Author Topic: Australia/USA Mustachian Philosophy Differences  (Read 54763 times)

AustralianMustachio

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #100 on: February 23, 2015, 07:11:52 PM »
I can live with the portfolio volatility risk. I can live with the currency exchange risk. I can even live with the greater tax liability if that means higher net ROI.

What I can't live with is the requirement to move my family within 30 days at the whim of the landlord. Try finding a 4 bedroom house rental in a very small geographic area that would have 2 separate living areas and be within your price range. Try doing this every couple of years.

Ah but this isn't a renters problem globally, this is an Australian problem due to the shitty arrangements we have where landlords literally lord it over renters.

In European countries where long term renting is the norm, they commonly have 5 year rental agreements. And after you sign the house is pretty much yours and you can do what you want with it in terms of aesthetics, gardening, etc.

In fact, maybe that's why real estate has been such a good investment in Australia historically - we have laws that totally favour the land lords here. Of course in Australia, home ownership is common and a source of pride, and used to be much more affordable. So its undestandable where it has all come from. With the rising prices, I'm not sure how realistic it will be forever.

Since for me the balance is strongly in favour of renting, I for one hope the trend changes to be more in line with the rest of the world, and renters have better long term rights and agreements.

bigchrisb

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #101 on: February 23, 2015, 07:33:29 PM »
What a heated thread!

I think its evident that there are many views on the property vs shares debate, and that its probably not going to be resolved within this thread.  Personally, I'm in the invest in shares camp, and will have the bulk of my investments there.  None the less, a PPOR stacked up for me, when I was able to buy it outright, and while I have a high marginal tax rate.  Its the tax concessions for primary places of residence (no GCT, no tax on imputed rent) that tipped the balance on paper for me.  The intangibles (security of tenure, home pride etc) were a significant bonus.

Perhaps we all need to agree to disagree on the property vs shares debate, as I think there are a lot of other bits of value to be drawn from this thread?

On currency risk and home bias, I've taken the view that I want enough income from foreign investments that I can fund my overseas purchases in perpetuity.  This includes the obvious things like overseas travel, but also includes electronics, vehicles, and a lot of day to day expenditure that is not AUD denominated  (think imported clothing, media, outdoors equipment, transport fuels).  The main items that I consume that are AUD exposed are:
- Housing
- Fresh food
- Health
- Education
- Financial services (accounting, brokerage, MER etc)
Of those, I'm in the process of buying my house (capitalized that expense), I've finished most of my education (but may have kids to consider), am in my early 30's, so at this stage fairly healthy, so the main cash expense that is AUD exposed is fresh food and financial services.

Hence, to preserve my real purchasing power, I've got a target to increase my international asset exposure, as a large portion of my cost of living is effectively denominated in foreign currency.   I'd argue that the quantity of import in our expense bases means that we should have a higher degree of insulation from the value of the AUD.


AustralianMustachio

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #102 on: February 23, 2015, 09:09:53 PM »
^^ Very interesting points bigchrisb about being exposed to international currencies for international purchasing power. So I guess if one intends to live overseas, they should have a greater proportion of international denominated investments, would you say?

I must say if I had the amount of assets you currently have, seeya later I would be overseas on a massive travelling romp in a minute ;)

bigchrisb

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #103 on: February 23, 2015, 09:20:34 PM »
^^ Very interesting points bigchrisb about being exposed to international currencies for international purchasing power. So I guess if one intends to live overseas, they should have a greater proportion of international denominated investments, would you say?

Agree 100%.

However, even staying in Australia, a large part of my ongoing expenses are foreign currency denominated.   If I take out housing (by buying a house in AUD), about 60% of my remaining costs are non AUD (albeit indirect). I suspect similar would be true for most Australians.  Hence I suspect that having exposure to non AUD assets reduces volatility in real purchasing power, even if it results in increased volatility in nominal AUD terms.

urbanista

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #104 on: February 23, 2015, 09:21:40 PM »
Since for me the balance is strongly in favour of renting, I for one hope the trend changes to be more in line with the rest of the world, and renters have better long term rights and agreements.

Mmm... by "the rest of the world" and "Europe" you mean which countries exactly? Because I know for sure that in Russia and Ukraine the situation with renting is much worse then in Australia. Basically, written agreements are non-existent. The landlord can ask the renter to vacate the property almost immediately.

mostlyeels

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #105 on: February 23, 2015, 09:22:53 PM »
  • Investing in super (retirement) funds. While super is tax effective for now, it isnít accessible to early retirees and, due to likely government manipulation in the near future, is at risk of being more restrictive to access and becoming taxable for future retirees. As such, it is critical to have enough retirement funds outside of super to fund your interim retirement period until preservation age and to mitigate these risks.

How do people think the government (not this one in particular, but really any government) could or would change the way super works?  My stache isn't in super, but I'll hit the current preservation age within 25 years, so super and then aged benefits will provide a nice lift -- assuming they still work the same way.  Will they just cut the tax benefit for new contributions, or on withdrawal?  Or will they move the preservation age a little more?

AustralianMustachio

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #106 on: February 23, 2015, 09:35:27 PM »
Since for me the balance is strongly in favour of renting, I for one hope the trend changes to be more in line with the rest of the world, and renters have better long term rights and agreements.

Mmm... by "the rest of the world" and "Europe" you mean which countries exactly? Because I know for sure that in Russia and Ukraine the situation with renting is much worse then in Australia. Basically, written agreements are non-existent. The landlord can ask the renter to vacate the property almost immediately.

Germany, the Netherlands, other northern European countries I guess.

Don't know anything about Russia and Ukraine

MsRichLife

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #107 on: February 23, 2015, 09:44:17 PM »
I've seen more than a few people make their fortune in Australia through investment property, so it has a track record.
Lately, I have been trying to back-calc where my NW came from. On the surface, as I have a large AA >50% in property, I think people might naturally assume it was through property investment. While the cap gains and income from these properties has no doubt contributed, I suspect it's a relatively small portion of my NW. I expect moreso these have served as forced savings vehicles to help me achieve a higher savings rate than I otherwise would have over the years... Going to crunch the numbers and see, but just to comment that it might be deceptive if people really made their fortune in property (or if they are more a store of wealth).

This is an interesting point. I feel like we've done very well with property over the years. We bought 7 properties in the early 2000's, before the latest boom, and have been selling them off over the last few years. We now have two rentals left and a house that will be our home during FIRE.

I always considered that I'd 'made my fortune' in property, and the boom has certainly contributed. But I've just come to the realisation that it was actually the aggressive pay down of the mortgages associated with those houses that really catapulted my net worth. I do wonder if I would have been saving as aggressively if I didn't have that debt reduction there as a Big Hairy Audacious Goal (BHAG)!

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #108 on: February 23, 2015, 10:25:47 PM »
I think its evident that there are many views on the property vs shares debate, and that its probably not going to be resolved within this thread.  Personally, I'm in the invest in shares camp, and will have the bulk of my investments there.  None the less, a PPOR stacked up for me, when I was able to buy it outright, and while I have a high marginal tax rate.  Its the tax concessions for primary places of residence (no GCT, no tax on imputed rent) that tipped the balance on paper for me.  The intangibles (security of tenure, home pride etc) were a significant bonus.

I have come to the exact same conclusions. Owning my PPOR works for me but past that point I will not invest in real estate.

Perhaps we all need to agree to disagree on the property vs shares debate, as I think there are a lot of other bits of value to be drawn from this thread?

I have no issues with that. Its just when people state property isn't an investment or the returns have and will only ever meet inflation is where I think it goes astray. My parents bought there standard house for $20k and it is now worth over a $1mill. That is a good investment compared to anything,

Hence, to preserve my real purchasing power, I've got a target to increase my international asset exposure, as a large portion of my cost of living is effectively denominated in foreign currency.   I'd argue that the quantity of import in our expense bases means that we should have a higher degree of insulation from the value of the AUD.

Fair points. Personally I'm not sure how much I will invest in OS stock markets.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #109 on: February 23, 2015, 10:38:28 PM »
Maybe from a USA perspective, but back here in Australia investing in our share market has beaten investing in world share markets in our currency, as shown in that ASX report, and achieving an 8.3% post tax return has been barely achievable.

The report looks at a 10 year period, where stocks had the biggest dip in generations, and it still beat 8.3%.  If this worst case scenario was able to do it, I don't think this qualifies as "barely achievable".

past housing returns should count as equally as past share market returns

This shows a gross misunderstanding of the fundamentals of economics.  Using past returns to predict future results, especially on a commodity, simply makes no sense.  The recency bias is evident.  We don't expect stocks and bonds to appreciate because of past returns, we expect them to appreciate, because of things like population growth, productivity, and production.  Your house doesn't do any of that.  It does not grow and multiply.  It cannot compound on itself.  Let's look at the long term housing chart again, this time stopping at the year 2000:



I'd caution not to ignore the black line.  This represents at least 80 years where the value of your home would be steadily declining.  Definitely not where you'd want the majority of your net worth to be.

Now let's look at the green line.  Had you bought in 1950, and held 50 years, you would have seen less than a 1% real return yearly on the value of your home.  Had you bought in 1953, it'd be about a 1.5% real yearly return.  During this span of 50 years, the first two decades would have seen a large drop, then a break even.  0 appreciation.  Starting in 1970, you would have seen 0 appreciation for 18 years.  Starting in 1988, you would have seen 0 appreciation for 10 years.

This is what we expect from a commodity.  The only reason anyone here is even debating this, is because of this part of the graph:



This is speculation, not investing.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #110 on: February 23, 2015, 10:45:18 PM »
Dividends are mathematically equivalent to selling stock (besides any small bonus you might get from frank credits).  If you feel a 4% withdrawal rate is risky, but taking 4% dividends is not, you aren't understanding how stocks work.

I understand that technically what you are stating might be considered correct however my take on it is different to yours. If I only utilize dividends than my stash should last forever.

This is not a "take".  It's simply how stocks and dividends work.  If you had $1,000 in stock A, a dividend stock that pays 4% a year, and $1,000 in stock B, which appreciates at 4% a year, but pays no dividend, they are mathematically the same.  You can either collect the 4% dividend from stock A, or sell 4% of your holdings in stock B each year.

Either way you will never run out of money.  I made an excel sheet that shows this:



Never take a less diversified portfolio, simply for dividends.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #111 on: February 23, 2015, 10:57:22 PM »
If you google Australia versus international shares returns, you'll find that over the very short term ie. the last two years, as the Aussie dollar has dropped and USA share have soared, International shares have well outperformed the Australian share market. However, for at least the 33 years before that, in Australian currency terms, the Australian share market has outperformed international shares over the long term eg. here's a chart from one of the webpages found:



International may all look pretty good to dodge given most of these shares are in his home currency and from companies in his own country, but over the long term from an Aussie perspective it seems you do not get the better ROI you expect from international shares and get greater volatility, amplified by currency movements, and less favourable tax treatment for your trouble. About the only thing going for them is greater portfolio diversity, which is why I am happy to hold some in my stash, but I can also achieve diversity through property, like owning your own home as we have be otherwise discussing in this thread.

If I found a US fund which held 75% financial stocks, and 25% mining stocks, it would look similar to the Australia stock line on that chart.  The fluctuations in currency had a negligible impact here.  Allowing past returns to dictate which sectors you choose to invest in, isn't a wise move. 

dungoofed

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #112 on: February 23, 2015, 11:01:58 PM »
  • Investing in super (retirement) funds. While super is tax effective for now, it isnít accessible to early retirees and, due to likely government manipulation in the near future, is at risk of being more restrictive to access and becoming taxable for future retirees. As such, it is critical to have enough retirement funds outside of super to fund your interim retirement period until preservation age and to mitigate these risks.

How do people think the government (not this one in particular, but really any government) could or would change the way super works?  My stache isn't in super, but I'll hit the current preservation age within 25 years, so super and then aged benefits will provide a nice lift -- assuming they still work the same way.  Will they just cut the tax benefit for new contributions, or on withdrawal?  Or will they move the preservation age a little more?

Every single "philosophy difference" raised in this thread so far deserves its own thread.

In answer to your question, I think "all of the above, and more" is probably the correct answer. Cutting tax benefits and changing the preservation age have both benefits and costs to government and society.

Also it's not necessarily a downhill slippery slope. If you look at Superannuation's short history you can see changes that have worked out well for some people and badly for others.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #113 on: February 23, 2015, 11:04:48 PM »
All this talk about commodities, I can't help but think about gold.  Indeed, the inflation-adjusted graph looks similar:



About 80 years of negative real growth, then a spike.  Unfortunately, gold is a commodity (it just sits there, not producing anything), so it couldn't hold those high prices.  It's speculation, not investing.  If I crop the image a bit, it looks almost like the commodity we're all talking about, today's Australian housing market.


frozzie

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #114 on: February 23, 2015, 11:11:09 PM »
This is speculation, not investing.

Bring on the popcorn, this thread is great !

One "little" thing that could explain our politicians willingness to value the "house prices are going up, everyone gets rich!" moto :
http://www.macrobusiness.com.au/2014/08/aussie-politicians-300m-property-portfolio/

Personally I like the perceived safety of owning the roof over my head (or renting to the bank) but the current increase clearly outperforms inflation/salary increase by a long shot ... clearly not sustainable.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #115 on: February 23, 2015, 11:13:19 PM »
There has never been a time in history where this could be said of the stock market.  The amount of risk is just not in-line with the possible gains.

This is another statement where you are amending the data and coming to your own conclusions. I have no issues with your belief system however I think you should recognize its all an opinion and that your opinion is not backed up via the data. My parents generation for instance have become rich via property. That might change in my generation and in my children's generation however this is predicting the future.

There is no opinion in that statement.  There has never been a time in history where holding stocks over about 15 years would have resulted in a negative real return.  This can not be said of the housing market.  Your parents generation buying property has no relevance to that statement.

Ozstache

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #116 on: February 23, 2015, 11:24:05 PM »
You raise some interesting points in this thread dodge, but when you repeatedly keep ignoring some of the facts presented to you and use historical data only when it suits your argument then it is no longer a constructive discussion. A bigcrisb suggests, it is time to move on and just agree to disagree.

dungoofed

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #117 on: February 24, 2015, 12:00:48 AM »
Hi Dodge

This shows a gross misunderstanding of the fundamentals of economics.  Using past returns to predict future results, especially on a commodity, simply makes no sense.  The recency bias is evident.  We don't expect stocks and bonds to appreciate because of past returns, we expect them to appreciate, because of things like population growth, productivity, and production.  Your house doesn't do any of that.  It does not grow and multiply.

Regarding appreciation due to population growth, this also affects housing though as you point out it's more akin to a commodity in that it is driven by supply/demand. But it doesn't necessarily follow that appreciation due to population growth doesn't exist nor that it implies a bubble.

The challenge is in working out the respective coefficients for capital appreciation due to population growth for stocks vs property. If, for example, a government was committed to only zoning land for residential use to the extent that prices continued to increase over time then whether you agree with the policy or not the price will continue to increase.

(edit: please feel free to ignore if you think this conversation has run its course)

deborah

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #118 on: February 24, 2015, 12:03:00 AM »
I am not sure that people in general in this thread have been arguing for or against stocks/investment property. Most (if not all) appear to be biased in their actual investments toward stocks.

There appears also to be a general consensus that people in this thread prefer to own a PPOR rather than rent - and most (if not all) appear to be doing this. Whether this is best use of your financial resources appears to be queried by some people.

I think dodge has poor understanding of the breadth of the changes in the Australian financial system which occurred around the time of the Hawke/Keating governments. As a result, it is difficult to compare shares, property and banking over the whole period dodge specified. These changes include the introduction of foreign banks, imputation credits, credit cards, negative gearing, superannuation... Housing in particular also changed incredibly because of the immigration policies brought in by Robert Menzies after the second world war. Before that there were very few migrants, and since then we have become a country where 49% of people were born overseas. The housing chart that dodge includes vividly shows the difference that these changes have made - almost to the year, you can see each change.

This is a fantastic thread, and I am really enjoying it! Thanks for continuing to steer it Ozstache.

To me, current discussion about superannuation changes tend to be concentrating on what to do when the superannuation is in pension phase, how to stop people with $2m in super getting the pension, and whether people deserve to get "free" superannuation money when they take it out. This all can be put together as - "the government should balance the budget by raiding super" - or some other phrase depending upon your point of view.
« Last Edit: February 24, 2015, 12:04:45 AM by deborah »

HappierAtHome

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #119 on: February 24, 2015, 12:21:48 AM »
This is a fantastic thread, and I am really enjoying it! Thanks for continuing to steer it Ozstache.

+1. Thanks Ozstache.

Commenting to follow.

marty998

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #120 on: February 24, 2015, 12:35:23 AM »
  • Investing in super (retirement) funds. While super is tax effective for now, it isnít accessible to early retirees and, due to likely government manipulation in the near future, is at risk of being more restrictive to access and becoming taxable for future retirees. As such, it is critical to have enough retirement funds outside of super to fund your interim retirement period until preservation age and to mitigate these risks.

How do people think the government (not this one in particular, but really any government) could or would change the way super works?  My stache isn't in super, but I'll hit the current preservation age within 25 years, so super and then aged benefits will provide a nice lift -- assuming they still work the same way.  Will they just cut the tax benefit for new contributions, or on withdrawal?  Or will they move the preservation age a little more?

I think you'll see the reintroduction of a 15% tax on pension earnings, or at least a 10% tax. The calls for a cut in concessions are just getting too loud. It's almost as if the government has deliberately ruled out everything else and tried to steer the debate here, without explicitly saying so, so they cannot be slammed in the polls for it.

I don't believe any government will go back to the days of Reasonable Benefits Limits and the like. Good times for accountants, not so much for anyone else. Horrendously complex system.

FFA

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #121 on: February 24, 2015, 01:43:18 AM »
I've seen more than a few people make their fortune in Australia through investment property, so it has a track record.
Lately, I have been trying to back-calc where my NW came from. On the surface, as I have a large AA >50% in property, I think people might naturally assume it was through property investment. While the cap gains and income from these properties has no doubt contributed, I suspect it's a relatively small portion of my NW. I expect moreso these have served as forced savings vehicles to help me achieve a higher savings rate than I otherwise would have over the years... Going to crunch the numbers and see, but just to comment that it might be deceptive if people really made their fortune in property (or if they are more a store of wealth).

This is an interesting point. I feel like we've done very well with property over the years. We bought 7 properties in the early 2000's, before the latest boom, and have been selling them off over the last few years. We now have two rentals left and a house that will be our home during FIRE.

I always considered that I'd 'made my fortune' in property, and the boom has certainly contributed. But I've just come to the realisation that it was actually the aggressive pay down of the mortgages associated with those houses that really catapulted my net worth. I do wonder if I would have been saving as aggressively if I didn't have that debt reduction there as a Big Hairy Audacious Goal (BHAG)!
Hi MsRichLife, yup I am having this same realization. Seems we have followed a similar path, we also bought a handful of properties since late 90's. Have not yet offloaded any... I have been planning to in the coming years to stagger CGT, but the main challenge is where to reinvest the funds, since everything seems expensive nowadays !

Looking at my numbers so far, less than a quarter of our net worth came from the property CG and net income over past 15 years. At least two thirds of NW came from wages/salary. Will post details on blog in more detail when time allows... But reinforces my view the key factors for FI are 1) saving rate, 2) earning rate. Investment returns (as much as we all like to enhance them) are a distant third.

redchair

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #122 on: February 24, 2015, 07:32:50 AM »
Quote
The US market is roughly 50% of the world, but even here the similar argument is almost always shot down, "The S&P500 does half of it's business overseas, that's enough international diversification for me!"  My typical response is, "The dozen large companies in NY state are closely linked to the global economy, why shouldn't I just buy them? GE often follows movements in the S&P 500, why not just own one stock?

If Samsung beats Apple in the multi-billion smartphone business, how much will it help me that Apple also sells phones in South Korea?  Why would I want to own Chevy and Ford and skip Honda and Toyota, or BMW and Mercedes, if you could own them all at low cost?

It is nonsense to think that correlation is always so strong, or that correlation alone is an excuse to not own all stocks in a market. Indexing makes sense globally as much as it makes sense domestically.  The currency risk does not outweigh the diversification benefits."

The general consensus is that US investors should invest internationally.  If those arguments don't fly for the incredibly diverse 50% of the world US market, you can be sure they don't fly for the 2 sector 2% of the world Australian market.

Regarding dividends, dividends are equivalent to selling stock (except the small franking bonus for Australian investors).  Making your portfolio even less diverse, for the sake of capturing more dividend stocks, in your early retirement portfolio shows a grave misunderstanding of how stocks work.

Diversification provides a diminishing marginal benefits. Without taking into account correlations, betas, etc (which in practice are not very useful anyway as they are historical), holding two stocks is twice as diversified as one, three is 50% more diversified than two, and so on.  Holding the ASX50 gives you >99% of the diversification of the ASX200. But yes international diversification gives you an extra benefit again, but,if you already hold a diversified ASX portfolio, that benefit is not huge.  I suggest people do hold international index funds.  it is the proportion that you suggest that I disagree with.

The reason to hold more of your home currency's market is because that is where you spend your money, not because it is big or important from any objective perspective.  Earning money in one currency and spending in aother is a very risky proposition.  Many, many businesses learnt this during Australia's high interest rate period in the 90s.  The banks offered yen denominated loans at very low japanese interest rates.  When the A$ fell against tthe yen, businesses earning in A$ and spending in Yen were doomed.

Even in an open economy like Australia, about 80% of spending is on Australian goods and services.  Probably more if you are living a Mustachian lifestyle, so it is safest to earn about 80% of your income in A$.  In the relatively rare situation that the AU market tanks while OS markets grow, that 20% or so exposure will give you the diversification required.  However in the event of high AU inflation and low US/Euro inflation, you will doubly suffer if you hold majority OS income producing assets.  of course there is no magic number but I urge you to consider whetehr you may be overexposed to curency risks based uon your *spending* currency.

I apreciate your point that dividends and capital growth are equivalent.  Superficially I agree, but I think it is far more nuanced than that.  There are good reasons to prefer cash dividends to company profit statements in many companies. Also,in AU, the franking benefit is pretty huge.  But I also hold growth companies in my portfolio that pay no dividend at all.
« Last Edit: February 24, 2015, 02:18:31 PM by redchair »

aspiringnomad

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #123 on: February 24, 2015, 11:45:38 AM »
Some exposure to real estate, particularly for the tax and intangible benefits already mentioned here is certainly appropriate. But Dodge is right that some folks here are exhibiting recency bias in their expected returns from owning their home. My favorite measure of whether you should buy or rent is the price to rent ratio. Obviously this varies by submarket within each country but overall in Australia it is currently well above the historical norm (it's even worse in NZ and Canada). That signals to me that the housing market has deviated from fundamental value and that there is some large segment of the market basing purchase decisions solely on expectations of future price growth above inflation. If so, that's speculation and I'd be very wary of buying into it.

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #124 on: February 24, 2015, 01:46:53 PM »
But Dodge is right that some folks here are exhibiting recency bias in their expected returns from owning their home.

I don't believe that this is the case at all. I think the median poster on this thread has said the following:-

1. In general we like to own our PPOR.
2. After that point we prefer to diversify into stocks.

I don't think that anyone is stating that the investment returns on property are better than stocks or that we believe that housing prices will continue to increase as per the past.

I also think that a key point was made above in that most peoples wealth comes from saving money and not from trying to eek out a little higher returns via stocks over housing.

I personally don't believe that the path that I have chosen is the quickest path to FI and ER but its a path that I am comfortable with. If I wanted to make my path quicker I don't believe that investing in stocks over my PPOR would make a significant difference. To make it a quicker path I have options such as being more frugal, moving overseas to a lower COL country or moving to a lower COL area in Australia.

My favorite measure of whether you should buy or rent is the price to rent ratio. Obviously this varies by submarket within each country but overall in Australia it is currently well above the historical norm (it's even worse in NZ and Canada). That signals to me that the housing market has deviated from fundamental value and that there is some large segment of the market basing purchase decisions solely on expectations of future price growth above inflation. If so, that's speculation and I'd be very wary of buying into it.

This is a separate debate. I think it is though very much like picking the stock market in that it is hard to do. I think property in Australia is over valued as well however I've been stating that for years and in that time property has increased in value. I bought a house say 5 years ago and it has been a good investment. If the market crashes I think it will still be a good investment because my mortgage is close to paid off and I can hold my house for a long time.

« Last Edit: February 24, 2015, 01:50:06 PM by steveo »

Ozstache

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #125 on: February 24, 2015, 02:49:11 PM »
But Dodge is right that some folks here are exhibiting recency bias in their expected returns from owning their home.

If you are referring to me, please reread my posts to see that while I discuss previously healthy housing market returns I do not propose using anything greater than inflation in future house growth rate calculations, as I don't believe the current trend is sustainable.



Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #126 on: February 24, 2015, 11:23:23 PM »
Holding the ASX50 gives you >99% of the diversification of the ASX200. But yes international diversification gives you an extra benefit again, but,if you already hold a diversified ASX portfolio, that benefit is not huge.

In order to measure how diversified you are, you must first consider the lens you're looking through.  The state of Texas has a bigger economy than all of Australia, I don't think anyone would consider themselves diversified if they only owned Texas stocks.  87% of Australia's economy is made up of two sectors.  If a US investor owns 100% stock, with 50% in REITS and 50% in Healthcare, they would have just about as many stocks as are in the ASX200, a much better dividend yield than the overall market, and they even would've beat the market (blue line) over the last 20 years:



Does anyone think owning 100% stock, in a retirement portfolio, containing only two sectors, is diversified?

I understand you suggest people own international stock, but I'm using this example to make a larger point.  It seems the only reason the Australian's in this thread are against further diversification, is to avoid currency risk.  This is a valid concern, but as yet hasn't been quantified.  Let's see if we can quantify it.  Here's the AUD/USD exchange rate from 2000-2015:



When the AUD/USD goes up, international stocks in terms of the AUD will fall.  When the AUD/USD goes down, international stocks in terms of the AUD will rise.  In other words, if you're living in Australia and invested internationally, your portfolio profits as the AUD/USD declines.  Let's see how that played out in actual stock returns.  First I will show the Gross Returns chart for the MSCI World portfolio in AUD, then the same chart in USD (Green line in both charts):





AUD portfolio annual performance:



USD portfolio annual performance:



Sources:
http://www.msci.com/resources/factsheets/index_fact_sheet/msci-world-ex-australia-index-aud-gross.pdf
http://www.msci.com/resources/factsheets/index_fact_sheet/msci-world-ex-usa-index.pdf

What do we see?
  • AUD portfolio ended at 145.87, while the USD portfolio ended at 178.12, about a 1% annualized difference over 15 years.
  • Performance since 1994 has been almost identical.  7.01% vs 7.28% annualized
  • 10 year performance has been almost identical.  6.61% vs 6.66% annualized
  • The fluctuating currency both helped and hurt the AUD during this period.  A steep rise in the AUD/USD in 2003 left the AUD investor flat for the year, while the USD investor gained 33%
  • A steep decline in the AUD/USD in 2008 cushioned the blow of the crash for the AUD investor.  The AUD investor only lost 24% in 2008, while the USD investor lost 40%
  • A decline in the AUD/USD in 2013-2014 gave the AUD investor a 63% gain during these years, while the USD investor only gained 32%
  • The AUD portfolio had much less fluctuation

If these currency fluctuations concern you, there are a few things to consider:
  • With an 80/20 stock/bond portfolio, you can rebalance from Australian bonds (I don't recommend international bonds) into global currencies to take advantage of any currency declines which typically revert to the mean.
  • You can remove currency risk almost entirely, by using Vanguard's MSCI International Shares Index ETF:

    https://www.vanguardinvestments.com.au/institutional/jsp/investments/etf-detail/etfdetailVGADHE.jsp

    Which they say is, "relatively unaffected by currency fluctuations".  Here's MSCI's overview page on how it works:

    http://www.msci.com/products/indexes/strategy/hedging_currency/hedged/

    I'm not sure yet how I feel about removing currency diversification from an international portfolio.  Investing theory is that hedging reduces diversification benefit. I forget the formal explanation - my simple take is that if long term Australia goes down the tubes vs the world, unhedged international will be a savior.  But it is much more unlikely that Australia will wildly out-perform the world.

Hopefully this helps remove any concerns of currency risk on your portfolio.  While it might be hard to see from these charts how international diversification can help the Australian investor, please consider this 25 year Japan chart before making any final decisions..


Ozstache

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #127 on: February 25, 2015, 12:34:34 AM »
  • Investing in super (retirement) funds. While super is tax effective for now, it isnít accessible to early retirees and, due to likely government manipulation in the near future, is at risk of being more restrictive to access and becoming taxable for future retirees. As such, it is critical to have enough retirement funds outside of super to fund your interim retirement period until preservation age and to mitigate these risks.

How do people think the government (not this one in particular, but really any government) could or would change the way super works?  My stache isn't in super, but I'll hit the current preservation age within 25 years, so super and then aged benefits will provide a nice lift -- assuming they still work the same way.  Will they just cut the tax benefit for new contributions, or on withdrawal?  Or will they move the preservation age a little more?

Every single "philosophy difference" raised in this thread so far deserves its own thread.

In answer to your question, I think "all of the above, and more" is probably the correct answer. Cutting tax benefits and changing the preservation age have both benefits and costs to government and society.

Also it's not necessarily a downhill slippery slope. If you look at Superannuation's short history you can see changes that have worked out well for some people and badly for others.

FYI, there was some discussion on this earlier in the thread. See: http://forum.mrmoneymustache.com/investor-alley/australiausa-mustachian-philosophy-differences/msg564052/#msg564052

AustralianMustachio

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #128 on: February 25, 2015, 04:14:20 AM »
Thanks once again everyone for all the stimulating discussion.

Thank you Dodge for your external viewpoint and all your research and charts! Im curious, from your perspective, within an indexed stock portfolio, what allocation would you have to Australia vs the rest of world, if you were an Australian investor?

redchair

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #129 on: February 25, 2015, 07:17:42 AM »
Hang on Dodge, didn't you argue that the very high correlation of the ASX with major international markets was a poor reason to regard international diversification benefit as marginal?  But high correlation of a world index denominated in two differnt currencies is good evidence that currency risk is not signifcant?

I concede that in the accumulation phase it is not as important to invest in your own currency because you are earnng your spending money and any A$ rises mean you can buy more OS shares that will (hopefully) recover in A$ terms before you need to sell them - this is what your data shows is possible (but is does not prove that it will happen). 

But I want to structure my protfolio fairly closely to the drawdown phase structure because making changes later is likely to be very expensive, especially due to CGT.  During draw down these currency fluctuations can cause enormous damage.  There is a value change of about 120% shown in the decade of A$/US$ exchange rate you show!  I am not comfortable with the possibility of having to draw down at double my planned rate, potentilly for periods of years. Or more than doube - I can't predict the future very well.

I think I can achieve sufficient diversification while keepig currency risk managanle.  Sufficient diversification is not perfect; but sufficient is enough.  The size of the economy is not important in this regard (if I earn a million US$ in Fiji it's still worth the same).

There are more than just mining and finance companies on the ASX.  One is not bound to the index; A dollar earnt in a mid cap is indistuinguishable from one earned from BHP.  I hold telco, retail, health care, education, IT and non mining energy companies.  I think I need more but I am getting there slowly.  The index is mining and finance heavy but that (and VHY) is my only exposure to these sectors.  I am light on AU manufacturing but I get major manufacturers in my US and EU indexes and I prefer to buy companies that are likely to make profits :)

I agree that hedging defeats much of the value of international diversificaion and usually adds to costs producing worse returns.  I don't think you're necessarily wrong, I just dont think you can bee so certain you are right.  And even if you are I would not feel comfortable with the currency risk of majority foreign holdings.  Parachuting is probably safer than driving, but do not want to parachute down to the shops!

dungoofed

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #130 on: February 26, 2015, 06:25:25 PM »
Here's another quick one:

Australian: budget deficit = economy is in the shitter (maybe 95% of Australians believe this)
American: budget deficit = government is fixing the economy (maybe 60% of Americans believe this)

This affects the investment choices of Australians, as well as political/fiscal policy of the government.

aspiringnomad

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #131 on: February 26, 2015, 10:49:24 PM »

This is a separate debate. I think it is though very much like picking the stock market in that it is hard to do.

I just read back through the thread and it's true that I cherry picked the optimism on house prices from one or two posters. Not the majority here. Apologies.

As for the statement quoted above, I think valuing real estate is very different from timing the stock market. Real estate prices should at least roughly reflect their fundamental value, i.e., rent. When that relationship gets completely out of whack, as has happened in Australia, then you have to at least consider the possibility of a bubble when buying into it. Stock prices are much more difficult to pin down because of varying market opinions on future productivity and earnings growth. Innovation doesn't do much for a house. But it does a lot for shares of innovative companies. Dodge has already explained much more convincingly and eloquently why stocks are a more dynamic marketplace than real estate.

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #132 on: February 27, 2015, 12:45:50 AM »

This is a separate debate. I think it is though very much like picking the stock market in that it is hard to do.

I just read back through the thread and it's true that I cherry picked the optimism on house prices from one or two posters. Not the majority here. Apologies.

As for the statement quoted above, I think valuing real estate is very different from timing the stock market. Real estate prices should at least roughly reflect their fundamental value, i.e., rent. When that relationship gets completely out of whack, as has happened in Australia, then you have to at least consider the possibility of a bubble when buying into it. Stock prices are much more difficult to pin down because of varying market opinions on future productivity and earnings growth. Innovation doesn't do much for a house. But it does a lot for shares of innovative companies. Dodge has already explained much more convincingly and eloquently why stocks are a more dynamic marketplace than real estate.

I don't buy this. Bubbles happen everywhere and its because sentiment comes into the picture. It happens to art, stocks, tulips, houses, gold and probably lots of other stuff. Predicting where we are at is really hard. I trade foreign currency. I now tend to look for something looking like it has gone too far one way. I then buy in the opposite direction and ignore it for a longish time.

Basically I think that predicting the future is hard and that markets no matter what they are based upon have the human element in them and that is what causes booms and busts.

At this point in the housing market I think its a big call to state that the market will definitely fall. It could but the demand is still there and the economy is still strong. Even if the economy does tank everyone needs a house to live in so as long as you aren't over leveraged and you have an income coming in you should be fine.
« Last Edit: February 27, 2015, 02:05:52 AM by steveo »

andystkilda

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #133 on: February 27, 2015, 06:57:47 AM »

I don't buy this. Bubbles happen everywhere and its because sentiment comes into the picture. It happens to art, stocks, tulips, houses, gold and probably lots of other stuff. Predicting where we are at is really hard. I trade foreign currency. I now tend to look for something looking like it has gone too far one way. I then buy in the opposite direction and ignore it for a longish time.

Basically I think that predicting the future is hard and that markets no matter what they are based upon have the human element in them and that is what causes booms and busts.

At this point in the housing market I think its a big call to state that the market will definitely fall. It could but the demand is still there and the economy is still strong. Even if the economy does tank everyone needs a house to live in so as long as you aren't over leveraged and you have an income coming in you should be fine.

I agree with these sentiments.

We've made a play on oil because our time horizon for holding is quite open (1 week - 3 years), so we're happy to wait and we're confident the market will recover at some point in that time.

Regarding the housing market, I also agree. We only look to buy properties in areas with very low rental vacancy rates, and always with at least a 20% deposit. This makes if very unlikely for a property to be more than slightly negatively geared - meaning we would be able to hold these properties and ride out even a lengthy downturn (if that happens in the near future).

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #134 on: February 27, 2015, 11:36:42 PM »
Thanks once again everyone for all the stimulating discussion.

Thank you Dodge for your external viewpoint and all your research and charts! Im curious, from your perspective, within an indexed stock portfolio, what allocation would you have to Australia vs the rest of world, if you were an Australian investor?

I'm not sure.  It's hard to go wrong copying Vanguard, and their LifeStrategy fund for Australia is 50% domestic 50% international:



https://www.vanguardinvestments.com.au/retail/ret/investments/funddetailHIG.jsp

I'd consider that the baseline, I wouldn't do any less international than 50%.  But 50% in Australia is 25x higher than the 2% it actually represents, that's a lot of risk in a single country with a comparatively tiny economy.  The only reason to hold a less diverse portfolio like this, is to reduce currency risk.  But if you can effectively eliminate currency risk with Vanguard's Hedged International ETF, I'm having trouble seeing a strong reason to not cap-weight equities, and stay at 2% Australia.  Or maybe use the international hedged fund for 49% of my equities, the normal international fund for 49%, and the Australia stock fund for the last 2%.

Either way 20% of my portfolio would be in Australian bonds, so that's a substantial amount of AUD exposure there.  Not to mention the job/emergency fund/savings account/house, and the all-important super (retirement) fund.  So I think I'd be comfortable with that.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #135 on: February 27, 2015, 11:44:52 PM »
Hang on Dodge, didn't you argue that the very high correlation of the ASX with major international markets was a poor reason to regard international diversification benefit as marginal?  But high correlation of a world index denominated in two differnt currencies is good evidence that currency risk is not signifcant?

I didn't use the charts to show high correlation, I used the charts to show the impact of currency risk.  AUD/USD doubled, dropped about 40%, rose back up, then dropped about 35%.  What impact did that make on the MSCI world index returns had you held in either AUD or USD?  Not much.  This is not evidence that currency risk isn't significant, it's evidence that relatively large currency swings can have a negligible difference.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #136 on: February 27, 2015, 11:57:38 PM »
But I want to structure my protfolio fairly closely to the drawdown phase structure because making changes later is likely to be very expensive, especially due to CGT.  During draw down these currency fluctuations can cause enormous damage.  There is a value change of about 120% shown in the decade of A$/US$ exchange rate you show!  I am not comfortable with the possibility of having to draw down at double my planned rate, potentilly for periods of years. Or more than doube - I can't predict the future very well.

The 15 years shown had about a 1% difference in return.  The previous 10 years had a 0.05% difference in return.  The previous 21 years had a 0.27% difference in return.  This is all within the range of expected stock returns over the long term.  If this type of fluctuation makes you uncomfortable, you might need a high allocation of bonds to help smooth the ride, and at that point it won't really mater how much international stocks you have.  The number will be too low to make a difference.

dungoofed

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #137 on: February 28, 2015, 01:52:31 AM »
Hang on Dodge, didn't you argue that the very high correlation of the ASX with major international markets was a poor reason to regard international diversification benefit as marginal?  But high correlation of a world index denominated in two differnt currencies is good evidence that currency risk is not signifcant?

I didn't use the charts to show high correlation, I used the charts to show the impact of currency risk.  AUD/USD doubled, dropped about 40%, rose back up, then dropped about 35%.  What impact did that make on the MSCI world index returns had you held in either AUD or USD?  Not much.  This is not evidence that currency risk isn't significant, it's evidence that relatively large currency swings can have a negligible difference.

What about if you're DCA over that period?

FFA

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #138 on: February 28, 2015, 08:47:05 AM »
Thanks once again everyone for all the stimulating discussion.

Thank you Dodge for your external viewpoint and all your research and charts! Im curious, from your perspective, within an indexed stock portfolio, what allocation would you have to Australia vs the rest of world, if you were an Australian investor?

I'm not sure.  It's hard to go wrong copying Vanguard, and their LifeStrategy fund for Australia is 50% domestic 50% international:



https://www.vanguardinvestments.com.au/retail/ret/investments/funddetailHIG.jsp

I'd consider that the baseline, I wouldn't do any less international than 50%.  But 50% in Australia is 25x higher than the 2% it actually represents, that's a lot of risk in a single country with a comparatively tiny economy.  The only reason to hold a less diverse portfolio like this, is to reduce currency risk.  But if you can effectively eliminate currency risk with Vanguard's Hedged International ETF, I'm having trouble seeing a strong reason to not cap-weight equities, and stay at 2% Australia.  Or maybe use the international hedged fund for 49% of my equities, the normal international fund for 49%, and the Australia stock fund for the last 2%.

Either way 20% of my portfolio would be in Australian bonds, so that's a substantial amount of AUD exposure there.  Not to mention the job/emergency fund/savings account/house, and the all-important super (retirement) fund.  So I think I'd be comfortable with that.
FWIW... Im doing 50/50 domestic / int.
 and the international part split 25 hedged/75 unhedged....

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #139 on: February 28, 2015, 12:02:20 PM »
Hang on Dodge, didn't you argue that the very high correlation of the ASX with major international markets was a poor reason to regard international diversification benefit as marginal?  But high correlation of a world index denominated in two differnt currencies is good evidence that currency risk is not signifcant?

I didn't use the charts to show high correlation, I used the charts to show the impact of currency risk.  AUD/USD doubled, dropped about 40%, rose back up, then dropped about 35%.  What impact did that make on the MSCI world index returns had you held in either AUD or USD?  Not much.  This is not evidence that currency risk isn't significant, it's evidence that relatively large currency swings can have a negligible difference.

What about if you're DCA over that period?

According to my calculations, someone adding $100 a year to the USD MSCI World from Jan 2000 to Jan 2015, would end up with $2,608.

Someone adding $100 a year to the AUD MSCI World from Jan 2000 to Jan 2015, would end up with $2,434.

A difference of about 7% total, or about 0.48% annualized.

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #140 on: February 28, 2015, 04:49:01 PM »
According to my calculations, someone adding $100 a year to the USD MSCI World from Jan 2000 to Jan 2015, would end up with $2,608.

Someone adding $100 a year to the AUD MSCI World from Jan 2000 to Jan 2015, would end up with $2,434.

A difference of about 7% total, or about 0.48% annualized.

This is a funny one though considering that the USD has just gained significantly over the AUD. I wonder how much of these returns are FX related rather than stock related. If so that changes the picture considerably. The best way to diversify may be to leverage the FX market.

The details are always important. You need to make sure that you aren't just cherry picking results to make out that your approach is right.

dungoofed

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #141 on: February 28, 2015, 07:05:23 PM »
Hi Dodge  - sorry mate I didn't mean to use you as my personal calculator but appreciate you taking the time.

deborah

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #142 on: February 28, 2015, 07:12:40 PM »
There's an interesting article in Fairfax today - http://www.canberratimes.com.au/comment/surge-expected-of-older-people-buying-their-first-home-20150228-13qjdh.html - about renting vs owning in retirement. The author assumes the younger person of today has a reasonable amount in super and rents. When she reaches retirement age, it makes sense to become a home owner, so that she receives the pension and is much better off.

dungoofed

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #143 on: February 28, 2015, 07:48:29 PM »
LOL oops!

deborah

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #144 on: March 01, 2015, 01:35:36 AM »
The Gratton Institute is putting out a book on Australian Cities tomorrow - how they are broken and what can be done to fix them. The article I read about it in http://www.canberratimes.com.au/victoria/melbournes-planning-disaster-jobs-boom-in-cbd-while-affordable-housing-grows-ever-outwards-in-suburbs-20150301-13oksj.html has a few maps of where jobs are in Melbourne, where people live... very interesting stuff. It tends also to show some reasons why Australian house prices are so high.

deborah

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #145 on: March 02, 2015, 07:22:26 AM »
One other difference that is worth noting is the aged pension. This has provisions that allow you to get a pension while you are living overseas. The provisions have recently changed in a lot of ways, however you basically need to be an Australian resident when you apply, and to have lived for 35 years in Australia (although if it is less there is a pro-rata). The problem for early retirees is that you may not qualify for residency, as they take a dim view of people coming back just to qualify for residency, according to Ron Bennetts.

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« Reply #146 on: March 11, 2015, 05:08:24 AM »
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qwerty8675309

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #147 on: March 11, 2015, 05:43:31 AM »
Subscribing too!

quidgy

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #148 on: March 11, 2015, 05:34:47 PM »
Also subscribing

Murdoch

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #149 on: March 12, 2015, 04:02:47 AM »
Just read the whole thread. Great discussion. Thanks to those who have contributed.
I read Bogle's book, along with the 4 Pillars of Investing, and then spent about a year or more on the Bogleheads forum before finding MMM and eventually this forum here. Only this forum has enough Aussie input/involvement to provide meaningful and interesting Aussie related posts and threads such as this one, for which I am grateful.

Murdoch