio because the property already gives you a high exposure to AUD.
* If you owned US assets (e.g. shares in a US company), VGAD would be more useful in your ETF portfolio because the US shares give you a high exposure to USD.

I've seen 50:50 mentioned as a good default ratio for local:overseas currency exposure. My current ratio is more like 20:80, which I'm now realising is rather risky. I'm thinking I'll direct my leftover income into VGAD for a while to balance this out. Seem like a sensible approach?

Yes you are correct. It should be a whole-of-assets decision.

If you have Australian property worth half your net worth and some cash/bonds, then you are already well hedged into the AUD and are mitigating AUD upside risk, so then you would be better off with no VAS/VGAD and instead stick with an all-global (unhedged) portfolio in your equities.

If you have no property (eg renting), and are retiring early so less AUD bonds/cash, then you will be more subject to AUD upside risk, so you would want to add AUD based assets (VAS/VGAD) to mitigate this risk.

50/50 is an ok starting point.
I use liabilities to personalise my proportion. I would say that housing costs are around 30% of liabilities, and the rest is roughly split 50/50 between domestic goods and goods originating from imported sources, so overall that comes to 65% AUD based assets (30% + 0.5x70%), but it doesn't need to be exact - anywhere in 50-75% should be fine. Also you can estimate your own numbers, these just my estimations.
« Last Edit: June 23, 2019, 03:18:41 AM by Andy R »

Andy R

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Re: Australian Investing Thread
« Reply #4522 on: June 23, 2019, 03:17:05 AM »
Just don't forget that there are no free lunches.  Hedging swaps performance for lower volatility.  If your timeframe is short(er) or volatility makes you weak in the knees, then hedge.  But you're in it for the long term and don't have the inside scoop that AUD is going to significantly appreciate against other currencies like the UDS,  then hedging is likely to cost you in reduced performance.

What are you basing this on?
If you look at Vanguard's wholesale version of VGAD (to get a longer time frame, plus it is literally the same underlying fund), it has not under performed the index over the last 10 years worth of data they have.

I've also read from Wisdom Tree's research that today's hedging costs around 2-3 basis points, so essentially free.

There is a few Vanguard research papers that mention that in resource rich countries like Australia and Canada that hedging actually increases volatility (over some time periods), but they refer to "annualised" volatility, which means the volatility from one year to the next, which obscures your ability to realise that the real risk is when it moves in the same direction every year for over a decade, as it did from 2000 to 2011 and the a currency hedged fund would make an massive difference.

Coco

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Re: Australian Investing Thread
« Reply #4523 on: June 23, 2019, 04:20:09 AM »
...the real risk is when it moves in the same direction every year for over a decade, as it did from 2000 to 2011 and the a currency hedged fund would make an massive difference.

Yeah, this is the kind of scenario that worries me. If the AUD is weak during my accumulation years but strengthens as I transition into retirement, it seems like this could be really, really bad for my portfolio (assuming I maintained my current 20:80 local:overseas currency ratio). Admittedly I haven't run the maths on this, so I'm going more on gut feeling than concrete numbers here.

Looking at the historical data, it does seem like multi-decade trends are pretty normal for exchange rates:
https://www.abc.net.au/news/2013-11-27/jericho-graph-4/5118864

These timescales are far longer than normal stock market boom/bust cycles. I'm comfortable with stock market risks, but I don't want to be stuck waiting decades for exchange rates to change before I can retire!

Does anyone know of any good blogs/articles/books that go into this issue in more detail? I'd be really interested to see simulated scenarios that show the results of different levels of currency hedging.
« Last Edit: June 23, 2019, 04:49:04 AM by Coco »

Andy R

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Re: Australian Investing Thread
« Reply #4524 on: June 23, 2019, 04:59:43 AM »
...the real risk is when it moves in the same direction every year for over a decade, as it did from 2000 to 2011 and the a currency hedged fund would make an massive difference.

Yeah, this is the kind of scenario that worries me. If the AUD is weak during my accumulation years but strengthens as I transition into retirement, it seems like this could be really, really bad for my portfolio (assuming I maintained my current 20:80 local:overseas currency ratio). Admittedly I haven't run the maths on this, so I'm going more on gut feeling than concrete numbers here.

Looking at the historical data, it does seem like multi-decade trends are pretty normal for exchange rates:
https://www.abc.net.au/news/2013-11-27/jericho-graph-4/5118864

These timescales are far longer than normal stock market boom/bust cycles. I'm comfortable with stock market risks, but I don't want to be stuck waiting decades for exchange rates to change before I can retire!

Does anyone know of any good blogs/articles/books that go into this issue in more detail? I'd be really interested to see simulated scenarios that show the results of different levels of currency hedging.

Yes you are right - it is essentially a whole other dimension of SOR risk that is on top of SOR risk - SOC (Sequence Of Currency) risk?. If they both hit together and you have not spent time mitigating those risks, well, I don't even want to think about it.

I have barely seen it discussed anywhere. I have picked up the odd comment on multiple forums and pieced together basically what I mentioned above.

There are reasons why people say you don't need to bother
1. Currency eventually evens out (they never point out it can take decades)
2. Currency hedging has a cost (they don't point out that today it's 2-3bps for developed country hedging)
3. In resource rich countries such as Australia and Canada, currency hedging actually increases annualised volatility (they don't mention that it is decade plus periods of currency moving in the same direction that is the real problem, not the volatility from one single year to the next).

If you ask me, people hear one of these reasons, don't spend even a nanosecond trying to find holes in the argument, and automatically assume hedging is crap or useless and end of story.

I think VGAD has a fundamental part to play in portfolio construction, but I don't mention it too often because people have heard one of those reasons and have just written it off as not needed.

JimmyMac

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Re: Australian Investing Thread
« Reply #4525 on: June 23, 2019, 05:08:43 AM »
...the real risk is when it moves in the same direction every year for over a decade, as it did from 2000 to 2011 and the a currency hedged fund would make an massive difference.

Yeah, this is the kind of scenario that worries me. If the AUD is weak during my accumulation years but strengthens as I transition into retirement, it seems like this could be really, really bad for my portfolio (assuming I maintained my current 20:80 local:overseas currency ratio). Admittedly I haven't run the maths on this, so I'm going more on gut feeling than concrete numbers here.

Looking at the historical data, it does seem like multi-decade trends are pretty normal for exchange rates:
https://www.abc.net.au/news/2013-11-27/jericho-graph-4/5118864

These timescales are far longer than normal stock market boom/bust cycles. I'm comfortable with stock market risks, but I don't want to be stuck waiting decades for exchange rates to change before I can retire!

Does anyone know of any good blogs/articles/books that go into this issue in more detail? I'd be really interested to see simulated scenarios that show the results of different levels of currency hedging.

Vanguard have a useful whitepaper that explains their choices for the diversified funds; pages 13-15 might help you out.
https://static.vgcontent.info/crp/intl/auw/docs/literature/research/constructing-australian-diversified-funds-whitepaper.pdf?20190612|104905

You can easily hedge a portion of your international allocation if short-term movements are an issue.

Coco

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Re: Australian Investing Thread
« Reply #4526 on: June 23, 2019, 06:42:58 AM »
You can easily hedge a portion of your international allocation if short-term movements are an issue.

Currency movement feels like a long-term risk to me, not a short-term one. In the linked Vanguard paper, figure 16 shows a period over 10 years long where hedged quite consistently outperforms unhedged (and vice-versa for other time periods!).

I don't really understand why people say hedging isn't needed for long time periods. Surely >10 years of underperformance could throw a big spanner in the works if one were drawing down on their portfolio during that time?

(I'm quite open to the possibility that I'm fundamentally misunderstanding something here, I'm still somewhat of a newbie to all this :))
« Last Edit: June 23, 2019, 06:47:43 AM by Coco »

Andy R

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Re: Australian Investing Thread
« Reply #4527 on: June 23, 2019, 07:03:35 AM »

I don't really understand why people say hedging isn't needed for long time periods. Surely >10 years of underperformance could throw a big spanner in the works if one were drawing down on their portfolio during that time?

(I'm quite open to the possibility that I'm fundamentally misunderstanding something here, I'm still somewhat of a newbie to all this :))

I also don't understand.

But when I first started learning about investing in shares, I spent months reading endless nonsense about LIC's, trying to figure out which one is most profitable based on some "long term average", dividend investing and a whole lot of other info. I finally found bogleheads and realised the reason I didn't understand it was because it was based on half truths and the masses just accepting what was told to them without trying to critically think of whether something makes sense.

I know more than enough now to debunk all of that crap, and have enough confidence to disagree (or disregard) when someone says something that is obviously false such as currency movements are only a short term problem.

I mean, it's easy to debunk. Take a look at someone who retired in 2000 when the AUD was worth 0.5 USD. Over the next 11 years the AUD rose to more than double, making anything denominated in USD worth less than half in terms of buying power of those spending AUD.

That is no different to SOR risk.

Until last year it was still over 1.5x after almost 2 decades. There is nothing short term about this.

Roland of Gilead

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Re: Australian Investing Thread
« Reply #4528 on: June 23, 2019, 09:49:24 AM »
Is there a way for someone from the US to cheaply invest in the AUD without a lot of fees?

Like buying Australian bonds paying in AUD or something?

So if I took $100,000 in USD and bought $144,000 in AUD intermediate bonds paying anything (3%?) then when/if AUD rises to .75 USD I sell the bonds for $108,000 USD?

itchyfeet

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Re: Australian Investing Thread
« Reply #4529 on: June 23, 2019, 11:26:17 AM »
Thinking out loud here 🤔

If international diversification is just an extra layer of diversification to reduce risk of portfolio failure, and the risk you are seeking to mitigate is home economy bias, then having an unhedged position is maybe what you want in the long term....

If the Australian economy tanks then the foreign exposure protects your investment returns, as the AUD will most likely depreciate.

If the Australian economy outperforms, then It is likely that the Australian currency would appreciate over the longer term, and your foreign investments will be worth less, but you will have made more money in Australia....

Diversification knocks the top and bottom off return scenarios.... This is the cost and benefit of diversification.

Maybe you shouldn’t worry about the AUD appreciating over the long term as it most probably means the Australian economy is doing ok and providing you with a nice return on your Aussie investments.

This is an untested and fairly ignorant hypothesis, but maybe something others who are better read can comment on....

Andy R

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Re: Australian Investing Thread
« Reply #4530 on: June 23, 2019, 11:41:31 AM »
Diversification knocks the top and bottom off return scenarios.... This is the cost and benefit of diversification.

This is not correct.

You have something called "expected return". As you move up the risk-return spectrum, your "expected return" (kind of the average of all return possibilities) increases, but at the same time your range of possible returns widens - this is the higher risk you face for the higher expected return.

When you diversify, you narrow that range down without lowering the expected return - which is why diversification is a free lunch - an upside with no downside.

What you are suggesting is to increase the risk without increasing the expected return, which is gambling as opposed to investing.

If this did not explain it well, this article will.

Interestingly, just as idiosyncratic risk is a risk without a reward, so is currency risk. a risk without a reward They are really both silly risks to take when you think about it.

itchyfeet

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Re: Australian Investing Thread
« Reply #4531 on: June 23, 2019, 12:23:37 PM »
Diversification knocks the top and bottom off return scenarios.... This is the cost and benefit of diversification.

This is not correct.

You have something called "expected return". As you move up the risk-return spectrum, your "expected return" (kind of the average of all return possibilities) increases, but at the same time your range of possible returns widens - this is the higher risk you face for the higher expected return.

When you diversify, you narrow that range down without lowering the expected return - which is why diversification is a free lunch - an upside with no downside.

What you are suggesting is to increase the risk without increasing the expected return, which is gambling as opposed to investing.

If this did not explain it well, this article will.

Interestingly, just as idiosyncratic risk is a risk without a reward, so is currency risk. a risk without a reward They are really both silly risks to take when you think about it.

Thanks

mrmoonymartian

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Re: Australian Investing Thread
« Reply #4532 on: June 23, 2019, 03:26:15 PM »
Travel overseas when the AUD is strong, and stay at home when it's weak.

mjr

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Re: Australian Investing Thread
« Reply #4533 on: June 23, 2019, 04:53:36 PM »
when someone says something that is obviously false such as currency movements are only a short term problem.

That was not the point I was trying to make.  The point was that if I am going to invest in an overseas market with currency risk, I'm doing it for the long term and will take what comes.  Hedging comes with a cost - it has to, that's the point of it.  It's like insurance.  Sometimes it will pay off, but most of the time it's just an additional expense.

Alchemisst

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Re: Australian Investing Thread
« Reply #4534 on: June 23, 2019, 07:43:13 PM »
...the real risk is when it moves in the same direction every year for over a decade, as it did from 2000 to 2011 and the a currency hedged fund would make an massive difference.

Does anyone know of any good blogs/articles/books that go into this issue in more detail? I'd be really interested to see simulated scenarios that show the results of different levels of currency hedging.

I would also like to know, as it's pretty confusing and I don't see why it wouldn't make much difference even if you're long term? If the AUD averages 60-70c but in 30 years it's around $1.00 that's a big difference..

Indexing seems so much easier for Americans haha

Andy R

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Re: Australian Investing Thread
« Reply #4535 on: June 23, 2019, 07:49:21 PM »
when someone says something that is obviously false such as currency movements are only a short term problem.

That was not the point I was trying to make.  The point was that if I am going to invest in an overseas market with currency risk, I'm doing it for the long term and will take what comes.  Hedging comes with a cost - it has to, that's the point of it.  It's like insurance.  Sometimes it will pay off, but most of the time it's just an additional expense.

There are 2 currency risks.
1. Where home currency rises and non-AUD based assets are lower in AUD terms. This is where hedging comes in to mitigate it.
2. Where home currency goes down (for sometimes a decade or more) and imported goods are more expensive in AUD terms. This is where global equities (unhedged) come in to mitigate it.

They each have one risk and mitigate the other.
If you think hedging comes at a cost, then so does unhedged global equities.
I don't see how you can consider this an argument against hedging without being an argument against buying unhedged.

Andy R

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Re: Australian Investing Thread
« Reply #4536 on: June 23, 2019, 07:54:34 PM »
Indexing seems so much easier for Americans haha

Eh I don't really agree.
They have the 3 fund portfolio - bonds, US equities, ex-US equities
We can have the 3 fund portfolio - bonds, global equities, global equities AUD-hedged

You can swap out some AUD-hedged for VAS to get some franking credits (although much of the franking credits are priced in now), so a 4 fund portfolio instead of a 3 fund portfolio. I don't see why it needs to be any more complicated.

Alchemisst

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Re: Australian Investing Thread
« Reply #4537 on: June 23, 2019, 08:42:06 PM »
Indexing seems so much easier for Americans haha

Eh I don't really agree.
They have the 3 fund portfolio - bonds, US equities, ex-US equities
We can have the 3 fund portfolio - bonds, global equities, global equities AUD-hedged

You can swap out some AUD-hedged for VAS to get some franking credits (although much of the franking credits are priced in now), so a 4 fund portfolio instead of a 3 fund portfolio. I don't see why it needs to be any more complicated.

What about VTS? VTS has much lower expense ratio, also most bogleheads seem to own VTS rather than global. Also what's the reason for owning hedged and ingested? Wouldn't you go with one or the other?

Andy R

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Re: Australian Investing Thread
« Reply #4538 on: June 24, 2019, 12:20:56 AM »
What about VTS? VTS has much lower expense ratio, also most bogleheads seem to own VTS rather than global.

Bogleheads use VTS because they are American, so overweighting US shares is their way of lower currency risk. It doesn't make sense for us to separate into US & ex-US.

Also what's the reason for owning hedged and ingested? Wouldn't you go with one or the other?

I think I mentioned that earlier.
AUD based assets help for when the AUD rises over long periods.
ex-AUD assets help for when the AUD lowers over long periods.

Alchemisst

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Re: Australian Investing Thread
« Reply #4539 on: June 24, 2019, 03:15:37 AM »
Indexing seems so much easier for Americans haha

Eh I don't really agree.
They have the 3 fund portfolio - bonds, US equities, ex-US equities
We can have the 3 fund portfolio - bonds, global equities, global equities AUD-hedged

You can swap out some AUD-hedged for VAS to get some franking credits (although much of the franking credits are priced in now), so a 4 fund portfolio instead of a 3 fund portfolio. I don't see why it needs to be any more complicated.

What about VTS? VTS has much lower expense ratio, also most bogleheads seem to own VTS rather than global. Also what's the reason for owning hedged and unhedged? Wouldn't you go with one or the other?

Sorry that was a typo I meant to say why have both hedged and unhedged
« Last Edit: June 24, 2019, 03:17:44 AM by Alchemisst »

Juan Ponce de León

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Re: Australian Investing Thread
« Reply #4540 on: June 24, 2019, 04:23:42 AM »
The AU$ generally ranges between 60c and $1 US.  Outside of that is serious outlier moments.  So I'd surmise that outside of that range ie/ under 60c it would be a good time to at least stop buying VGS and start buying VGAD, or for the brave sell some VGS and buy VGAD. 

It also trends hard within the range. 

Between Dec 96 and March 2001 it went from roughly 81c to 48c.
Then it trended all the way to July 2008 at 98c
GFC hit and plummeted to 60c by Oct 2008 where it found support
Ran back up hard July 2011 $1.10!
Sep 2015 hit 70c and we've been between 70-80c ever since.

I do like how when the GFC hit the AU$ plumetted along with the stocks, the flight to safety (US$) in times of panic is a huge bonus for us Australians investing in US$.

Sorry just random thoughts haha




Richmond 2020

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Re: Australian Investing Thread
« Reply #4541 on: June 24, 2019, 08:17:40 PM »
I notice that Vanguard are reducing/slashing their fees again. VAS down from .14% to .10%

Competition pushing the fees down for ETFs across the board.
« Last Edit: June 24, 2019, 08:30:45 PM by Richmond 2020 »

Andy R

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Re: Australian Investing Thread
« Reply #4542 on: June 24, 2019, 10:04:32 PM »
I notice that Vanguard are reducing/slashing their fees again. VAS down from .14% to .10%

I wonder if they are taking less profit from it or if they negotiated with S&P.

It would be great if they'd do outside the US what they did in the US and abandon MSCI/S&P and go with FTSE/CRSP instead. The investment will be the same, but the fees would drop like a stone, and it would serve MSCI/S&P right for being such greedy bastards.

marty998

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Re: Australian Investing Thread
« Reply #4543 on: June 25, 2019, 05:30:59 AM »
I notice that Vanguard are reducing/slashing their fees again. VAS down from .14% to .10%

I wonder if they are taking less profit from it or if they negotiated with S&P.

It would be great if they'd do outside the US what they did in the US and abandon MSCI/S&P and go with FTSE/CRSP instead. The investment will be the same, but the fees would drop like a stone, and it would serve MSCI/S&P right for being such greedy bastards.

Interesting question. I see firsthand how much the market data providers are "extracting" from the industry (and hence our investments), it's quite an extraordinary number from Moodys, S&P, Bloomberg, and those are just the well known ones.

Nonethless a drop in fees is always welcome :)

Alchemisst

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Re: Australian Investing Thread
« Reply #4544 on: June 26, 2019, 07:50:46 PM »
What about IWLD vs. VGS? IWLD expense is .09% vs .18% for VGS..

mjr

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Re: Australian Investing Thread
« Reply #4545 on: June 28, 2019, 02:06:23 AM »
Vanguard estimated dividends announced.

How about that VAP dividend ?  $2.52, 2.72%. Anyone know why it's so high ?  I assume there's some capital repaid in that.

hm520

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Re: Australian Investing Thread
« Reply #4546 on: June 28, 2019, 04:48:38 PM »
Happy new (financial) year - well almost. 19/20 should be good for me - I'll only have $5k left on HECS at the most after 18/19 so it will be paid off and there'll be a nice tax return bump.

marty998

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Re: Australian Investing Thread
« Reply #4547 on: June 29, 2019, 06:13:03 AM »
Vanguard estimated dividends announced.

How about that VAP dividend ?  $2.52, 2.72%. Anyone know why it's so high ?  I assume there's some capital repaid in that.

Top 10 stocks are 85% of the fund. I guess somewhere in those there must be a big corporate action that has triggered it. Final announcement will be on Monday, it may/may not get revised so we'll see.

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marty998

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Re: Australian Investing Thread
« Reply #4548 on: July 21, 2019, 06:06:43 PM »
Vanguard tax statements are out (got mine for VAS today).

Never seen this before but I've given a $552 AMIT upwards cost base adjustment! Nice little bonus there.

Gremlin

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Re: Australian Investing Thread
« Reply #4549 on: July 22, 2019, 08:00:38 PM »
Vanguard tax statements are out (got mine for VAS today).

Never seen this before but I've given a $552 AMIT upwards cost base adjustment! Nice little bonus there.

Yes.  I got that too!  Not quite sure how I deal with it on my tax return, but I'm sure I'll work it out.  It's a nice problem to have...