Author Topic: Australian Investing Thread  (Read 1548178 times)

marty998

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Re: Australian Investing Thread
« Reply #4500 on: May 20, 2019, 03:02:00 AM »
Lovely day on the markets today. Can't recall the last time the banks went up 7-9% in a single day!

Obviously this is due to a lower risk of adverse legislation if Labor won. I fully expect the Government to ignore the Royal Commission and Ken Hayne and Rowena Orr will be recalled back in 10 years with another one.

For now I'll say sentiment is the winner. We'll wait and see if it translates to a rebirth of the property market (doubtful, but you never know).

Mattystein

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Re: Australian Investing Thread
« Reply #4501 on: May 21, 2019, 02:25:13 AM »
H all,

Posted a number of days ago and have since been trying to refine my plan towards FIRE. We've got our frugality nailed down to where we are living happily. So moving forward I need to finish my investment plan. As you will see below, we aren't starting with much, but we don't need much.

General Info
Couple, aged 32/28.
Both of us with HECS debt.
Super: $26k + $7k
Savings: ~$16k (cash in Ubank savings account) + ~$9k (lent using RateSetter @ average 8.6% p.a. split over 3 and 5 year terms)

Income
Me: $60k base. Opportunity for ~$5k of overtime (which I will do), but no super guarantee on this as per agreement.
Partner: $20k permanent part-time while studying at Uni. She will be finished in another 4 years, at which point graduate starting salary will be at least $60k, but until then...
Net income (after tax/HECS): ~$69k

Expenses
Yearly: $40k (includes everything, no need to go into too much detail)
This leaves ~$29k to invest each year (~$2,400/month). It seems my earlier estimation of $1,200/month was very conservative. Then when my partner reaches full time work we will be able to up our savings considerably but this plan is just for the next 4 years to set up a great base and get the good habits formed.

Emergency Fund
We will keep $10k as an emergency fund at this stage. According to current living expenses it is only 3 months of living, but realistically it would be 4 months as we'd tighten the belt a bit. I can aim to keep a full 6 months if this is entirely necessary, or add a little bit each week.
Leaves $15k to invest now. Could split it any way though if a bigger emergency fund is definitely required.

Super
Within Super I have just switched to SunSuper.
Fees are $78/year + 0.1% of balance up to $800k + Management fees of allocation.

I have tentatively selected an allocation of:
40% 'Australian Shares - Index' (VAS equivalent) - Fees = 0.11% p.a.
30% 'International Shares - Index (unhedged)' (VGS equivalent) - Fee = 0.09% p.a.
30% 'International Shares - Index (hedged)' (VGAD equivalent) - Fee = 0.09% p.a.
So all up the fees will be $78 + 0.198% p.a. Pretty good I think.

Also possibly interested in the 'Emerging Markets Shares' (0.15% p.a.) which is possibly VGE? Not sure if this warrants a portion of my allocation. I can change my allocations easy enough so that's a plus.

Outside Super
Vanguard ETFs for me using SelfWealth as a broker ($9.50 per trade). Asset allocation starting simple as:
30% VAS (0.14% p.a.)
70% VGS (0.18% p.a.)
I may look at substituting A200 (0.07% p.a.) for VAS (realise its only tracking top 200 not 300 so slightly less diverse Aussie wise) and VTS (0.03% p.a.) for VGS (also realise VTS being US-domiciled has possible ramifications).

Breakdown
Of the $2,400/month we can invest I was thinking of putting 20% ($720) into super and 80% ($1,680) outside.

So how does this all sound? I'd be particularly interested in thoughts relating to my asset allocation, both inside and outside of super.
Honestly, I would love any and all critique/suggestions you can throw my way. All are welcome.
If I have missed anything please let me know.

I am almost about to commit to this strategy with a goal of FIRE in 15 years (aged 47). I believe this will be easily possible with my partner obtaining full-time employment. I am also happy to do part-time work in my early 'retirement' which reduces the risks further. Another final note, is that we will most likely both be inheriting a decent amount (total ~$800k) from our parents which is an extra safety-net although not factored in to my plan.

Andy R

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Re: Australian Investing Thread
« Reply #4502 on: May 21, 2019, 05:09:17 AM »
Really well done, congratulations for getting your finances together and all laid out in a nice clean plan.

I think I like it all.
29k/yr is a good amount, much better than 15k, especially for a slightly late starter (or non-early starter)
Nice to see there is a great upside potential once your partner finishes studying.
I like your allocations. I'd bring your Aussie shares in super down to 30% max, but not a huge deal.
I include Emerging market, it is a nice diversifier, but the difference will be a very tiny fraction of the result of your consistent savings and having the plan, so it's not going to be significant in the grand scheme of things if you leave it out.

Sorry I don't have anything useful. It looks great to me.

marty998

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Re: Australian Investing Thread
« Reply #4503 on: May 21, 2019, 06:15:54 AM »
Plans for a house and/or kids @Mattystein?

Notch

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Re: Australian Investing Thread
« Reply #4504 on: May 21, 2019, 07:54:32 PM »
So how does this all sound? I'd be particularly interested in thoughts relating to my asset allocation, both inside and outside of super.

My advice is that you should decide on your overall asset allocation (VAS/VGS/VGE) then hold as much of the higher yielding component (VAS) in super as possible.  This is so your dividends get taxed at 15% rather than 34.5%.

Mattystein

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Re: Australian Investing Thread
« Reply #4505 on: May 21, 2019, 08:01:45 PM »
Plans for a house and/or kids @Mattystein?

Kid, yes (if possible). My partner has some medical issues which make this difficult. But ideally she would love kids. Maximum of 2.

House, not at this stage. Renting suits us regarding location and lifestyle. However if it is a worthwhile purchase down the track I would look at it, but not if it affects FIRE a lot.

Mattystein

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Re: Australian Investing Thread
« Reply #4506 on: May 21, 2019, 08:03:03 PM »
So how does this all sound? I'd be particularly interested in thoughts relating to my asset allocation, both inside and outside of super.

My advice is that you should decide on your overall asset allocation (VAS/VGS/VGE) then hold as much of the higher yielding component (VAS) in super as possible.  This is so your dividends get taxed at 15% rather than 34.5%.

Great tip, thank you!

Edit: Just to clarify, if I choose a total allocation of 30% VAS, I should hold it all inside Super? This doesn't affect the reliability of the portfolio outside super being enough to get me from ER to preservation age?
« Last Edit: May 21, 2019, 09:25:35 PM by Mattystein »

Mattystein

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Re: Australian Investing Thread
« Reply #4507 on: May 21, 2019, 09:32:00 PM »
I like your allocations. I'd bring your Aussie shares in super down to 30% max, but not a huge deal.
I include Emerging market...
If I include a percentage of emerging markets how does 10% sound? And drop Aussie back to 20%? International 70%?

Notch

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Re: Australian Investing Thread
« Reply #4508 on: May 21, 2019, 10:57:28 PM »
So how does this all sound? I'd be particularly interested in thoughts relating to my asset allocation, both inside and outside of super.

My advice is that you should decide on your overall asset allocation (VAS/VGS/VGE) then hold as much of the higher yielding component (VAS) in super as possible.  This is so your dividends get taxed at 15% rather than 34.5%.

Great tip, thank you!

Edit: Just to clarify, if I choose a total allocation of 30% VAS, I should hold it all inside Super? This doesn't affect the reliability of the portfolio outside super being enough to get me from ER to preservation age?

Yes.

That mostly depends on how much you save and how well the market performs. 

But if, for example, VAS has outperformed and you'd like to spend some of it in early retirement - just sell VGS or whatever you hold outside of super, and convert some of your VAS to VGS in super to rebalance the allocation.


Andy R

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Re: Australian Investing Thread
« Reply #4509 on: May 22, 2019, 12:04:03 AM »
If I include a percentage of emerging markets how does 10% sound? And drop Aussie back to 20%? International 70%?

Looks good to me.

itchyfeet

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Re: Australian Investing Thread
« Reply #4510 on: May 26, 2019, 10:38:16 PM »
With 80% off shore just be prepared that short term currency volatility will cause your stash to bounce around in value a lot.

Andy R

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Re: Australian Investing Thread
« Reply #4511 on: May 27, 2019, 02:51:50 AM »
Yeah I target 50% in AUD based assets, with 25% in VAS and 25% on VGAD. This way if the Australian economy tanks, only 25% of my current capital is exposed to a recession or market crash, but the assets are equally affected by currency movements in either direction to minimise both upside and downside currency risk.

Without VGAD you either pay with concentration risk (too much VAS) or currency risk (too much VGS), but I'm not going to comment much on VGAD because basically everyone writes it off saying that in the long term, currency movements are a wash. When I look at the history it tells a story, but each to their own.

Also Mattystein did say that half their international shares in super are currency hedged, which is essentially VGAD, so that will lower currency risk to some degree also.

itchyfeet

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Re: Australian Investing Thread
« Reply #4512 on: May 27, 2019, 11:25:05 AM »
Yeah I target 50% in AUD based assets, with 25% in VAS and 25% on VGAD. This way if the Australian economy tanks, only 25% of my current capital is exposed to a recession or market crash, but the assets are equally affected by currency movements in either direction to minimise both upside and downside currency risk.

Without VGAD you either pay with concentration risk (too much VAS) or currency risk (too much VGS), but I'm not going to comment much on VGAD because basically everyone writes it off saying that in the long term, currency movements are a wash. When I look at the history it tells a story, but each to their own.

Also Mattystein did say that half their international shares in super are currency hedged, which is essentially VGAD, so that will lower currency risk to some degree also.

Fair comment

conwy

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Re: Australian Investing Thread
« Reply #4513 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 #4514 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 #4515 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 #4516 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 #4517 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 #4518 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.

Trevor Reznik

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Re: Australian Investing Thread
« Reply #4519 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 #4520 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 #4521 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 #4522 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 #4523 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.

Trevor Reznik

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Re: Australian Investing Thread
« Reply #4524 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 #4525 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 #4526 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 #4527 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 #4528 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 #4529 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 #4530 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 #4531 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 #4532 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 #4533 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 #4534 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 #4535 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 #4536 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 #4537 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 #4538 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 #4539 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 #4540 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 #4541 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 #4542 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 #4543 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 #4544 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 #4545 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 #4546 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 #4547 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 #4548 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 #4549 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.