Australian Investing Thread

[dungoofed]

Yep, I'm also somewhat perplexed - interest rate down, stocks down, currency up.  Not the standard reaction!

While this is curious, its not going to change my strategy - the saving on interest will just get tipped into the stash (debt paydown).

What I don't understand is how wide the yield differential is between stocks and home loans at the moment.  I'm borrowing money at 4.04% after this cut. The yield on the broad Australian stock market is currently about 4.4%.  Add in the franking credits, and its just over 6%.  So, borrowing money to invest in stocks nets 2% positive income.  I can't see how that is sustainable - either prices will be bid up to close that gap, or Mr Market is expecting a) dividends to fall, b) interest rates to rise, or c) pricing in a high likelihood of capital loss.

I'm fully intending on sticking with the DRP/BSPs, and knocking down my debt load with my savings.

I think a) and c) are pretty much the same thing. If corporate profits fall one or both will happen.
Do you have any historical numbers of the difference between a mortgage rate and stock market yield? I'd be interested to see, should be somewhat related to equity risk premium.
To me the difference doesn't seem that attractive atm. I would not want to take the risk of borrowing money at 4% for a very flakey 2% extra yield given the state of the economy and how shaky things are starting to feel. But I'm probably just paranoid.

I think this is another example of how the government has fucked themselves with franking credits. 6% is almost three times what 10 year bonds are yielding!

[idjces]

Ordinary result from Westpac today... flat profit as compared to prior period.

Too early to say the good times are over but it seems like a pretty odd result given the run-up in investor loans (WBC getting the lions' share of them). I can't seem to work it out - analyst pack of 140 pages said nothing basically.... lots of pretty graphs, no real explanation why there was no profit growth.

ANZ and NAB to report this week, are the good times over?

I was expecting the good times to be over for the big 4, in the reports 6 months ago. Mortgage rates and interest margins being slashed, huge sums of money being handed out in sign up bonuses and interest free periods, unemployment soaring. The banks having to issue shares at a discount and then some. ANZ was the only one to meet those low expectations, before CBA's results threw that theory out the window.

Now westpac's recent results are more in line with the theory.

[bigchrisb]

What I don't understand is how wide the yield differential is between stocks and home loans at the moment.  I'm borrowing money at 4.04% after this cut. The yield on the broad Australian stock market is currently about 4.4%. 

Hi bigchrisb, I'll be borrowing at 4.16% after the cut. Your 4.04% is dang impressive!

Just wondering where you got the 4.4% dividend from, because according to the "Average P/E ratios and average dividend yield" on the following link
http://www.afrsmartinvestor.com.au/share-tables/

All Ords appear to be yielding < 4%. Additionally, the large LICs such as AFI/ARG/MLT are also < 4% net yields. I agree with you point about current yields and mortgage rates though. Still positive cashflow after taking into account franking credits.

Seems like everyone is using the easy money to bid up property prices. Whereas I've been releasing equity from my property portfolio to invest into shares...seems as though I'm swimming against the tide. Could be a good thing, or I could get wiped out. Fingers crossed I'm onto a good thing!

edit: make that 4.21% after the cut! greedy CBA only passing on 0.20% of the RBA cut

I have been using the data the RBA publishes: http://www.rba.gov.au/statistics/tables/pdf/f07.pdf
Looking at it, one is a MSCI index, and the other is a s&p index.  Looking at the detail for MSCI, it contains 71 stocks, and has more financials (55% financials, 15% materials, 30% others).  This probably explains the difference.

With the LICs,  most have a payout ratio of less than 100% (or some over 100%), and don't hug an index, which means they aren't a great yardstick for market yield.

[FFA]

I think this is another example of how the government has fucked themselves with franking credits. 6% is almost three times what 10 year bonds are yielding!

I support franking credits. The concept is to avoid double tax which is fair.

Where it gets screwed is companies aggressively minimising tax, with effective tax rates are sometimes 5% or less. Hockey is still on the case lets see if they can deliver anything.

Bhp 500 mil is a good start. Booking approx 5 bil in marketing fees in singapore is imo beyond credibility, these are commodities mostly sold on term contracts afterall!

[slothman]

This probably explains the difference.

Thanks buddy that makes sense. Do you think there will be more yield chasers given the recent cut or do you think all that idle money is staying put?

[happy]

….

Personally im holding a decent cash balance despite interest being a pittance. I could be wrong, but I expect some market wobbles in the next year or two as this unconventional monetary policy inevitably unwinds....

This is where I am at also ( but all in Super due to my age), but looking at some of the returns on stocks, I frequently wonder if I'm taking the correct course. This rate cut just makes it a tougher line to take.

So I'm glad to see at least one of you hot young investors is taking a similar view.

[AustralianMustachio]

What is being talked about above (should i stay in cash or be in shares/property/etc?) is the result of all this rate cutting around the world. It's pretty much forcing people up the risk spectrum in terms of their investments.

The low interest rates destroy the returns of term deposits/cash, push bond yields down, and so people are forced to take on more risk just to get a decent return on their money.

Our market has been bid up this year from Jan - March, pretty much purely due to PE expansion, as opposed to underlying earnings actually rising. But people still remember the GFC, and are very wary of the stockmarkets volatility. In this thread already we've had a few people talk about bad experiences with shares during the GFC.

So where is the most natural place for money to go? In my opinion - real estate.

These rate cuts aren't going to be good for slowing down our booming (bubbling?) housing market

[terrier56]

….

Personally im holding a decent cash balance despite interest being a pittance. I could be wrong, but I expect some market wobbles in the next year or two as this unconventional monetary policy inevitably unwinds....

This is where I am at also ( but all in Super due to my age), but looking at some of the returns on stocks, I frequently wonder if I'm taking the correct course. This rate cut just makes it a tougher line to take.

So I'm glad to see at least one of you hot young investors is taking a similar view.

Hmm I think you are making a mistake here. The risk of stocks is cancelled out by the very long time period that super is held. This could potentially cost you $100K's over the long run.

What he is doing is different. Taking a stock position with an increasing hedge against crash (it's not clear to me if this is a better strategy than a dollar cost avg). You on the other hand are guaranteeing low returns that don't have short term volatility.

[bigchrisb]

I started writing a long post about my theories about the current market and probability.  However, reading over it, I can help but feel that I'm navel gazing, and that my guess is probably no better or worse than anyone else's speculation.  I'm probably best off picking and sticking with an asset allocation!

[dungoofed]

Chris - I think people in this thread are less militant about "100% Vanguard Total Market or GTFO" than elsewhere in these forums. And your posts are always well thought out. I'd be happy to read, and if you were concerned you could preface it with "WARNING: Guesses and Speculation Ahead. Drive Carefully" or something. Whatever you come up with, it's still going to be well within the realms of "sensible."

….

Personally im holding a decent cash balance despite interest being a pittance. I could be wrong, but I expect some market wobbles in the next year or two as this unconventional monetary policy inevitably unwinds....

This is where I am at also ( but all in Super due to my age), but looking at some of the returns on stocks, I frequently wonder if I'm taking the correct course. This rate cut just makes it a tougher line to take.

So I'm glad to see at least one of you hot young investors is taking a similar view.

Hmm I think you are making a mistake here. The risk of stocks is cancelled out by the very long time period that super is held. This could potentially cost you $100K's over the long run.

What he is doing is different. Taking a stock position with an increasing hedge against crash (it's not clear to me if this is a better strategy than a dollar cost avg). You on the other hand are guaranteeing low returns that don't have short term volatility.

For what it's worth I'm overweight defensive assets. I'm moving back to Australia so there is a lot of cash here and there just to make sure I can cover moving expenses and to cover my first 12 months living expenses but I'm not panicked about potential lost gains. I've mentioned it before but I am invested in a modified version of the Permanent Portfolio, so I have gold (warrants), term deposits and AGBs too. This is definitely the underperforming part of my portfolio but I know that it's there for a reason, even though I don't know what that reason will be.

In fact, my next purchase will possibly be more AGBs which are slightly underpriced but yielding well under historical ASX returns. There is a lot of temptation to throw this money into stocks, especially because if rates rise over the next few years then I'll lose a lot on these things, but they are a hedge against rates dropping even more, even into negative territory.

[bigchrisb]

Fair enough!  Speculation ahead!

There is a huge amount of cash in the system right now.  For example, http://www.fsc.org.au/downloads/uploaded/2014_0226_140226-%20FSC%20Maddock-%20Capital%20Flows%20Report%20FINAL_2d88.pdf has some stats to the end of 2013, showing that the Australian super system has approx $215b of cash. The cash in super alone is equivalent to about 12.5% of the total value of the Aus share market.  I don't have the data, but I suspect the same is true of broader institutional asset allocations (e.g. future fund $15%), along with corporate and household.  This means there is a lot of cash on the sidelines not earning anything, waiting to be deployed.  Rates lowering will add pressure to push this out of cash.   My guess is that all this cash will act as a pretty big buffer to asset valuations if they fall - which will by definition temper the fall!

This seems to be a different scenario to 2007, when stock leverage was much higher, and there wasn't much hard cash on the sidelines.  My suspicion is that while we will have volatility in the near future, we probably won't have a precipitous fall of 50%! 

Never the less, I'm seeing some potential changes in my earned income coming up in the next few years, so I'm trying to wind down my leverage levels.  I'm also happy to keep DRPs running, to keep some re-investment out of my control.  If I didn't have the investment debt, I would be buying in with DCA, but ensure I had some access to borrow against this in future when we do see a bit of a fall.

[dungoofed]

Some quick notes:

* Money tied up in housing in Australia is much larger than I thought!

* Don't forget that the cash may just be there for consumption ie not necessarily waiting to be deployed in the market. Especially among baby boomers who are retiring now en masse.

* The points about SMSF, I think a lot of that is property-loving Aussies using their super for buying an investment property.

* There is actually an argument in the paper for the government to decrease the rate of compulsory super.

* The way to remove undeployed cash in the system is to make keeping it in cash a bad idea. Unfortunately the way to do this is to increase supply.

Maybe the stock market just needs to rise for a few more years in order to get everyone to start piling in again. It was eight years from the tech boom in 1999 until pre-GFC boom in 2007. 2015 this year so, what's that, eight years? oh.

Gold is still well above pre-2008 levels. People haven't had enough time to forget yet.

[FFA]

….

Personally im holding a decent cash balance despite interest being a pittance. I could be wrong, but I expect some market wobbles in the next year or two as this unconventional monetary policy inevitably unwinds....

This is where I am at also ( but all in Super due to my age), but looking at some of the returns on stocks, I frequently wonder if I'm taking the correct course. This rate cut just makes it a tougher line to take.

So I'm glad to see at least one of you hot young investors is taking a similar view.

Hmm I think you are making a mistake here. The risk of stocks is cancelled out by the very long time period that super is held. This could potentially cost you $100K's over the long run.

What he is doing is different. Taking a stock position with an increasing hedge against crash (it's not clear to me if this is a better strategy than a dollar cost avg). You on the other hand are guaranteeing low returns that don't have short term volatility.

to clarify a bit what i'm doing. I have some recent lump sums coming in and the cash is tipping my AA overweight defensive. I put some tolerances in my Investment Policy Statement like max +/-10% on the high level growth/defensive split. At the moment I will be pushing up to my +10% defensive and maybe slightly over for a while. at the same time I am also Dollar Cost Averaging into shares and super, but probably at a slower rate than I would normally (eg 1-2 years instead of 3-6 months) if it wasn't for my caution about the current abnormal financial markets.

So, I do stick to an AA, but I have put some flex in there for lump sums and market timing (not for frequent use, only where I deem there is some extreme or abnormal situation - subjective, I know). I understand market timing is generally frowned upon in this forum. And while I agree it is a poor strategy for the majority, I don't dismiss it outright, especially if controlled to a small fraction of total portfolio.

[marty998]

This seems to be a different scenario to 2007, when stock leverage was much higher, and there wasn't much hard cash on the sidelines.  My suspicion is that while we will have volatility in the near future, we probably won't have a precipitous fall of 50%! 

Seem to recall 2007 was when the Super system (SMSF sector) was overflowing with cash when all those with the means dumped $1m cash into their funds in Peter Costello's last gasp hurrah.

I too cannot see a fall of 50%, but geez with CBA putting in one of its worst 1 day share price performances in history then it makes me a little nervous.

Still, I've got 5 months left on the mortgage and after that will be tilting heavily into stocks. I think I've finally changed my mindset that market falls are not something to be feared but something to be welcomed so that I can back the truck up and load her up.

Maybe the stock market just needs to rise for a few more years in order to get everyone to start piling in again. It was eight years from the tech boom in 1999 until pre-GFC boom in 2007. 2015 this year so, what's that, eight years? oh.

Kills my theory of stockmarket crashes.... 1987 (Black Friday), 1997 (Asian FC), 2007 (Global FC).

Thought we'd string it out to 2017...

Anyone believe our 24 years of uninterrupted economic growth is over? Storm clouds are aligning, business confidence is in the toilet, party is well and truly over for the banks

Woolworths posted a 3rd qtr sales fall and shares got hammered. REA Group (realestate.com.au) fell by 10% today! Mining stocks have already been slaughtered in the past 12 months.

Many stocks and sectors are just lacking revenue growth and IMO signs are there for a recession...may be a good time to keep some powder dry for when the bottom falls out. We'll look back in 24 months time and see the next 6 months as a great opportunity to buy - counter cyclical strategy.

Tipping the market to correct 20ish% it's already done around 6%, once the banks go ex div in mid may it'll be 10% and on we go.

[potm]

2 days ago it was near recent highs. A bit too early to be predicting economic doom just yet.
My personal opinion is that the low interest rate party has a way to go. How will governments and central banks handle it when the can cannot be kicked anymore is another thing though.

Doesn't matter what happens though, keep on saving and buying :) Not bothered at all by the falls.
Good timing for me to make some extra super contributions before the fin year ends.

[FFA]

The ole "sell in may and stay away" might've worked this time! Ha

Certainly an unexpected twist to get a rate cut, asx dip and aud rally. Mkt has certainly shrugged the rate cut and completely latched onto the wording deletion implying the end of the easing cycle.

I agree re: cash support. Im not expecting any big corrections just a bit more volatility as the EU and japan ramp up qe and the fed inches towards the first rate increase

[happy]

….

Personally im holding a decent cash balance despite interest being a pittance. I could be wrong, but I expect some market wobbles in the next year or two as this unconventional monetary policy inevitably unwinds....

This is where I am at also ( but all in Super due to my age), but looking at some of the returns on stocks, I frequently wonder if I'm taking the correct course. This rate cut just makes it a tougher line to take.

So I'm glad to see at least one of you hot young investors is taking a similar view.

Hmm I think you are making a mistake here. The risk of stocks is cancelled out by the very long time period that super is held. This could potentially cost you $100K's over the long run.

What he is doing is different. Taking a stock position with an increasing hedge against crash (it's not clear to me if this is a better strategy than a dollar cost avg). You on the other hand are guaranteeing low returns that don't have short term volatility.

Ok I'm listening, but I don't understand why it makes any difference whether its in super or not. Since I will be accessing super in the next 4 years or so, the time frame is immaterial.  I'm still on training wheels with all this, so if you can clarify I'd be grateful.
 

[marty998]

2 days ago it was near recent highs. A bit too early to be predicting economic doom just yet.
My personal opinion is that the low interest rate party has a way to go. How will governments and central banks handle it when the can cannot be kicked anymore is another thing though.

Thats the point - the Government has proven it cannot handle it and any moves the RBA are doing are not working. The can has been kicked into the empty iron ore pits of the Pilbara and cannot be found now.

I'm genuinely concerned to be frank. The fed budget is essentially a pile of doggie doo doo, with more $50b+ deficits coming, and the economy is spluttering along with no real direction. Always thought we were better managed than most of the other countries, but wow, we may be in for a fair bit of hurt sooner rather than later.

[potm]

Iron ore pales in comparison to the housing market. So much of our economy depends on it being strong and it certainly is at the moment. Plenty of scope left to kick the can. Look around the world. We're like in division 3 compared to all the premier league countries.

It is impossible to predict the future actions of governments and reserve banks though. Australia will probably take the lead of other countries in how to proceed. First in line will be the USA who are the only ones at a stage to try and go the other way. We'll see how they manage to achieve that, I don't expect them to have much success in raising rates any significant amount. What does that mean for the world in the medium to long term being stuck on ultra low interest rates? Will governments and central banks change tactics? Recession we had to have instead of whatever it takes? Inflation? Deflation? Who knows. We live in exciting times.

[FFA]

Its a global phenomenon, many govts are impotent on fiscal policy and its all left to central banks to fix. Monetary policy is being pushed beyond its intent everywhere. At least we have a sign now 2% cash rate is a bottom. Spare a thought for negative rate countries. oz is still better managed relatively i feel, in the  "steven bradbury" style.

[dungoofed]

Its a global phenomenon, many govts are impotent on fiscal policy and its all left to central banks to fix. Monetary policy is being pushed beyond its intent everywhere. At least we have a sign now 2% cash rate is a bottom. Spare a thought for negative rate countries. oz is still better managed relatively i feel, in the  "steven bradbury" style.

You know, ever since the RBA dropped rates 100 basis points at the end of 2008 it almost feels like every single thing they do needs to be a "surprise." Seriously makes them look like amateurs.

I'm not a betting man but I reckon I could get some pretty good odds right now on the RBA cutting again next time. I honestly think they are going to do their stupid "surprise the market" thing and cut rates, and giving a sign that there will be no further cuts is a part of this stupid plan. I hope I'm wrong but if I'm right I'm going to send a link to this thread to the folks at the RBA and a bunch of major institutional investors so that the RBA can't use this stupid strategy any more.

[FFA]

Its a global phenomenon, many govts are impotent on fiscal policy and its all left to central banks to fix. Monetary policy is being pushed beyond its intent everywhere. At least we have a sign now 2% cash rate is a bottom. Spare a thought for negative rate countries. oz is still better managed relatively i feel, in the  "steven bradbury" style.

You know, ever since the RBA dropped rates 100 basis points at the end of 2008 it almost feels like every single thing they do needs to be a "surprise." Seriously makes them look like amateurs.

I'm not a betting man but I reckon I could get some pretty good odds right now on the RBA cutting again next time. I honestly think they are going to do their stupid "surprise the market" thing and cut rates, and giving a sign that there will be no further cuts is a part of this stupid plan. I hope I'm wrong but if I'm right I'm going to send a link to this thread to the folks at the RBA and a bunch of major institutional investors so that the RBA can't use this stupid strategy any more.

If you want to single out amateurs surely it's the ECB. Years of dithering and even tightening when blind freddy could see they should be easing. More than 5 years to finally decide to QE, after every man and his dog has bought up European govt bonds ahead, leaving them to swallow negative yields.

I feel the RBA's been doing a good job, all things considered, and they have a solid reputation globally. [ glenn stevens, in the small chance you're reading this after dungoofed sends you the link, please give yourself a pat on the back :) ]

I don't expect any more cuts for a while, unless there's some global chaos or other unexpected economic snags. Can you really distinguish if RBA is surprising the market, or if market is second guessing/pre-empting the RBA. I tend to think it's more the latter actually.

[dungoofed]

bigchrisb - I remembered this morning that the government has already solved the excess cash balances problem!

http://www.abc.net.au/news/2015-03-28/federal-government-set-to-introduce-tax-on-bank-deposits/6355662

(This is from the end of March).
 

[terrier56]

….

Personally im holding a decent cash balance despite interest being a pittance. I could be wrong, but I expect some market wobbles in the next year or two as this unconventional monetary policy inevitably unwinds....

This is where I am at also ( but all in Super due to my age), but looking at some of the returns on stocks, I frequently wonder if I'm taking the correct course. This rate cut just makes it a tougher line to take.

So I'm glad to see at least one of you hot young investors is taking a similar view.

Hmm I think you are making a mistake here. The risk of stocks is cancelled out by the very long time period that super is held. This could potentially cost you $100K's over the long run.

What he is doing is different. Taking a stock position with an increasing hedge against crash (it's not clear to me if this is a better strategy than a dollar cost avg). You on the other hand are guaranteeing low returns that don't have short term volatility.

Ok I'm listening, but I don't understand why it makes any difference whether its in super or not. Since I will be accessing super in the next 4 years or so, the time frame is immaterial.  I'm still on training wheels with all this, so if you can clarify I'd be grateful.

Sorry happy I didn't realise you were only 4 years from collection. You're fine to take this line :)

[happy]

Good terrier56! I think I've learned a lot in the last couple of years, but am always looking to improve: I might still overlook something obvious, but its happening less often now.

[potm]

The point remains though that you will have to invest it eventually. Staying in cash forever will guarantee low returns. Even though you are close to preservation age, you will still need growth assets as hopefully you have many more years of life left.

[happy]

Yes I agree Potm and thanks FFA for your explanation. I certainly have growth assets, but have built up higher cash allocation (by directing my fortnightly contribution to cash) than I have previously carried due to my perception that the market is overvalued, and  wanting to cushion  a substantial loss if there is a severe correction around retirement. At some point I will need to reinvest the excess cash to return to my chosen AA, but not yet. Currently the cash portion is returning above inflation after tax. I had intended to do so when shares were better value, but I honestly did not foresee the cash rate dropping as low as it now has. If it does not stay above inflation, and it must be getting close with the latest cut, then I will have to think hard about the position I have taken.

Hehe after 30 years of DCAing into super according to a fixed formula, my first tentative effort at market timing which I thought was logical and conservative at the time, might well turn out to be yet another example of why market timing is not a good idea :). Time will tell.

[bigchrisb]

Thought I'd dig a bit more into how much cash is sitting on sidelines, and compare this against what happened in 2007/8/9.  Turns out the RBA publishes a lot of time series data that comes in handy for this.   I'll be referencing table E1 and table D10 from http://www.rba.gov.au/statistics/tables/index.html

December 2007:
Total margin debt: $41B
Household deposits: $442B
Business deposits: $174B
Household gearing: 20% (1332bn total liabilities, 6766bn total assets)

March 2009:
Total margin debt: $21B
Household deposits: $548B
Business deposits: $234B
Household gearing: 24%

i.e. $20bn in margin disappeared, households stashed 100bn in cash, businesses stashed 60bn in cash - i.e. in 15 months, there was a move to cash of some $180b.  Compare that to the market cap, of some 1000bn, and its a massive move.

Dec 2014:
Total margin debt: $11.8B
Household deposits: $873B
Business deposits: $356B
Household gearing: 22%

Its worth noting that margin lending is a quarter of what it was in 2007, while both household and business cash levels have doubled.  With data like this, I really struggle to see the same sort of cash/liquidity issues seen in the GFC, and hence harder to see the huge falls, in the stock market at least.  Don't get me wrong - I reckon there will always be volatility, but my money is staying mostly in stocks, along with debt paydown.

[potm]

Leverage on shares is not a concern at the moment but what about housing.
I'm assuming that total gearing figure includes housing assets and liabilities in there.
How much have the debt levels increased by? The gearing may not have gone up but that is based on current housing prices. Any pullback in the housing market will have wide ranging effects on the economy and sharemarket.
 

[bigchrisb]

Leverage on shares is not a concern at the moment but what about housing.

Precisely!  Since end 2007 and today, household debt has pretty much doubled (2.1T vs 1.3T), while the value of houses has increased from  3.8 to 5.1T. i.e. of the ~1.3T in additional houses and house value, 0.8T is purely from growing debt.

I'm far more nervous about AU houses over the medium/long term than I am about AU stocks.

[themadman]

Ok guys, can I get some advice please? :) I posted across in the "Ask A Mustachian" thread, but it was recommended I post my questions in here because you're obviously all Aussie's/understand the scene here. I haven't yet had the time to read through this whole thread, and I know this is probably covered to some extent elsewhere but I'm trying to figure out my best options financially.

I'm 20 years old, 2 years left of Uni (this + next year), no job and $324 fortnightly centrelink payments. I'm saving $155/fortnight with the intent of investing it. I've just done a little research and invested $2000 in Vanguard's VTS with a $20 brokerage fee through CBA's CDIA.

I have another $1000 to invest and I'm not sure if I should keep adding to it for a while before investing or just plunge right in and pay the 2% for brokerage. What do you guys use as a minimum amount when investing? Once you start getting under $500 (4% brokerage) it seems a bit excessive, but I don't really know what the general rule is that I should be using? What would you guys be recommending that I do with this other $1000? How much would you start to invest before you worried about diversifying? ie. Now that I have $2000 in a US-centred ETF with low management fees (0.05%), should I start putting some into an Australian index, or into bonds etc? Or should I just keep building in that same fund for a while?

I've had suggestions to put it into HECS and get the 10% discount, but I just don't know if that's worth it when I can get 5-10% returns on my money for the next 10 years instead of just paying up front...It doesn't seem smart when there's no interest on the loan and the HECS discount is disappearing next year?

Another general question I had: With this VTS fund, the dividend yield is 1.71% ttm with quarterly returns. Does this mean the actual dividends last year were 1.71*4=7%? Or is that 1.71 divided over each of the quarterly dividends (0.42%/quarter)?

[DrowsyBee]

Man, when it comes to Financial Independence, everyone tends to say the same thing: Do whatever works for you.

Yeah, investing $500 with a $20 brokerage fee is crazy. I only invested small amounts because I had no brokerage fees for a while.

Another thing people here are likely to say is...do a lot of research and work out your desired asset allocation, then work towards that.


Sidenote - Wait, HECS has a 10% discount? I thought it was 5%

[potm]

Ok guys, can I get some advice please? :) I posted across in the "Ask A Mustachian" thread, but it was recommended I post my questions in here because you're obviously all Aussie's/understand the scene here. I haven't yet had the time to read through this whole thread, and I know this is probably covered to some extent elsewhere but I'm trying to figure out my best options financially.

I'm 20 years old, 2 years left of Uni (this + next year), no job and $324 fortnightly centrelink payments. I'm saving $155/fortnight with the intent of investing it. I've just done a little research and invested $2000 in Vanguard's VTS with a $20 brokerage fee through CBA's CDIA.

I have another $1000 to invest and I'm not sure if I should keep adding to it for a while before investing or just plunge right in and pay the 2% for brokerage. What do you guys use as a minimum amount when investing? Once you start getting under $500 (4% brokerage) it seems a bit excessive, but I don't really know what the general rule is that I should be using? What would you guys be recommending that I do with this other $1000? How much would you start to invest before you worried about diversifying? ie. Now that I have $2000 in a US-centred ETF with low management fees (0.05%), should I start putting some into an Australian index, or into bonds etc? Or should I just keep building in that same fund for a while?

I've had suggestions to put it into HECS and get the 10% discount, but I just don't know if that's worth it when I can get 5-10% returns on my money for the next 10 years instead of just paying up front...It doesn't seem smart when there's no interest on the loan and the HECS discount is disappearing next year?

Another general question I had: With this VTS fund, the dividend yield is 1.71% ttm with quarterly returns. Does this mean the actual dividends last year were 1.71*4=7%? Or is that 1.71 divided over each of the quarterly dividends (0.42%/quarter)?

Have you checked out the various free brokerage offers available? Can be nice to give you a start without paying an excessive amount of brokerage.

Your thinking is right on the HECs. It depends on what the amount is and your future earnings. If the debt is going to be around for 10 years then the 10% upfront discount isn't worth it. Also at any time you can get a 5% bonus on voluntary payments so it's not really a 10% discount. I'd suggest waiting until the balance is low some year in the future and pay it off in May before it gets indexed in June. Also the HECs discounts were supposed to disappear a couple years ago. Hasn't happened yet. But that is something to take into consideration.

The dividend yield quoted is for the whole year. USA companies tend to pay lower dividends due to tax reasons.

As for what to invest in, there's no right answer. You have to decide for yourself. There's been plenty of discussion in this and other threads. I recommend doing research beyond this forum as well.

[AustralianMustachio]

Leverage on shares is not a concern at the moment but what about housing.

Precisely!  Since end 2007 and today, household debt has pretty much doubled (2.1T vs 1.3T), while the value of houses has increased from  3.8 to 5.1T. i.e. of the ~1.3T in additional houses and house value, 0.8T is purely from growing debt.

I'm far more nervous about AU houses over the medium/long term than I am about AU stocks.

But, if the housing market tanks, it will affect stocks and other assets greatly:

"Impact of house price falls on other assets"
https://www.nabtrade.com.au/insights-and-ideas/insights/news/2015/04/impact_of_house_pric

[Kepler]

Brilliant thread - have really enjoyed reading.  Just posting to follow at the moment, but will be back soon to say something substantive.

[marty998]

It never ceases to amaze me just what a basket case NAB is.

$5.5 billion rights issue at 20% discount to market price to pay for provisions for the bad behaviour in its UK Clydesdale bank, which it can't sell and is going to spin-off in a demerger back to shareholders who don't want it.

Bloody hell. I keep saying it, every few years they invent a new way to lose money.

[potm]

It better be a renounceble rights issue for the capital raising.
20% discount capital raising yet will probably still increase the dividend.

Makes me want to actively manage my super as well instead of indexing.

[FFA]

the example of nab vs cba often comes to mind whenever i see dividend fixation. The extra 1.5% pa looks attractive but you may have lost it 50x over in relative capital gains over the years. Sometimes, high dividends are not a good thing.

[MMMaybe]

I saw this in the Age today. Is it really possible for people to be this leveraged up? WOW, I am not sure that I could sleep at night if this was me. At least they got a sensible reply, suggesting that they do a 7% interest rate stress test on their mortgage debt. They also were advised to sell one of the properties and reduce debt. What do you think of this situation?

Q. My wife, 28, and I, 30, have annual incomes of $100,000 and $120,000 respectively. We live in a property we bought for $900,000, now worth $1.1million with $809,000 owing and $480,000 in our offset account.

Our other investments consist of two townhouses (worth $2.7 million, with $2 million owing, and are returning $1300 and $1350 a week respectively) and an apartment (worth $520,000 with $460,000 owing and is returning $540 a week). Both are on interest-only loans. In our superannuation, I have $100,000 and my wife $40,000. My wife also has $25,000 in shares. We have no other debts.

We maximised the amount of salary packaging. What is the best way to make the most of our wealth as we probably need to build some savings to prepare for children in the next few years? We would also want some passive income, should one of us be unable to work. A.N.

[bigchrisb]

Yeah, I saw that too.  The amount of leverage in some of the resi RE investors boggles my mind!   What gets me is that people only seem to look at loan to value ratio ($4.5M in assets, 2.8M in debt, for total gearing of 62%, not that insane), as opposed to debt to income ratio ($385k gross income against 2.8M in debt, or 7.25 times gross income!).   Doesn't give a lot of leeway for income to drop (job loss, one income for a few years wrt kids, extended vacancy in a rental), or interest rates to rise.

I've found that my sleep at night factor for leverage is much more related to my debt:income ratio rather than my debt:assets ratio.  Investment debt at about 3x income is about my upper limit for comfort, and I feel better with it under 2 (its currently just under 3). 

Its also hard to know with RE how close to the wind someone is actually sailing.  People generally have an idea of what its "worth", but in an illiquid market, there is probably a good 5% uncertainty in this, and some ~5% in transaction costs/CGT.  10% downside on a $4.5M portfolio is 1/3rd of that couple's net worth!

[MMMaybe]

Yep, BigChris, glad I am not alone in thinking this was crazy!

I just feel like they have all their investing eggs in the RE basket. They seem to be planning on one scenario only and that is one of continuing asset appreciation while their personal circumstances stay the same or improve.

Its not going to take much of a shift for the wheels to come off the bus for people like this.

I was living in the Caribbean at the time of the RE bubble in the US/Caribbean, which preceeded the GFC and this kind of hubris/reckless bank lending looks oddly familiar to me. When the tide changes, it changes fast and I feel like I am watching it happen all over again.

I should note that some of the most ill thought through loans that were done at the time down there were funded by two famous US investment banks that no longer exist today. Now of course, everyone will tell me that its different this time!

[AustralianMustachio]

I guess RE investors take comfort from the fact that there aren't margin calls, and that any drop in the property market should be much slower than in shares. Since property isnt valued every day, you don't usually wake up to an overnight crash in the real estate market, as fas as I know.

And I'd say drops in value would be less generally. I think in the GFC, property in the US fell about 30% vs the stock market falling 50%.

Disclaimer: have no real estate investments myself. Certainly not an expert

[slothman]

Im in a similar situation as that guy but with a slightly smaller property portfolio and a much larger share portfolio.

SANF is quite comfortable as my LVR is under 80%, living expenses are quite low, PPOR is mostly paid off and have taken out income protection insurance in case I cant go to work.

[steveo]

I just feel like they have all their investing eggs in the RE basket. They seem to be planning on one scenario only and that is one of continuing asset appreciation while their personal circumstances stay the same or improve.

Add me to the list of people that think its crazy. I also don't think it will work out that well. You are getting hammered in interest payments and your asset allocation is way too focussed in RE. Plus buying and selling costs aren't taken into the picture.

I suppose it works if the market continues to run up significantly for a large number of years and you can maintain those interest payments.

I basically though think its way too much effort and hassle for the reward. I'd rather get rid of all my debt within my PPOR and then invest in Shares and Bonds to have a more well rounded portfolio. This way is also to me much less stressful.

[marty998]

I guess RE investors take comfort from the fact that there aren't margin calls, and that any drop in the property market should be much slower than in shares. Since property isnt valued every day, you don't usually wake up to an overnight crash in the real estate market, as fas as I know.

And I'd say drops in value would be less generally. I think in the GFC, property in the US fell about 30% vs the stock market falling 50%.

Disclaimer: have no real estate investments myself. Certainly not an expert

There most certainly are margin calls of sort (requests for cash top ups)... but usually by the time the banks catch up to you the equity is all gone.

The real problem is that banks won't take partial possession...they'll take the lot when you're in trouble.

[FFA]

I have been a heavy RE investor, but never with anything like that kind of leverage. And if I had my time over I don't think I'd do it the same again. Gradually shifting out of these properties and into shares in the coming years. 

I agree that properties might feel less risky because the asset price is not transparent, and everyone else seems to be doing it.... Ignorance is bliss.

Fortunately for us, we did ok with our properties and managed to avoid nightmare tenants (well we had one but not bad over 15 years and up to 4 properties). Also as I have come to realise, the bigger drivers of reaching FIRE are spending less and earning more. I think we did a better job of those two than managing our investments, although I'm trying to atone for it now !

[potm]

“When enough time passes and nothing bad happens, people who are making a lot of money tend to think it is because they are smart, not because they are taking a lot of risk”

Excerpt From: Schroeder, Alice. “The Snowball.” Random House Publishing Group, 2009. iBooks.
This material may be protected by copyright.

[FFA]

Just to balance the discussion, i'd also add RE investing can be a good addition to portfolios, especially if done well. i.e. Sensible leverage, property selection, active property management (maintenance, tenant selection/retention), diversification of properties (across cities/suburbs, property types, cash flow, etc), price negotiation and timing in property cycle, etc.

[MMMaybe]

Just to balance the discussion, i'd also add RE investing can be a good addition to portfolios, especially if done well. i.e. Sensible leverage, property selection, active property management (maintenance, tenant selection/retention), diversification of properties (across cities/suburbs, property types, cash flow, etc), price negotiation and timing in property cycle, etc.

Oh definitely. Not disputing that at all. Its just that there are a lot of people who aren't going about it with a sensible judicious approach. Those are the people who make me nervous.

[Taswegian]

Hmm. Im torn on that example. Am in a similar situation re debt:net assets (600k:1m), but those valuations are eye watering.
That said, mainly posting to keep track of this thread - took me a while to find it and more relevant than hearing about 401k IRA flips..  ;)