Australian Investing Thread

[steveo]

Pretty sure those loitering on these boards are deep into the DIY quadrant (financial or otherwise), so probably a somewhat skewed response.

Personally, I wouldn't pay a brass razoo for this.  I'm pretty cost sensitive - with about $2.5M under my management, one basis point is $250 a year to the bottom line.  Even paying myself $100 an hour, saving a basis point is worth two and a half hours of my time.  I'm also the kind of investor that has swapped from IVV to VTS to get from 0.07 to 0.05% (when the cost basis worked out too, for CGT).  I'm probably not the ideal profit centre for wealth management.

Heck, even my low cost ETFs and LICs (which average about 15 basis points) are costing me close to a months expenses every year.

This makes sense to me. I'm not in your financial position however I would probably prefer to invest directly rather than through a company like Betterment.

[steveo]

haha

I think if it were done well it could be as big as Betterment in the US. But the problem is making it profitable. The word on the street is that Betterment/Wealthfront/etc are not profitable, but just positioning themselves for when the big banks need to play catchup and buy out someone.

I agree with these comments. I can only imagine a big bank going for this as a way to retain market share and hopefully increase expenses at a later point in time.

[potm]

Most ppl who take control of their own finances and know about MER would have a similar view.

For everyone else, they'll be on their 2%+ MER. There's not much market demand for it.

I think firstly there needs to be more demand and competition in the ETF space so that their MERs get lowered. Unfortunately our market is so small. What we do have is a big pool of investments in super, if only the government would put some real reform into place for that instead of this mySuper or whatever it is they have done.

[bigchrisb]

Speaking of managing MERs on a portfolio of size, has anyone else considered redeeming their ETFs in specie? 

What this means is that you surrender $x in the ETF in exchange for the direct underlying holdings.  I reckon ETFs make a lot of sense during the accumulation, but the MER becomes non trivial eventually.  For example, the redemption unit on VAS is about $1.5M.  That means, if you have $1.5M of VAS, you can redeem it for the underlying $1.5M of securities (and a one off fee of approx $1250 - refer the PDS).

If I had 1.5M sitting there at a MER of 0.15%, I'm paying someone $2250 a year to "manage" the shares.  As its a market cap ETF, this really only means trading when shares are created or destroyed - and not just because of price changes.  I figure once a portfolio gets to that sort of size, the effort of dealing with dividend details from 300 individual stocks would start to be paid for by the cost savings.

Anyone else looked at this path before?  I'm still to figure out the CGT treatment of an in-specie redemption too.  There would be some bonus opportunities available from tax loss harvesting too.

I guess what I'm trying to say is that is there a point at which it makes sense to run your own index fund, rather than have someone else running it for you?

[dungoofed]

Steveo you might find this recent article a relevant read:

http://www.sharesight.com.au/2015/02/24/where-is-the-uber-of-australian-wealth-management/

[happy]

Steveo I've often seen Betterment  being  given positive reviews and thought "I wish we had something like that in Oz", but  I suspect if it were really available I'd look at the cost, and weigh up pretty carefully whether it really delivered anything I couldn't do myself.

[Ozstache]

Speaking of managing MERs on a portfolio of size, has anyone else considered redeeming their ETFs in specie? 

What this means is that you surrender $x in the ETF in exchange for the direct underlying holdings.  I reckon ETFs make a lot of sense during the accumulation, but the MER becomes non trivial eventually.  For example, the redemption unit on VAS is about $1.5M.  That means, if you have $1.5M of VAS, you can redeem it for the underlying $1.5M of securities (and a one off fee of approx $1250 - refer the PDS).

If I had 1.5M sitting there at a MER of 0.15%, I'm paying someone $2250 a year to "manage" the shares.  As its a market cap ETF, this really only means trading when shares are created or destroyed - and not just because of price changes.  I figure once a portfolio gets to that sort of size, the effort of dealing with dividend details from 300 individual stocks would start to be paid for by the cost savings.

Anyone else looked at this path before?  I'm still to figure out the CGT treatment of an in-specie redemption too.  There would be some bonus opportunities available from tax loss harvesting too.

I guess what I'm trying to say is that is there a point at which it makes sense to run your own index fund, rather than have someone else running it for you?

Regardless of how much I end up with in index funds, I don't mind paying 0.15% of whatever that amount is to keep my management effort to a minimum, the paperwork simple for tax time and to stop me fiddling with the mix to build a better index!

[potm]

Also if you ever needed to sell it might be a bit of a hassle to sell 300 individual stocks!
Hopefully in the long run our MERs will reduce to be closer to 0.05 like in the US.

On another note, the odds of another interest rate cut next month have once agin shifted to more likely than not. If not next month then it seems almost certain we'll get one in the next few months.
There'll be a bit of a lag effect but I can see lots of new money pouring into the market once term deposits mature and people realise they are getting less than 3%.

[MsRichLife]

There'll be a bit of a lag effect but I can see lots of new money pouring into the market once term deposits mature and people realise they are getting less than 3%.

Yep. I'm one of them. My term deposits that were earning a reasonable return are maturing and I'm looking to move the funds into the market. If I'm thinking this way, I can imagine a lot of others are too.

[dungoofed]

Call me a contrarian market timer but wouldn't this be a good time to be stocking up on defensive assets (bonds, money market, cash, term deposits, maybe some gold)?

All the usual measures (Shiller PE Ratio, lack of Graham Number stocks, rolling 12 month # of IPOs, etc) are indicating the US and Australian markets are currently overpriced. I'm not saying we're in bubble territory but I'd be quite cautious trying to find value in today's market.

[MsRichLife]

Yes. I'm in a quandary. I developed an investment plan six months ago with strict rules for buying into and selling out of the market. I did that to take the emotion out of it all. Turns out, I haven't had a buying opportunity for some time, so in cash I remain.

[bigchrisb]

In some good news for Australian investors, Vangaurd seems to be lowering its fees. Saw a new prospectus has been issued for VEU, lowering the fees from 0.15% to 0.14%.  Wonder if similar will happen with their other funds?

Its nice that vanguard seem to do this proactively, and pass it on to their investors.

While 1 basis point may not seem like much, I have about $240k in VEU, so this is a straight transfer of $24 a year from Vanguard back to me. Happy days to the investors in VEU!

[AustralianMustachio]

RBA cuts are pretty good for existing portfolios of index funds - domestic shares go up and the AUD goes down, driving up international holdings.

I don't hold any term deposits though. I feel for the retirees. I am also scared for the typical Australian SMSF's asset allocation, loaded up with equities. I hope all this "rates lower for longer" stuff is on the money, and no gigantic shocks in the market occur. Many retirees in Australia will get badly burnt. My baseless hunch is that the next big shock will be in property, but not for a while

[potm]

Call me a contrarian market timer but wouldn't this be a good time to be stocking up on defensive assets (bonds, money market, cash, term deposits, maybe some gold)?

All the usual measures (Shiller PE Ratio, lack of Graham Number stocks, rolling 12 month # of IPOs, etc) are indicating the US and Australian markets are currently overpriced. I'm not saying we're in bubble territory but I'd be quite cautious trying to find value in today's market.

Bonds are the most overpriced assets of all at the moment, which makes shares, although at very high prices, not that overpriced relatively.
We're in unprecidented situations with central banks going berserk, driving down interest rates, printing massive amounts of money. So much hinges on what actions they take from here.
It's very hard to predict how other people will behave to ride the market ups and downs successfully. Indexing just gives you the average. I prefer to buy good companies, with earnings which will not be too impacted by an economic downturn.

[dungoofed]

Agree bonds have flipped upwards in recent weeks but not as much as stocks have.

[AustralianMustachio]

Agree bonds have flipped upwards in recent weeks but not as much as stocks have.

Thinking in months and years though, not weeks, and stocks are nowhere near as overpriced as bonds are.

In Europe plenty of interest rates now have a negative yield on them. I heard this recently, some media pundit quoting a bond trader: "People tell me... oh come on, you can't make money on a bond at 0%! And I reply: Really? people told me that at half a percent, and I've made a fortune since then..."

[potm]

What you have to understand is that bond prices move inversely with interest rates. The longer the duration, the more the impact. All time record low interest rates means all time high bond prices. Anyone buying bonds now for a 'safe' investment may be in for a rude shock. But as AustalianMustachio mentions, we still have some room to move in Australia.

[FFA]

Speaking of managing MERs on a portfolio of size, has anyone else considered redeeming their ETFs in specie? 

What this means is that you surrender $x in the ETF in exchange for the direct underlying holdings.  I reckon ETFs make a lot of sense during the accumulation, but the MER becomes non trivial eventually.  For example, the redemption unit on VAS is about $1.5M.  That means, if you have $1.5M of VAS, you can redeem it for the underlying $1.5M of securities (and a one off fee of approx $1250 - refer the PDS).

If I had 1.5M sitting there at a MER of 0.15%, I'm paying someone $2250 a year to "manage" the shares.  As its a market cap ETF, this really only means trading when shares are created or destroyed - and not just because of price changes.  I figure once a portfolio gets to that sort of size, the effort of dealing with dividend details from 300 individual stocks would start to be paid for by the cost savings.

Anyone else looked at this path before?  I'm still to figure out the CGT treatment of an in-specie redemption too.  There would be some bonus opportunities available from tax loss harvesting too.

I guess what I'm trying to say is that is there a point at which it makes sense to run your own index fund, rather than have someone else running it for you?

I think there's definitely a point, and especially so if you're prepared to hold asx20 (which probably covers two thirds or more of the asx 300 mkt cap anyway). Compromise some diversification but much easier on the admin, and most of these large caps are high yield stocks too. Basically this is what I did for roughly half my oz shares. I'd rather this than vhy ...

[andystkilda]

Has anyone invested significant funds in oil (through ETFs or shares that are highly exposed to the price of crude oil)?

...or am I the only one stupid enough?

[dungoofed]

While 1 basis point may not seem like much, I have about $240k in VEU, so this is a straight transfer of $24 a year from Vanguard back to me. Happy days to the investors in VEU!

Yeah most important is whether other ETF providers feel pressure to lower their own MERs. There are a lot of ETFs for which I look at the MER and think "You guys are just pulling numbers out of a hat." I understand that there are costs for running an ETF but 0.3% on a RAFI ETF, yes there's a formula involved but it's still just a formula, no different to VAS etc.

I guess conversely if local providers were really overcharging then overseas providers would see it as an opportunity to muscle in, which they haven't.

Regarding redeeming ETFs in specie, I think I'll probably be a stock picker like FFA well before my VAS holding reaches that level. But you're right it is a fair saving at that level, and it's something you can do now instead of waiting for Vanguard/etc to lower their fees.

[dungoofed]

What you have to understand is that bond prices move inversely with interest rates. The longer the duration, the more the impact. All time record low interest rates means all time high bond prices. Anyone buying bonds now for a 'safe' investment may be in for a rude shock. But as AustalianMustachio mentions, we still have some room to move in Australia.

Hi potm - I guess my point was that anyone with a stocks/bond ratio target allocation (eg 70/30) who was about to invest right now would almost certainly be buying bonds instead of stocks simply because they would currently be overweight in stocks due to recent outperformance (both US and Australian markets). And I don't think this is a bad thing if 30% of your portfolio in bonds is what you're committed to.

Of course this begs the question, is 30% (or any percent) of your portfolio in bonds actually a good strategy? (yes, we have discussed this before on this thread. Deja vu)

[FFA]

What you have to understand is that bond prices move inversely with interest rates. The longer the duration, the more the impact. All time record low interest rates means all time high bond prices. Anyone buying bonds now for a 'safe' investment may be in for a rude shock. But as AustalianMustachio mentions, we still have some room to move in Australia.

Hi potm - I guess my point was that anyone with a stocks/bond ratio target allocation (eg 70/30) who was about to invest right now would almost certainly be buying bonds instead of stocks simply because they would currently be overweight in stocks due to recent outperformance (both US and Australian markets). And I don't think this is a bad thing if 30% of your portfolio in bonds is what you're committed to.

Of course this begs the question, is 30% (or any percent) of your portfolio in bonds actually a good strategy? (yes, we have discussed this before on this thread. Deja vu)

A concern I have is if the usual diversification benefit of negative correlation might break down this time. Reason being the distortion of QE and ultra low monetary policy. Traditional biz cycle theory, interest rates are hiked as the share mkt peaks to cool the economy and vice versa at the trough. The current cycle is shares being pushed up by low interest rates. So at the moment share and bond prices are moving together and they might not hedge each other as well as they have before...

I'm also not at all keen on bonds for the time being.

[dungoofed]

Might need some gold in there then (blaspheme!)

[AustralianMustachio]

I agree, in this crazy central bank dominated era, we are pretty much in uncharted waters. Both bonds and equities have been propped up massively.

I personally think holding some cash is a good strategy as a hedge. For the buying opportunities in severe market downturns, if nothing else.

[dungoofed]

btw Paul Krugman has already declared QE a runaway success. A little old but here's a good starting place if you want to learn more:

http://www.bloombergview.com/articles/2014-11-11/theres-more-to-qe-than-krugman-thinks

[potm]

Like I said, long dated bonds make stocks look very cheap at the moment. Following some set investing formula will not protect you. As FFA has mentioned, the negative correlation has broken down due to the actions of reserve banks. We now have negative interest rates in some countiries, that is absolutely insane.

[dungoofed]

Sorry that wasn't an endorsement of Krugman/QE. If anything you and I are on the same page potm, except that I'm still happy to plow money into AGBs as per my strategy. Specifically, GSBG37 (with a little in VGB). It's not a massive portion of my portfolio. It's a hedge against "stocks doing worse than whatever bonds are doing."

My brother warned me about drag due to hedging against too many black swans. You've pointed out that bonds don't return enough to warrant the risk. I'd argue that with everyone bearish on AGBs they should be a bargain right now. But the reality is that no-one knows for sure, and the best we can do is understand the underlying and invest accordingly.

[potm]

I didn't read the link. I just hope you understand how bonds work. Long dated bonds have significant price risk. They are not 'safe' assets. What they hedge against is falling interest rates. Not much else to say so I'll leave it at that.

[alsoknownasDean]

Has anyone invested significant funds in oil (through ETFs or shares that are highly exposed to the price of crude oil)?

...or am I the only one stupid enough?

Haha, I've considered the same thing. I've found an oil ETF that had taken a battering in the last year and was thinking that it's more likely to rise in the medium term.

Still, I'm probably better off putting my money into more conservative investments at first :)

[FFA]

I didn't read the link. I just hope you understand how bonds work. Long dated bonds have significant price risk. They are not 'safe' assets. What they hedge against is falling interest rates. Not much else to say so I'll leave it at that.

potm, how do u consider term deposits? Just curious. I feel the same way, have a fair cash allocation and very little FI. Recently put some of this cash (less than 15%) in a 5 yr TD at 4.15%... Would u consider this safe? To me it is, but then in some ways it's no different to a long dtd bond except you don't really reprice your TD when rates change.

Dungoofed, maybe u can consider such TD instead of AGB's ? To me anyway they make better sense the yield is more than 1% higher and they are also govt backed up to 200k...

[qwerty8675309]

This is a great thread! Thought I'd just say hi and introduce myself. 31yo from Melbourne. Have just under $300k in various ETFs and LICs:

40% VAS and STW (I'm trying to unwind my STW holding and move it over to VAS because of the fees, but don't want to pay CGT, so I'm waiting for a market drop)
10% AFI, ARG or MLT (Invested depending on the LIC with the biggest NTA discount)
30% VTS (for exposure to the US)
20% VEU (for exposure to rest of the world)

Also have $35k in an emergency fund, but I've been thinking about reducing it to $15k (because my yearly expenses are around $15k a year). I'm not sure about the US, but here in OZ, if I lose my job, the redundancy payout is fairly substantial (worked mine out to be around $36k based on the schedule at fairwork.gov.au). Part of this is tax free as well. Essentially, if I factored this into my emergency fund, I could probably have a $0 emergency fund (or an amount that is substantially lower than I have now). What do all of you think?

[potm]

potm, how do u consider term deposits? Just curious. I feel the same way, have a fair cash allocation and very little FI. Recently put some of this cash (less than 15%) in a 5 yr TD at 4.15%... Would u consider this safe? To me it is, but then in some ways it's no different to a long dtd bond except you don't really reprice your TD when rates change
[/quote]

Yes, term deposits are much better than bonds in terms of yield at the moment. 5 years is not too long a timeframe so you are not as exposed to changes in interest rates. Bonds give you longer exposure though, which protects you against falling interrst rates. This would have been good for all the retirees who were too scared to invest and are now struggling. If they had gotten themselves some long dated bonds back when rates were high they would have been protected.

As to your term deposit. Do you value that 4.15% yeild highly enough to want to lock it in for 5 years. Personally I would rather keep cash. You can spend cash on neccesities or investments when the opportunities arise.

[FFA]

Yes agree, 85+% of my defensive allocation in high interest savers earning mid to high 3%. Just wanted at least some FI in portfolio and saw TD as better way to go than bonds right now.

But the other point I was getting at maybe TD seems safer since it doesn't have mtm repricing. Eg soon after I locked mine in the bank reduced to 4% (yay), but unlike a bond there is no 2ndary mkt and therefore no increase above face value due to the rate cut.

[potm]

You're thinking about it the wrong way. Having no secondary market is a negative. You can sell the bond if you need the money but with the term deposit you have to break it and pay whatever that costs. Your term deposit does change in value when interest rates change, you just can't see it. Kind of like an unlisted company.

[DrowsyBee]

http://www.canberratimes.com.au/business/number-of-new-australian-millionaires-hits-fiveyear-high-20150301-13qv45.html?skin=text-only

From yesterday's Canberra Times. I'm guessing this Net Worth is from property and people finally paying off their PPOR/Investment Properties with such low interest rates. Looks like we are on track to have over 1 million millionaires in this country in the near future, according to the article.

"The largest barrier preventing rich investors from taking up investment advice was the preference for control." - Ain't that a funny problem, if you've got a million dollars without Financial Advice, why would you need it after you've got $1 million? With a background in marketing, if I wanted to target these millionaires, I'd do more articles about millionaires and impending doom and gloom to make millionaires think they need professional help to maintain their net worth. So, probably expect more articles mentioning the r-word that sell financial advice in the near future.

[FFA]

This is a great thread! Thought I'd just say hi and introduce myself. 31yo from Melbourne. Have just under $300k in various ETFs and LICs:

40% VAS and STW (I'm trying to unwind my STW holding and move it over to VAS because of the fees, but don't want to pay CGT, so I'm waiting for a market drop)
10% AFI, ARG or MLT (Invested depending on the LIC with the biggest NTA discount)
30% VTS (for exposure to the US)
20% VEU (for exposure to rest of the world)

Also have $35k in an emergency fund, but I've been thinking about reducing it to $15k (because my yearly expenses are around $15k a year). I'm not sure about the US, but here in OZ, if I lose my job, the redundancy payout is fairly substantial (worked mine out to be around $36k based on the schedule at fairwork.gov.au). Part of this is tax free as well. Essentially, if I factored this into my emergency fund, I could probably have a $0 emergency fund (or an amount that is substantially lower than I have now). What do all of you think?

Personally I would keep enough to live for a year and not rely on any redundancy or other assistance, treat them as bonuses if and when you get them.

Separate from this emergency fund, you may consider if you want to be 100% equities (very high risk tolerance needed) or have some cash/fixed interest allocation. I'm not sure if you have already, or what you've shown is your entire portfolio in the shares. Some people use age related rules of thumb e.g 110 minus your age, which would imply in your case 79% shares /21% bonds-term deposits-cash.

Your share allocations and logic all seem very sensible.

[deborah]

Also have $35k in an emergency fund, but I've been thinking about reducing it to $15k (because my yearly expenses are around $15k a year). I'm not sure about the US, but here in OZ, if I lose my job, the redundancy payout is fairly substantial (worked mine out to be around $36k based on the schedule at fairwork.gov.au). Part of this is tax free as well. Essentially, if I factored this into my emergency fund, I could probably have a $0 emergency fund (or an amount that is substantially lower than I have now). What do all of you think?

Personally I would keep enough to live for a year and not rely on any redundancy or other assistance, treat them as bonuses if and when you get them.

There are a lot of other things that can happen besides redundancy! Even a redundancy is not guaranteed (or at least not immediately). If a company goes under, it often hasn't paid employees' superannuation (companies can legitimately be a quarter behind in this, and when companies are about to go under, they are usually further behind), let alone the redundancy and holiday payments owed. There are schemes for these circumstances, but they are not going to give you everything. For instance http://www.theaustralian.com.au/news/nation/firm-has-to-cash-up-and-pay-workers-superannuation/story-e6frg6nf-1225891380508 was the first case where the federal General Employee Entitlement and Redundancy Scheme was used.

Quite some years ago, I was injured when a double decker bus rammed my car, and could only work part time for three years. Because I didn't have a work history of 6 months in the type of work I was doing, I couldn't claim for the enormous amount of money I missed out on earning. This is just one instance where there are cracks that you can fall between. Your emergency fund is for those types of unpredictable things. By all means, pare it down to 1 year's spending, but I wouldn't go without it entirely.

[qwerty8675309]

Personally I would keep enough to live for a year and not rely on any redundancy or other assistance, treat them as bonuses if and when you get them.

Separate from this emergency fund, you may consider if you want to be 100% equities (very high risk tolerance needed) or have some cash/fixed interest allocation. I'm not sure if you have already, or what you've shown is your entire portfolio in the shares. Some people use age related rules of thumb e.g 110 minus your age, which would imply in your case 79% shares /21% bonds-term deposits-cash.

Your share allocations and logic all seem very sensible.

Giving this some more thought, you are definitely correct - there is always the chance that there won't be a redundancy payment, particularly if the company goes under or refuses to pay. I think I'll stick with a years worth of expenses in my emergency fund.

I know it seems risky, but yes - excluding my emergency fund, 100% my investments are in equities. My investment strategy is to stay 100% in equities until 25 years before retirement, and then to increase my bond holding by 2% a year until retirement. This is based on a Vanguard article I read a while back. It said that over 25-30 years, equities have a very high chance of returning a positive return (from memory it was something like 99%) based on historical market returns, even if you included the great depression over that 30 year period. I also see bonds as being a bit of a drag on my portfolio at my age (just a personal preference) because the income is not franked, and the average returns are generally lower than with equities. I do see the advantage of holding bonds as a re-balancing strategy though, so I can take advantage of stock market corrections, but given the correlation between bonds and equities lately, I'm not sure how much of an advantage this will actually be.

[dungoofed]

On another note, the odds of another interest rate cut next month have once agin shifted to more likely than not. If not next month then it seems almost certain we'll get one in the next few months.

Indeed, the talking heads have gone from "will the RBA cut rates?" to "the RBA will cut rates, but here are the reasons why it's a bad idea..."

Not sure how this is all going to turn out. Frustrating that as a country the only tool in our tookit is interest rates.

[AustralianMustachio]

RBA cuts are pretty good for existing portfolios of index funds - domestic shares go up and the AUD goes down, driving up international holdings.

Haha after glancing at the news, looks like i jinxed myself

[FFA]

http://www.rba.gov.au/speeches/2015/sp-dg-2015-03-05.html

This is worth a read

[urbanista]

I could probably have a $0 emergency fund (or an amount that is substantially lower than I have now). What do all of you think?

What if you get sick and need an urgent surgery but the public hospital would not be able to book you in immediately? Our uncle had to have an emergency heart by-pass surgery. Public system said he had to wait, and he had inadequate private cover so they didn't cover it. Eventually, he was able to use family connections to get surgery done in the public hospital quickly. I have no such connections, so prefer to keep cash ready. Also, he run up $10K bill just for special tests - that's out of pocket.

[dungoofed]

http://www.rba.gov.au/speeches/2015/sp-dg-2015-03-05.html

This is worth a read

One area where low interest rates do appear to be having the broadly expected effect is on asset prices: global equity markets have been strong; property prices are again recording solid gains in some countries; and bond prices have increased substantially. However, for these increases in asset prices to boost the global economy, households and businesses need to respond by increasing their spending. While in the United States there are now some signs that this is happening, on the whole the response of private spending to higher asset prices has been muted.

Overall, looking at this experience, I find it difficult to escape the conclusion that changes in interest rates are not affecting decisions about spending and saving in the way they might once have done. Undoubtedly, low interest rates are helping to repair balance sheets by lowering debt-servicing costs and by pushing up asset prices. In so doing, they are helping lay the foundations for future growth in consumption and investment. But, while this repair process is taking place, consumption is weaker than it otherwise would be. In turn, subdued consumption growth is feeding through to a more subdued business climate and weaker investment.

Maybe people have become more mustachian!

[FFA]

MMM is derailing the global economy !?! Haha

On a serious note though I find this cautionary and from a credible source... basically admitting that monetary policies are not really working as intended anymore, have substantially propped up shares and property, and we are in unchartered territory.

[potm]

Thanks for the link, good speech that summaries where we are. Doesn't tell us where we're headed from here though, unprecendented times. Monetary policy might not be having much impact with reductions, but I'm sure any rate rises would have some pretty significant impacts at the moment.

[englyn]

Why would a Mustachian with share investments have a non-zero emergency fund?
Consider possible scenarios.
1) Most likely - nothing bad happens. In which case your money's better off invested.
2) Somewhat likely - small bad thing happens, like unexpected major car expenses. In which case, a zero balance zero fee credit card is your friend, until you have the chance to pay it off from wages/cash allocation/if all else fails share sales.
3) Extremely unlikely - something really terrible happens. For which I have credit cards, health insurance (because it's less than the medicare levy surcharge), income protection/TPD insurance. And if all else fails I can sell shares and get the cash in a few days.
The opportunity cost of having money out of the market is way more than the tiny chance of potential cost of having to sell shares at a suboptimal time IMO.

[FFA]

Why would a Mustachian with share investments have a non-zero emergency fund?
Consider possible scenarios.
1) Most likely - nothing bad happens. In which case your money's better off invested.
2) Somewhat likely - small bad thing happens, like unexpected major car expenses. In which case, a zero balance zero fee credit card is your friend, until you have the chance to pay it off from wages/cash allocation/if all else fails share sales.
3) Extremely unlikely - something really terrible happens. For which I have credit cards, health insurance (because it's less than the medicare levy surcharge), income protection/TPD insurance. And if all else fails I can sell shares and get the cash in a few days.
The opportunity cost of having money out of the market is way more than the tiny chance of potential cost of having to sell shares at a suboptimal time IMO.

Depends on your risk tolerance and personal situation. Ten years ago I thought the same way. Nowadays since becoming FI and having two young kids I became much more risk averse. Basically it's all about 3). If my wife or child gets in any kind of serious problem I want to have cash on hand if needed.

[deborah]

Why would a Mustachian with share investments have a non-zero emergency fund?
Consider possible scenarios.
1) Most likely - nothing bad happens. In which case your money's better off invested.
2) Somewhat likely - small bad thing happens, like unexpected major car expenses. In which case, a zero balance zero fee credit card is your friend, until you have the chance to pay it off from wages/cash allocation/if all else fails share sales.
3) Extremely unlikely - something really terrible happens. For which I have credit cards, health insurance (because it's less than the medicare levy surcharge), income protection/TPD insurance. And if all else fails I can sell shares and get the cash in a few days.

I do agree that an "emergency fund" is somewhat unnecessary, but I always have a year of cash lying around that I can get at very easily, and is used for all my day to day costs. After all, in the mustashian world, this is a fairly small amount of money, gaining reasonable interest, which stops me from having to sell shares or other long term investments in a low market. If I need it for an emergency, I will just need to buy less as the dividends etc. slowly increase the pool back to what I want. It also enables me to take advantage of investment opportunities.

[DrowsyBee]

Can't we easily explain the lack of increase in spending by the...you know...incredibly low rates that people are taking advantage of to pay off their house quicker than normal?

[FFA]

Can't we easily explain the lack of increase in spending by the...you know...incredibly low rates that people are taking advantage of to pay off their house quicker than normal?

Normal expected behavior people will pay off faster when interest rates are high, and their repayments will be bigger anyway due to the interest component. With low rates people might let the loan sit and interest components are less. More important the impact on new borrowings to spend/invest, which are incentivized by low rates and discouraged by high rates. That's the usual theory but it's not working so well this time around.