Author Topic: Australia/USA Mustachian Philosophy Differences  (Read 54775 times)

dungoofed

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #50 on: February 22, 2015, 08:30:50 PM »
I've never really looked into real estate as an investment personally. From what I understand though the Australian property market has been propped up somewhat due to immigration policy over the past several decades. These immigration policies have been forced to the forefront in recent years, but I wouldn't bet on the Australian Government changing anything that would affect the trajectory of housing prices any time soon. The whole thing is massively political. Even something like getting rid of negative gearing, no government would dare suggest it these days.

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #51 on: February 22, 2015, 09:12:32 PM »
The whole thing is massively political. Even something like getting rid of negative gearing, no government would dare suggest it these days.

Correct. I'd add that even if it is in the interest of the Australia people as a whole for property to decrease in cost and all that was being suggested was to remove some of the financial benefits of owning property that means nothing to the political parties as they don't want to risk losing votes.

Change also might not affect property prices. Immigration plus a cultural bias towards property investment is a hard thing to mitigate against.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #52 on: February 22, 2015, 09:44:13 PM »
2.  Expecting a higher than inflation return, from an asset class which over the long term rises only with inflation, is a recipe for disaster.  If the stock market drops in value you still have your stocks.  And your bonds.  Don't trick yourself into thinking your house is an investment.  It's not.  It can act as an inflation hedge, and it can make sense to buy instead of rent in some areas, but it's not part of your investment portfolio.

I don't believe that these comments are really accurate. I'm not sure that housing has returned historically the rate of inflation. Housing has made people rich in Australia.

As for your house not being an investment of course it is. If I sell my house for $1 million dollars does that money count as an investment ? I'm not stating that you count it as part of your FI asset portfolio but its definitely an investment. The question is really how good of an investment is housing. I'm not sure about this however I think owning the house you live in has several advantages over renting. On the flip side I can't see myself ever buying an investment property. I don't believe it makes sense in Australia.

3.  Why would you need an additional buffer?  When the 4% rule is calculated, there is no additional buffer, and it works out fine.  This is the whole point of the Trinity Study, to determine a worst-case-scenario withdrawal rate.  The vast majority of retirement years can support a higher than 4% withdrawal rate, the 4% is the buffer.

This is a tougher one. My understanding from the above posts is that the 4% wr does not provide a 95% or above success for a retirement equal to 40 years if you have a 50/50 stock bond asset allocation. Therefore you need to have an asset allocation of 75% stocks and 25% bonds/cash. Having a different asset allocation increases your risk of some form of failure. For those of use looking to retire for longer than 40 years I think we need some increased buffer. I can see your point on this but I suppose it comes down to how each of us feel with regards to the risk and our retirement portfolio.

Just because something is expensive, and fluctuates in value, doesn't make it an investment.



There have been entire decades, multiple decades, where home prices in Australia decreased when taking inflation into account.  One of those "lost decades" just ended in 1999.  The one starting around 1974 lasted almost 2 decades.  The one in 1950 lasted 2 decades, the one from the beginning of the chart lasted at least 80 years...etc.  It looks like the latest boom started right in-line with the last US boom, which has already fallen in-line.  How long until the Australian housing market follows?

You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.  There is no economic reason for a commodity to grow faster than inflation.

Even if someone bought a house in 1975, and held to today, they would only go from 150 to 350 on the chart.  A 2.3x increase.  The inflation adjusted stock market has grown 20x since 1975.

"Having a different asset allocation increases your risk of some form of failure. For those of use looking to retire for longer than 40 years I think we need some increased buffer."

Historically speaking, have a higher stock allocation decreases chances of failure, since the main source of failure for a long retirement (40+ years) is inflation, and stocks are the best way to combat that.
« Last Edit: February 22, 2015, 09:47:24 PM by Dodge »

FFA

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #53 on: February 22, 2015, 10:08:00 PM »
You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.
while it's sitting there, it provides shelter which can be contracted for rental income. unlike the gold, that just sits there...

dungoofed

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #54 on: February 22, 2015, 10:19:25 PM »
Just going to jump in and say that this is EXACTLY the kind of difference in thinking I was hoping we'd see.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #55 on: February 22, 2015, 10:26:10 PM »

You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.
while it's sitting there, it provides shelter which can be contracted for rental income. unlike the gold, that just sits there...

Correct. Rentals are investments. Not the house you live in.

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #56 on: February 22, 2015, 10:29:42 PM »
Just because something is expensive, and fluctuates in value, doesn't make it an investment.

Yes it does. Art can be an investment. Commodities are definitely investments. You don't get to define what is an investment.

There have been entire decades, multiple decades, where home prices in Australia decreased when taking inflation into account.  One of those "lost decades" just ended in 1999.  The one starting around 1974 lasted almost 2 decades.  The one in 1950 lasted 2 decades, the one from the beginning of the chart lasted at least 80 years...etc.  It looks like the latest boom started right in-line with the last US boom, which has already fallen in-line.  How long until the Australian housing market follows?

I have no idea if property will continue to rise. It doesn't even bother me but the same thing can occur in stocks.

You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.  There is no economic reason for a commodity to grow faster than inflation.

I view commodities as investments. I actually like commodities as a hedge against all sorts of financial stresses on the global financial system. Housing though is better because it does produce something. If you live in it it provides shelter. If you rent it out you receive a rental income. Its much more like a stock than it is like a commodity but you can keep your opinion on housing as it doesn't bother me.

Even if someone bought a house in 1975, and held to today, they would only go from 150 to 350 on the chart.  A 2.3x increase.  The inflation adjusted stock market has grown 20x since 1975.

Really. That might be the case for your statistics but its not the case for my parents. They bought their house probably about 1975 (maybe a little later). They purchased it for $20k. Its now worth I would think at least $1mill. That beats stocks no questions. That is just in a standard area of Sydney. I really doubt that they are unusual and I suggest you go back and check your figures. They have spend money on a pool, an extension and upkeep but still the performance of their house must be the best investment they have purchased. Again I bet that they aren't the only ones who have done that.

Historically speaking, have a higher stock allocation decreases chances of failure, since the main source of failure for a long retirement (40+ years) is inflation, and stocks are the best way to combat that.

I get this. My problem with what you are stating is that you aren't taking into account any risk with regards to being 100% stocks over that time period. Once you are 100% allocated to a particular market you face risks with any financial crisis with regards to that market.

I think you have a massive bias towards stock based investment vehicles. I prefer stocks as well but I prefer stocks because they have certain characteristics that other investments don't have and that is mainly based around franked credits and the fact I can invest with much smaller amounts without going into debt (margin included).

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #57 on: February 22, 2015, 10:33:28 PM »
Correct. Rentals are investments. Not the house you live in.

Just to clarify this. The rental income less the cost of ownership is exactly what you receive when you own your own house. Plus there are tax benefits with regards to owning your house. Rental income gets taxed. You don't get taxed when you don't pay rental income because you are living in a paid off house.

For instance if I would pay $800 per week rent I am recieveing the benefits of basically paying $40k a year for a rental property. I do have to pay maintenance etc out of that money. If I rented that house out I would receive the same rental income however any profit would be taxed.
« Last Edit: February 22, 2015, 10:40:16 PM by steveo »

AustralianMustachio

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #58 on: February 22, 2015, 11:16:06 PM »
When people think of "property" here they generally mean buying investment property using leverage, and renting it out. And the interest paid on these loans is tax deductible, which is where the benefit mainly lies I think.

Dodge thank you very much for adding a different viewpoint into this thread!

I would like to point out that your chart with the historical performance of the ASX after the GFC doesn't include dividends, which are much higher in Australia than the rest of the world. The accumulation index is higher than the pre GFC high now. Adding franked dividends on top of that, which with a middle tax bracket can bump your returns up considerably, and you can see why Australians love investing in shares so much, as well as property.

In fact I believe in the last 100 years, Australian shares have performed the best in the entire world, or thereabouts. I think I saw this on a Vanguard chart, which I'll try to find. Of course, past performance isn't the same as future, but you see where people are coming from

I think another problem is that bonds in Aus don't get any of that favourable tax treatment that shares (franking) and property (neg gearing) do. So people just want to "live off dividends" instead of actual fixed interest products. However what they don't realise is that with fixed interest you're mostly aiming to preserve your capital, not earn a massive return. An 100% stocks portfolio at retirement isn't dangerous because the income isnt high enough, it's dangerous because of capital value fluctuations.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #59 on: February 22, 2015, 11:26:00 PM »
Just because something is expensive, and fluctuates in value, doesn't make it an investment.

Yes it does. Art can be an investment. Commodities are definitely investments. You don't get to define what is an investment.

There have been entire decades, multiple decades, where home prices in Australia decreased when taking inflation into account.  One of those "lost decades" just ended in 1999.  The one starting around 1974 lasted almost 2 decades.  The one in 1950 lasted 2 decades, the one from the beginning of the chart lasted at least 80 years...etc.  It looks like the latest boom started right in-line with the last US boom, which has already fallen in-line.  How long until the Australian housing market follows?

I have no idea if property will continue to rise. It doesn't even bother me but the same thing can occur in stocks.

You should view housing as a commodity.  Like gold.  It doesn't produce anything, like a company does (stock), it doesn't represent a contractual agreement for an entity (company/government) to pay you back on a fixed schedule (like a bond), it just...sits there.  There is no economic reason for a commodity to grow faster than inflation.

I view commodities as investments. I actually like commodities as a hedge against all sorts of financial stresses on the global financial system. Housing though is better because it does produce something. If you live in it it provides shelter. If you rent it out you receive a rental income. Its much more like a stock than it is like a commodity but you can keep your opinion on housing as it doesn't bother me.

Even if someone bought a house in 1975, and held to today, they would only go from 150 to 350 on the chart.  A 2.3x increase.  The inflation adjusted stock market has grown 20x since 1975.

Really. That might be the case for your statistics but its not the case for my parents. They bought their house probably about 1975 (maybe a little later). They purchased it for $20k. Its now worth I would think at least $1mill. That beats stocks no questions. That is just in a standard area of Sydney. I really doubt that they are unusual and I suggest you go back and check your figures. They have spend money on a pool, an extension and upkeep but still the performance of their house must be the best investment they have purchased. Again I bet that they aren't the only ones who have done that.

Historically speaking, have a higher stock allocation decreases chances of failure, since the main source of failure for a long retirement (40+ years) is inflation, and stocks are the best way to combat that.

I get this. My problem with what you are stating is that you aren't taking into account any risk with regards to being 100% stocks over that time period. Once you are 100% allocated to a particular market you face risks with any financial crisis with regards to that market.

I think you have a massive bias towards stock based investment vehicles. I prefer stocks as well but I prefer stocks because they have certain characteristics that other investments don't have and that is mainly based around franked credits and the fact I can invest with much smaller amounts without going into debt (margin included).

Investment: An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

Source: http://www.investopedia.com/terms/i/investment.asp

Houses are not expected to appreciate faster than inflation.  So unless it is to be used as a source of rental income, it's not an investment.  The point where we disagree, is that you expect it to appreciate faster than inflation.

Stocks have fundamental reasons to increase in value, things like population growth, productivity growth...etc.  These are not present in houses.  Houses are things.  They don't create or generate anything.

The stats are for the Australian housing market in general.  Just like some penny stocks beat the market, you can get lucky with your house choice as well.  Interestingly enough, they still would have underperformed the market by quite a bit.





Note, the number above does not take into account mortgage interest, the pool, the extension, maintenance, upkeep...but it also doesn't take into account rent prices.

Regarding market risks, I'm currently invested in 10,000 unique companies across the globe.  Here's a fun bullet point from Why your house is a terrible investment
  • It should be subject to the fortunes of one country, one state, one city, one town…No! One neighborhood! Imagine if our investment could somehow tie its owner to the fate of one narrow location. The risk could be enormous! A plant closes. A street gang moves in. A government goes crazy with taxes. An environmental disaster happens nearby. We could have an investment that not only crushes it’s owner’s net worth, but does so even as they are losing their job and income!

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #60 on: February 22, 2015, 11:28:08 PM »
Correct. Rentals are investments. Not the house you live in.

Just to clarify this. The rental income less the cost of ownership is exactly what you receive when you own your own house. Plus there are tax benefits with regards to owning your house. Rental income gets taxed. You don't get taxed when you don't pay rental income because you are living in a paid off house.

For instance if I would pay $800 per week rent I am recieveing the benefits of basically paying $40k a year for a rental property. I do have to pay maintenance etc out of that money. If I rented that house out I would receive the same rental income however any profit would be taxed.

You're forgetting about the opportunity cost of putting the majority of your net worth into an asset which only increases with inflation.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #61 on: February 22, 2015, 11:34:22 PM »
When people think of "property" here they generally mean buying investment property using leverage, and renting it out. And the interest paid on these loans is tax deductible, which is where the benefit mainly lies I think.

Dodge thank you very much for adding a different viewpoint into this thread!

I would like to point out that your chart with the historical performance of the ASX after the GFC doesn't include dividends, which are much higher in Australia than the rest of the world. The accumulation index is higher than the pre GFC high now. Adding franked dividends on top of that, which with a middle tax bracket can bump your returns up considerably, and you can see why Australians love investing in shares so much, as well as property.

In fact I believe in the last 100 years, Australian shares have performed the best in the entire world, or thereabouts. I think I saw this on a Vanguard chart, which I'll try to find. Of course, past performance isn't the same as future, but you see where people are coming from

I think another problem is that bonds in Aus don't get any of that favourable tax treatment that shares (franking) and property (neg gearing) do. So people just want to "live off dividends" instead of actual fixed interest products. However what they don't realise is that with fixed interest you're mostly aiming to preserve your capital, not earn a massive return. An 100% stocks portfolio at retirement isn't dangerous because the income isnt high enough, it's dangerous because of capital value fluctuations.

No problem :)

Can you point me towards a historical chart of the ASX which includes dividends?  I couldn't find one.  I felt comfortable with my statement because I was comparing it to a world chart which also didn't include dividends, but including dividends would be ideal.

"An 100% stocks portfolio at retirement isn't dangerous because the income isnt high enough, it's dangerous because of capital value fluctuations."

Correct, which is exacerbated by the portfolio being so un-diversified, focused almost entirely on two sectors in a single country.

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #62 on: February 22, 2015, 11:37:54 PM »
Investment: An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

Like purchasing a house. That ends that right there.

I get that you don't like property as an investment but lots of people love it. I personally don't like it that much as well but its an investment and some people have done extremely well out of it.

bigchrisb

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #63 on: February 22, 2015, 11:40:08 PM »
Its frustrating how hard it is to get ASX accumulation index data.  I've been keeping the monthly data from the RBA's stats, but its on my home laptop.  If no-one beats me to it, I'll post it when I get home this evening.

If you are interested, the data comes from Table F7 of the RBA's monthly stats package. http://www.rba.gov.au/statistics/tables/pdf/f07.pdf

Starting in 1979, the index with no dividends has increased from 500 to 5588 (11.6 times), while the accumulation index has risen from 1000 to 48685 (48.6 times).  The treatment of franking credits is ignored in the accumulation index, so for an average investor, where franking washes out with the tax payable, you can almost treat this like a post tax number. 

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #64 on: February 22, 2015, 11:42:39 PM »
Correct. Rentals are investments. Not the house you live in.

Just to clarify this. The rental income less the cost of ownership is exactly what you receive when you own your own house. Plus there are tax benefits with regards to owning your house. Rental income gets taxed. You don't get taxed when you don't pay rental income because you are living in a paid off house.

For instance if I would pay $800 per week rent I am recieveing the benefits of basically paying $40k a year for a rental property. I do have to pay maintenance etc out of that money. If I rented that house out I would receive the same rental income however any profit would be taxed.

You're forgetting about the opportunity cost of putting the majority of your net worth into an asset which only increases with inflation.

I think its pretty obvious that housing has beaten inflation and I would suggest pretty close to beating stocks (if not beating stocks) over the period that you previously mentioned. Reality says that housing has beaten inflation so that argument is null and void.

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #65 on: February 22, 2015, 11:55:26 PM »
I just looked this up on the Internet. I haven't completed any massive analysis however its pretty clear that housing is an investment that has provided returns pretty similar to the stock market.

http://observationsandnotes.blogspot.com.au/2012/04/home-real-estate-stock-market.html
http://www.dailyreckoning.com.au/australian-investment-shares-or-property/2009/04/02/
http://www.macrobusiness.com.au/2013/07/australias-huge-property-market-gets-bigger/

This article is interesting and shows how hard it is to pick the market:-

http://www.news.com.au/finance/real-estate/housing-market-will-implode-warns-edward-chancellor/story-e6frfmd0-1225861377051

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #66 on: February 22, 2015, 11:57:33 PM »
Investment: An asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.

Like purchasing a house. That ends that right there.

I get that you don't like property as an investment but lots of people love it. I personally don't like it that much as well but its an investment and some people have done extremely well out of it.

This has nothing to do with emotions.  Look through my posts, you will see no mention of any emotional words (like/dislike, love/hate) on this topic.  Buying a house (and getting into a mortgage) when you're young, is one of the top factors preventing people from accumulating wealth.  It's important for people to understand the alternatives, and not simply sign the papers for a half a million dollar mortgage when they're 25, because "it's what everyone does here" and "house prices only go up!"

It seems the word "hope" is the qualifier in the definition which makes you call it an investment.  I believe that's a slippery slope, as it sounds like the people selling iPhone cases saying you need to "protect your investment", but I guess it counts :)

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #67 on: February 23, 2015, 12:00:58 AM »
I just looked this up on the Internet. I haven't completed any massive analysis however its pretty clear that housing is an investment that has provided returns pretty similar to the stock market.

http://observationsandnotes.blogspot.com.au/2012/04/home-real-estate-stock-market.html
http://www.dailyreckoning.com.au/australian-investment-shares-or-property/2009/04/02/
http://www.macrobusiness.com.au/2013/07/australias-huge-property-market-gets-bigger/

This article is interesting and shows how hard it is to pick the market:-

http://www.news.com.au/finance/real-estate/housing-market-will-implode-warns-edward-chancellor/story-e6frfmd0-1225861377051

Nothing here contradicts any of my assertions.  Please post something specific, and we can discuss it.

Ozstache

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #68 on: February 23, 2015, 12:16:12 AM »
Correct. Rentals are investments. Not the house you live in.

Just to clarify this. The rental income less the cost of ownership is exactly what you receive when you own your own house. Plus there are tax benefits with regards to owning your house. Rental income gets taxed. You don't get taxed when you don't pay rental income because you are living in a paid off house.

For instance if I would pay $800 per week rent I am recieveing the benefits of basically paying $40k a year for a rental property. I do have to pay maintenance etc out of that money. If I rented that house out I would receive the same rental income however any profit would be taxed.

Agreed. Back to my earlier example of my $550K house that would rent for $550 per week and has overheads of $5K per year. The house is saving me $28600 in rent, but costs me $5000 in overheads, giving a net saving to me of $23600 per year. This works out to be an equivalent net yield of 4.3% on an inflation-adjusted asset, which is not too shabby for a retirement portfolio being drawn at a lower rate than this.

If I were to rent the same house instead, that $28600 would have to come from my after tax salary. As I am already towards the top of the 32.5% tax bracket in retirement income, the income required to produce this $28600 would push me well into the next tax bracket of 37%. Let's not forget the medicare levy which adds another 2% tax onto these, so let's call it 35% average tax rate + 2% = 37% effective tax rate. If I generously assume this income comes entirely from franked dividends , that's still a 7% tax rate I pay, so I'd need $30753 before tax which works out to be a 5.6% after franking dividend yield on $550K. Not an impossible return in a strong market with a good economic tail wind, but not something I would like to rely upon year in year out over a 40 year retirement phase. For a high income earner in the accumulation phase, like our friend bigchrisb earlier in this thread, the tax penalty on producing this rental income is greater still.
« Last Edit: February 23, 2015, 12:18:43 AM by Ozstache »

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #69 on: February 23, 2015, 12:26:08 AM »
It seems the word "hope" is the qualifier in the definition which makes you call it an investment.

I'll try once more for you.

1. The returns from property and stocks have over time been comparable. Stocks might have outperformed but its not clear cut. If you read this article this is fairly clear:- http://observationsandnotes.blogspot.com.au/2012/04/home-real-estate-stock-market.html
2. Property provides rental income (or if you own a house you don't have to pay rental income) as well as capital growth.

Its not a case of stocks are an investment and property isn't. They are both possible investment opportunities.

I hope thats clear to you now.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #70 on: February 23, 2015, 12:32:03 AM »

Correct. Rentals are investments. Not the house you live in.

Just to clarify this. The rental income less the cost of ownership is exactly what you receive when you own your own house. Plus there are tax benefits with regards to owning your house. Rental income gets taxed. You don't get taxed when you don't pay rental income because you are living in a paid off house.

For instance if I would pay $800 per week rent I am recieveing the benefits of basically paying $40k a year for a rental property. I do have to pay maintenance etc out of that money. If I rented that house out I would receive the same rental income however any profit would be taxed.

Agreed. Back to my earlier example of my $550K house that would rent for $550 per week and has overheads of $5K per year. The house is saving me $28600 in rent, but costs me $5000 in overheads, giving a net saving to me of $23600 per year. This works out to be an equivalent net yield of 4.3% on an inflation-adjusted asset, which is not too shabby for a retirement portfolio being drawn at a lower rate than this.

If I were to rent the same house instead, that $28600 would have to come from my after tax salary. As I am already towards the top of the 32.5% tax bracket in retirement income, the income required to produce this $28600 would push me well into the next tax bracket of 37%. Let's not forget the medicare levy which adds another 2% tax onto these, so let's call it 35% average tax rate + 2% = 37% effective tax rate. If I generously assume this income comes entirely from franked dividends , that's still a 7% tax rate I pay, so I'd need $30753 before tax which works out to be a 5.6% after franking dividend yield on $550K. Not an impossible return in a strong market with a good economic tail wind, but not something I would like to rely upon year in year out over a 40 year retirement phase. For a high income earner in the accumulation phase, like our friend bigchrisb earlier in this thread, the tax penalty on producing this rental income is greater still.

If you used after tax dollars to buy the $550,000 house, you need to perform the same calculation on the Buy example as well. And if the $28,600 would have to come from your after-tax salary, then you also need to calculate the mortgage interest for the Buy example.

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #71 on: February 23, 2015, 12:34:25 AM »
Starting in 1979, the index with no dividends has increased from 500 to 5588 (11.6 times), while the accumulation index has risen from 1000 to 48685 (48.6 times).  The treatment of franking credits is ignored in the accumulation index, so for an average investor, where franking washes out with the tax payable, you can almost treat this like a post tax number.

Wow! That means 77% of the gain has been from dividends and only 23% from capital growth.

Ozstache

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #72 on: February 23, 2015, 12:45:08 AM »

Correct. Rentals are investments. Not the house you live in.

Just to clarify this. The rental income less the cost of ownership is exactly what you receive when you own your own house. Plus there are tax benefits with regards to owning your house. Rental income gets taxed. You don't get taxed when you don't pay rental income because you are living in a paid off house.

For instance if I would pay $800 per week rent I am recieveing the benefits of basically paying $40k a year for a rental property. I do have to pay maintenance etc out of that money. If I rented that house out I would receive the same rental income however any profit would be taxed.

Agreed. Back to my earlier example of my $550K house that would rent for $550 per week and has overheads of $5K per year. The house is saving me $28600 in rent, but costs me $5000 in overheads, giving a net saving to me of $23600 per year. This works out to be an equivalent net yield of 4.3% on an inflation-adjusted asset, which is not too shabby for a retirement portfolio being drawn at a lower rate than this.

If I were to rent the same house instead, that $28600 would have to come from my after tax salary. As I am already towards the top of the 32.5% tax bracket in retirement income, the income required to produce this $28600 would push me well into the next tax bracket of 37%. Let's not forget the medicare levy which adds another 2% tax onto these, so let's call it 35% average tax rate + 2% = 37% effective tax rate. If I generously assume this income comes entirely from franked dividends , that's still a 7% tax rate I pay, so I'd need $30753 before tax which works out to be a 5.6% after franking dividend yield on $550K. Not an impossible return in a strong market with a good economic tail wind, but not something I would like to rely upon year in year out over a 40 year retirement phase. For a high income earner in the accumulation phase, like our friend bigchrisb earlier in this thread, the tax penalty on producing this rental income is greater still.

If you used after tax dollars to buy the $550,000 house, you need to perform the same calculation on the Buy example as well. And if the $28,600 would have to come from your after-tax salary, then you also need to calculate the mortgage interest for the Buy example.

No. The $550000 comes from your after tax money, whether you use that money to buy the house or invest it elsewhere. There is no mortgage interest in this example.

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #73 on: February 23, 2015, 12:51:35 AM »
Starting in 1979, the index with no dividends has increased from 500 to 5588 (11.6 times), while the accumulation index has risen from 1000 to 48685 (48.6 times).  The treatment of franking credits is ignored in the accumulation index, so for an average investor, where franking washes out with the tax payable, you can almost treat this like a post tax number.

Wow! That means 77% of the gain has been from dividends and only 23% from capital growth.

This is interesting isn't it.

I think a safe way to reach retirement is to complete the following steps:-

1. Pay off your mortgage. This leaves you rent free for life assuming that you don't upgrade your house which I don't intend too.
2. Invest in a low cost ETF within the ASX up to the amount that provides enough dividends to live off for life.
3. Save a certain amount into cash or commodities or a combination of both that provides you with a safety margin.

This won't be the quickest way to get there but it should be fairly robust especially if you combine that with the ability to go back to work or to tighten your spending.

My personal philosophy is that relying on the 4% WR is not the ideal way to ensure that you are FI for life. I do think that its a great goal and as good as you can get generally if you want to become FI. I do track my WR. I won't though completely rely on that number.

In stating all of that if work pisses me off I might just call it quits prior to getting all my ducks lined up.
« Last Edit: February 23, 2015, 12:57:45 AM by steveo »

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #74 on: February 23, 2015, 12:53:49 AM »
but not something I would like to rely upon year in year out over a 40 year retirement phase. For a high income earner in the accumulation phase, like our friend bigchrisb earlier in this thread, the tax penalty on producing this rental income is greater still.

I think you have to consider these components and its where the details matter.

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #75 on: February 23, 2015, 01:55:33 AM »
Dodge you raise some interesting points and I'm learning a lot.

Off the top of my head, property gives a hedge against high levels of inflation, gives returns via rent and sometimes capital appreciation due to increasing demand. It gives piece of mind that comes with owning something physical, as well as that which comes from never having to fear getting kicked out. It gives you a massive asset that can be leveraged to access more credit. It give you certain tax benefits. It's easy to understand.

I've seen more than a few people make their fortune in Australia through investment property, so it has a track record.

However whether it gives better returns than stocks, whether the reward is worth the risk, whether it (and stocks for that matter) will continue on its current trajectory or whether the bubble will burst, I'll have to defer. But I'm enjoying the discussion.

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #76 on: February 23, 2015, 01:57:16 AM »
Some house data too for interest: Here's the RBA paper showing Housing in Australia since 1955 has averaged a real return of 2.5% (jump to the conclusion):  http://www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-06.pdf. Philip Soos shows the Australian real house price index from 1880 here: http://www.prosper.org.au/wp-content/uploads/2011/07/PhilipSoosBubblingOver1.pdf.

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #77 on: February 23, 2015, 02:03:05 AM »
wow, an Australian thread.  I joined just to comment.  You lot seem to argue a lot though.

I the topic of international diversification.  The Australian market is small but its performance is very highly correlated with international (US and Euro) markets.  The extra diversification benefit to be had from investing overseas is marginal.  I take the point that mining is overweight here.  To counter this I hold a collection of individual stocks to try to balance my VAS holding.

It makes perfect sense for any individual investor to be predominantly invested in his or her home currency/economy.  This way you benefit from and suffer from the same inflationary effects.  Having your portfolio predominantly invested in foreign markets is a huge currency risk.  If Australian inflation is 3% and US/Euro inflation is 1%, that's 2% a year you will lose in value over time (in a random market walk), other things being equal.  Foreign markets don't outperform the ASX but, if you are already well diversified, they might actually increase risk.  Having said that, 20% of our portfolio is with VTS and VEU funds, because, hey, I can't predict the future!

Dividends:  Using average market dividends can be misleading (as can using average market returns).  There are growth companies on the ASX that pay no/low dividends which skews the average down.  If you set out to achieve high dividends it is easy to get >4% both historically and in the current market.  If you don't want to select individual stocks, VHY pays 5.8% plus franking and has tracked the market pretty well so far.  I just cannot see how an analysis could conclude a 2.5% SWR when you can easily achieve >5% dividends and never touch your principle.  It would be interesting to see the historical dividend performance of the index that VHY is based on (I don't think it's that old though).

Shit, our rental property yield >7% in gross rent and about 6% after costs (before tax).  The underlying property and the rent should increase with inflation, so theoretically there is no reason I wouldn't be safe to spend the lot.

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #78 on: February 23, 2015, 03:03:00 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).

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #79 on: February 23, 2015, 03:16:57 AM »
  • If you can rent the same house for $550 a week, that's what you need to be comparing it to.  Renting vs Buying.  Is it better to buy a house for $550,000 and live in it, or rent the same house for $550 a week and invest the difference?  The answer will depend on your mortgage interest, downpayment, property taxes, insurance...etc.  A 20% downpayment alone ($110,000) is expected to compound to about $450,000 after 15 years if you invested it instead.  I don't have all the variables, but it looks like renting comes out way ahead here.

Attached is a spreadsheet I put together modelling this scenario under Australian conditions. On the assumptions side, I have set overhead costs, rent and the house price to rise at CPI. As previously discussed, house prices have risen at much more than inflation over last half century in Australia, but let's just assume this maths defying run is close to being over and peg it to CPI. The investment grows at a separate investment rate and is added to at net amount of what would have been made in repayments plus overheads minus actual rent. I've even thrown in home purchase costs for good measure.

I have used Excel's goal seek to determine the break-even point investment rate for own versus rent, which works out to an 8.3% pa after tax investment return being required, which again is certainly possible but fairly optimistic. Indeed, the ASX 2014 long term investing report previously discussed http://www.asx.com.au/documents/resources/russell-asx-2014-long-term-investing-report.pdf reports a 9.2% before tax return over the last decade. Exhibit 2 on page 4 shows that 9.2% return dwindle to to 7.1% for someone in the highest tax bracket, so even someone in a mid-range tax bracket would be struggling to hit that 8.3% net return from shares. Finally, to be fair to, property came in at 6.1% (or 3.3% above CPI), which swings the result strongly in favour of owning, for that decade at least.

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #80 on: February 23, 2015, 03:20:00 AM »

Shit, our rental property yield >7% in gross rent and about 6% after costs (before tax).  The underlying property and the rent should increase with inflation, so theoretically there is no reason I wouldn't be safe to spend the lot.

See here's where everyone has missed the vital stat. Rents and house prices track wage price growth over the long term, not inflation. And historically wages grow quite a bit faster than inflation.

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #81 on: February 23, 2015, 05:11:18 AM »
Great thread. Posting to follow.

With renting, I think one thing that sways me heavily towards owning vs renting is the hidden costs of renting. Tenancy laws can be pretty sucky for tenants. Being forced to move frequently cos the place is being sold or the landlord wants to move in (or pretends to so they can raise rents) can happen - my friends had to move 5 times in 4 years (they ended up buying to get security of tenure). Moving costs add up, even if you move yourself - paying double rent for at least a week, utility connection costs etc. At least $1k per move. And rental properties tend to have shitty insulation which increases heating and cooling costs. And it's rare that you can garden and grow your own veggies without getting into trouble with the real estate agent. And so on.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #82 on: February 23, 2015, 07:58:35 AM »
Starting in 1979, the index with no dividends has increased from 500 to 5588 (11.6 times), while the accumulation index has risen from 1000 to 48685 (48.6 times).  The treatment of franking credits is ignored in the accumulation index, so for an average investor, where franking washes out with the tax payable, you can almost treat this like a post tax number.

Wow! That means 77% of the gain has been from dividends and only 23% from capital growth.

Not quite.  If a dividend is 5%, then it only accounts for 5% of the growth.  I'm going to steal a part of an amazing post by waltworks a few months ago.  Think of it this way:

-If I have a stock that I hold for 100 years that appreciates 1% per year and pays no dividends, after 100 years, I've got $270.
-If I have a stock that I hold for 100 years that appreciates zero, and pays 1% dividends (which I reinvest) and we assume no taxation on those dividends, I also have $270.
-If my stock both appreciates 1% and pays 1% (reinvested) dividends, I have $724.

Now, in that scenario, I would never say that *either* the capital gains or the dividend is mostly responsible for the extra gains, right? In fact, a rational person would say that both are responsible for 50% of the gains.

Let's look at another scenario.
-Capital gains @6% and no dividends. My $100 is now $33,930.
-Dividends @4% and no capital gains. My $100 is $5,050.
-Both added together (as the Bogle example) for a total of 10%/year. $100 becomes $1,378,000!

Now stop for a minute and think. When I added in the dividends, I suddenly had way more money! 97.5% of my gains came because I reinvested them! Dividends are awesome!

BUT - you could just spin it the other way and say that the capital gains accounted for 99.6% of the gains when you start from the default state of an only-dividend scenario.

The point is this: If you are getting 6% from capital gains and 4% from dividends, then 60% of your gains are capital gains. Period. Otherwise over any long time scale, adding in ANY RANDOM FACTOR that boosts the investment yield will "account for" most of your profit.

That's just how exponents work. I could add in a special "magic investor bonus" of 1% on top of that 10% and it would "account for" most of my gains over that time period (in fact, my 1% magic-factor raises my total to a cool $3.4 million - the vast majority of my gains!)

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #83 on: February 23, 2015, 08:02:12 AM »
Starting in 1979, the index with no dividends has increased from 500 to 5588 (11.6 times), while the accumulation index has risen from 1000 to 48685 (48.6 times).  The treatment of franking credits is ignored in the accumulation index, so for an average investor, where franking washes out with the tax payable, you can almost treat this like a post tax number.

Wow! That means 77% of the gain has been from dividends and only 23% from capital growth.

This is interesting isn't it.

I think a safe way to reach retirement is to complete the following steps:-

1. Pay off your mortgage. This leaves you rent free for life assuming that you don't upgrade your house which I don't intend too.
2. Invest in a low cost ETF within the ASX up to the amount that provides enough dividends to live off for life.
3. Save a certain amount into cash or commodities or a combination of both that provides you with a safety margin.

This won't be the quickest way to get there but it should be fairly robust especially if you combine that with the ability to go back to work or to tighten your spending.

My personal philosophy is that relying on the 4% WR is not the ideal way to ensure that you are FI for life. I do think that its a great goal and as good as you can get generally if you want to become FI. I do track my WR. I won't though completely rely on that number.

In stating all of that if work pisses me off I might just call it quits prior to getting all my ducks lined up.

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.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #84 on: February 23, 2015, 08:11:19 AM »
Some house data too for interest: Here's the RBA paper showing Housing in Australia since 1955 has averaged a real return of 2.5% (jump to the conclusion):  http://www.rba.gov.au/publications/rdp/2014/pdf/rdp2014-06.pdf. Philip Soos shows the Australian real house price index from 1880 here: http://www.prosper.org.au/wp-content/uploads/2011/07/PhilipSoosBubblingOver1.pdf.

Yes, this supports the data from the chart I posted.  Of course, they choose the precise moment on the chart where things turned around, thus ignoring the previous 80+ years of declining real value.  It also doesn't take into account the many "lost decades".  It wouldn't be good for your ability to accumulate wealth, if the majority of your net worth were in a house during these many decades of negative real growth.

If even the best time periods only show 2.5% real (after inflation) growth, it's clear why houses have underperformed.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #85 on: February 23, 2015, 08:26:25 AM »
wow, an Australian thread.  I joined just to comment.  You lot seem to argue a lot though.

I the topic of international diversification.  The Australian market is small but its performance is very highly correlated with international (US and Euro) markets.  The extra diversification benefit to be had from investing overseas is marginal.  I take the point that mining is overweight here.  To counter this I hold a collection of individual stocks to try to balance my VAS holding.

It makes perfect sense for any individual investor to be predominantly invested in his or her home currency/economy.  This way you benefit from and suffer from the same inflationary effects.  Having your portfolio predominantly invested in foreign markets is a huge currency risk.  If Australian inflation is 3% and US/Euro inflation is 1%, that's 2% a year you will lose in value over time (in a random market walk), other things being equal.  Foreign markets don't outperform the ASX but, if you are already well diversified, they might actually increase risk.  Having said that, 20% of our portfolio is with VTS and VEU funds, because, hey, I can't predict the future!

Dividends:  Using average market dividends can be misleading (as can using average market returns).  There are growth companies on the ASX that pay no/low dividends which skews the average down.  If you set out to achieve high dividends it is easy to get >4% both historically and in the current market.  If you don't want to select individual stocks, VHY pays 5.8% plus franking and has tracked the market pretty well so far.  I just cannot see how an analysis could conclude a 2.5% SWR when you can easily achieve >5% dividends and never touch your principle.  It would be interesting to see the historical dividend performance of the index that VHY is based on (I don't think it's that old though).

Shit, our rental property yield >7% in gross rent and about 6% after costs (before tax).  The underlying property and the rent should increase with inflation, so theoretically there is no reason I wouldn't be safe to spend the lot.

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.

Dodge

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #86 on: February 23, 2015, 09:29:05 AM »
  • If you can rent the same house for $550 a week, that's what you need to be comparing it to.  Renting vs Buying.  Is it better to buy a house for $550,000 and live in it, or rent the same house for $550 a week and invest the difference?  The answer will depend on your mortgage interest, downpayment, property taxes, insurance...etc.  A 20% downpayment alone ($110,000) is expected to compound to about $450,000 after 15 years if you invested it instead.  I don't have all the variables, but it looks like renting comes out way ahead here.

Attached is a spreadsheet I put together modelling this scenario under Australian conditions. On the assumptions side, I have set overhead costs, rent and the house price to rise at CPI. As previously discussed, house prices have risen at much more than inflation over last half century in Australia, but let's just assume this maths defying run is close to being over and peg it to CPI. The investment grows at a separate investment rate and is added to at net amount of what would have been made in repayments plus overheads minus actual rent. I've even thrown in home purchase costs for good measure.

I have used Excel's goal seek to determine the break-even point investment rate for own versus rent, which works out to an 8.3% pa after tax investment return being required, which again is certainly possible but fairly optimistic. Indeed, the ASX 2014 long term investing report previously discussed http://www.asx.com.au/documents/resources/russell-asx-2014-long-term-investing-report.pdf reports a 9.2% before tax return over the last decade. Exhibit 2 on page 4 shows that 9.2% return dwindle to to 7.1% for someone in the highest tax bracket, so even someone in a mid-range tax bracket would be struggling to hit that 8.3% net return from shares. Finally, to be fair to, property came in at 6.1% (or 3.3% above CPI), which swings the result strongly in favour of owning, for that decade at least.

Indeed, if these are your numbers, buying can make sense.  The biggest flaw here, however, is that you're using numbers from this part of the chart:



Since your housing number is so high, growing with inflation gives a lot of growth.  For example, if you decrease the house price to $250,000, the new break even stock growth rate is 6.25%.  Also, surprised that repairs + insurance + everything else really total to less than 1% of the housing value.  When the parts that make up the house are so cheap to replace, relative to the price of the house as a whole, it really starts to look like a bubble.  But I won't pretend to be able to predict the future.  It all comes down to risk.



Stocks had no problem beating 8.3% for most of the periods on record, but let's ignore that for now.

Leveraging into such an expensive item, tied to one country/state/city/neighborhood is very risky compared to a diversified world portfolio.  Your numbers show that leveraging over half a million dollars on owning a single item, only breaks even with putting 0 leverage into a portfolio which owns 6-10,000 unique companies across the globe.  Even taking the bubble into account, the risk-adjusted returns are sub-par.  I personally know people who bought their house at the peak of the US housing market.  They will never recapture that lost wealth over their lifetimes.  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. 

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #87 on: February 23, 2015, 02:02:31 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.

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #88 on: February 23, 2015, 02:09:15 PM »
The international analysis of Australian housing has tended to came up with one of two responses - yes there is a bubble, and no - there is not a bubble because the housing market in Australia is very constrained. Dodge is arguing the bubble case, so I will talk about the other.

Australia is one of the most urbanised countries in the world. As a result of our land tenure regulations, lnd available for housing is very restricted. There is little impetus to change the availability of land, and therefore housing is validly high cost. There is also a very high latent demand because houses are not being built fast enough to meet population growth - partly because of immigration.

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #89 on: February 23, 2015, 02:09:29 PM »
I personally know people who bought their house at the peak of the US housing market.  They will never recapture that lost wealth over their lifetimes.

You never know. Plus just to clarify that you are talking about the US market.

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.

Housing in Australia has historically been an extremely good investment. It has certain advantages over other investment classes. It also has several disadvantages. I think focusing on the advantages and the disadvantages is a better way to discuss each investment class.

steveo

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #90 on: February 23, 2015, 02:13:54 PM »
The international analysis of Australian housing has tended to came up with one of two responses - yes there is a bubble, and no - there is not a bubble because the housing market in Australia is very constrained. Dodge is arguing the bubble case, so I will talk about the other.

Australia is one of the most urbanised countries in the world. As a result of our land tenure regulations, lnd available for housing is very restricted. There is little impetus to change the availability of land, and therefore housing is validly high cost. There is also a very high latent demand because houses are not being built fast enough to meet population growth - partly because of immigration.

I'm not sure that Dodge is just arguing that Australia has a housing bubble. He appears to be arguing that:-

1. Housing is never an investment unless its a rental property.
2. Housing only provides returns equal to inflation.

I think that these two points are factually incorrect and have been proven to be factually incorrect within this thread.

If we are talking about a housing bubble I think that there is a valid argument that we have a housing bubble however the question is will that bubble remain and will it in fact increase. I can't predict the future and so I find it hard to judge. I posted a link to an article that was gloom and doom 5 years ago. That is a long time for the bubble to remain and in fact increase. People are still buying and the cost of housing is still going up.

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #91 on: February 23, 2015, 02:14:43 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.
As someone who is retired this works for me - income from dividends is all I need. The tax implications of capital gains make it beneficial not to sell but to use the income from dividends instead. As my needs to not require all my dividends, rebalancing can easily be done with the remaining dividends.

deborah

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #92 on: February 23, 2015, 02:19:28 PM »
People are still buying and the cost of housing is still going up.
Some of the latest figures show there are only a couple of markets that are still going up, and others are going down. However, this is probably stagnation rather than a bubble burst. I think that stagnation is a more likely scenario.

The trouble is that the US and Australian markets are fairly different. Because our houses are bigger, there is an economy of scale in maintenance costs. Because our land is more expensive, the proportion of the cost that is land is higher, which also reduces maintenance costs.

Ozstache

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #93 on: February 23, 2015, 02:28:20 PM »
Indeed, if these are your numbers, buying can make sense.  The biggest flaw here, however, is that you're using numbers from this part of the chart:

In the last sentence, where I clearly differentiate this, yes but for the model as attached no; house growth is set to inflation.

Since your housing number is so high, growing with inflation gives a lot of growth.  For example, if you decrease the house price to $250,000, the new break even stock growth rate is 6.25%.

Maybe so, but that's where house prices are in Australia right now so wishing for a halving in value to improve the share investment's result is, well, wishing.

Also, surprised that repairs + insurance + everything else really total to less than 1% of the housing value.  When the parts that make up the house are so cheap to replace, relative to the price of the house as a whole, it really starts to look like a bubble.

It is not so much that house parts are cheap to replace here in Australia, it's more that our houses tend to be of much better build quality than USA houses and hence don't require maintenance as often. I have lived in both the USA (for 7 years) and Australia, so have experienced this first hand.

Stocks had no problem beating 8.3% for most of the periods on record, but let's ignore that for now.

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.

Leveraging into such an expensive item, tied to one country/state/city/neighborhood is very risky compared to a diversified world portfolio.  Your numbers show that leveraging over half a million dollars on owning a single item, only breaks even with putting 0 leverage into a portfolio which owns 6-10,000 unique companies across the globe.  Even taking the bubble into account, the risk-adjusted returns are sub-par.  I personally know people who bought their house at the peak of the US housing market.  They will never recapture that lost wealth over their lifetimes.  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.

No, my numbers show that if I ignore the last 50 years of inflation-beating house price performance and peg it to inflation instead, the resulting Australian dollar share market performance level required to equal housing's handicapped performance is achievable only if I'm in a middle or lower tax bracket. If I invested more broadly in world share markets, the resultant performance is worse (after tax and currency adjustments). If I remove that housing handicap, as I could reasonably do because past housing returns should count as equally as past share market returns, owning soundly beats renting.

Are you seriously proposing we Aussies all sell up our houses, put 2% of our stash into the Aussie share market and the rest spread across world share markets? And the resultant increased portfolio volatility, currency risk and greater tax liability is less risky than diversifying some of your money into an asset that has a reasonable implied ROI at the time of purchase and puts a roof over your head for the rest of your life, regardless of what happens to its value in future? Maybe it's just me but are there any Aussies out there who would actually follow dodge's recommended strategy?

In short, the amount of risk with what you propose as an alternative is just not in-line with the possible gains.
« Last Edit: February 23, 2015, 02:40:16 PM by Ozstache »

happy

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #94 on: February 23, 2015, 03:24:13 PM »
Thanks Dodge for  prodding us to evaluate our perspective. I don't agree with you on all points, but the exercise deepens my  understanding and is valuable.

I also agree with Deborah's latest remark.

The Sydney market which I know best, continues to surprise me. A couple of years ago I was sure it had topped out, but nay off she goes again. Just for the exercise I evaluated a couple of Sydney properties I have owned. Home unit I bought 28 years ago for $72k - almost identical unit sold for $450k recently - a net gain of 6.5% per year. House I bought 23 years ago for 220000, would be worth just under a million - again a net increase of 6-6.5%. Nothing special about these properties, they were "median" prices in average Sydney suburbs. The data for my parents house build in the early 1960s works out at 8-9% per annum. I'm not saying I'm convinced this will go on forever, and if anything I think it must top out, if not drop.

Ozstache has run figures on Buy vs Rent, a second set of numbers to crunch would be Own (without a mortgage) vs Rent ( and invest the capital). In this instance as Bigchrisb has said,  it will depend on your income. If you are in 37% or 47% marginal tax rates, assuming you rent a property of similar value, and in a rising market, its cheaper to own because of the tax implications.  If you have  a low marginal tax rate, renting starts to come out ahead. If you are accumulating in a high marginal tax bracket, and have purchased, but are retiring on an income in a low marginal bracket theoretically you could sell rent and invest and come out ahead. This ignores the other benefits of home ownership of course, and emotionally having grown up with over 40years indoctrination of "always stay in a rising real estate market" I have to admit I would find this  notion personally challenging.

The taxation system is substantially different to the US and is what makes home ownership more of a proposition in spite of higher housing prices.  This is really based on a tax free capital gain for PPOR, and higher income tax rates than US and an assumption that this  capital gain will continue. Of course Bogles index investing strategy is based on an assumption that the stock market will always continue to go up also. Its the same notion either way.
« Last Edit: February 23, 2015, 03:45:38 PM by happy »

deborah

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #95 on: February 23, 2015, 04:03:39 PM »
Also, surprised that repairs + insurance + everything else really total to less than 1% of the housing value.  When the parts that make up the house are so cheap to replace, relative to the price of the house as a whole, it really starts to look like a bubble.

It is not so much that house parts are cheap to replace here in Australia, it's more that our houses tend to be of much better build quality than USA houses and hence don't require maintenance as often. I have lived in both the USA (for 7 years) and Australia, so have experienced this first hand.

Maybe it's just me but are there any Aussies out there who would actually follow dodge's recommended strategy?

In short, the amount of risk with what you propose as an alternative is just not in-line with the possible gains.
Another part of the cheaper maintenance is that Australia tends to be a kinder climate. While we have terrible storms and fires, we also don't have snow and ice. This means that most vintage and veteran cars come from Australia, where they have had an easier life. I suspect that the same would hold for houses.

Over my investing years I have mainly owned Australian shares. In fact for the first 10 years I only owned BHP shares - because I was an employee and they had a scheme where you paid 10%, the shares were gradually paid off with dividends over 10 years and then you paid any residual. Before coming to MMM I had thought I was too localised, and since I have decided that I really need to diversify. However, I have yet to work out a plan. Anyway, the lack of international holdings hasn't really been an issue, as my portfolio has done better than expected over the years.

In some ways I have been very lucky. I was retrenched from BHP, and sold some shares at that stage to fully fund the others. After that BHP shares went down, so friends who stayed in BHP, and had to sort out their employee shares after I left (when that section of BHP was sold), had to sell their shares at a loss. Later I was employed by NAB for a short time and participated in their employee share plan.

I also learnt a bit about the share system and the money market while I was at BHP because some of my work was related to them. The ASX was only a block away, and they ran some really good courses on different aspects of investing. I think they are available as online webinars now.

I am trying to work out a strategy for changing over to ETFs and increasing my international exposure. I am not really happy about the weight of sectors in ETFs because the Australian market is overweight in resources and banks, so I am not sure that they are entirely the way to go in an Australian context, and think that some individual share holdings may be necessary to get the weighting I would prefer.

Ozstache

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #96 on: February 23, 2015, 04:11:42 PM »
Looking at how the Australian stock index handled our last financial shock:



I don't see anything special here.  It fell 50% just like everyone else, but it hasn't caught back up yet.  If the Australian stock index rises 15% this year, it will still only match the pre-crash level.  Had you been invested in a world portfolio, you would have already recovered from the biggest financial shock of our generation back in 2013, and your portfolio would now be seeing record highs.

You need to compare apples with apples. On a total return basis, the ASX200 index you reference does not include the substantial dividends returns that occurred during the GFC, which more than make up for the lower performance of this index compared to world markets. Quoting from here: https://www.vanguardinvestments.com.au/retail/ret/articles/insights/smart-investing/The-power-of-dividends-compounding-and-time.jsp

Five years ago on July 16, 2009, the S&P/ASX200 closed at 3995.6 points with further to fall in the depths of the GFC. Move forward to July 16, 2014 when this index closed at 5518.9 points - a rise of 38 per cent.

By contrast on July 16, 2009, the S&P/ASX200 Accumulation Index closed at 27,332.5. And move forward again to July 16, 2014, this index closed at 47,043.6 - a rise of 72 per cent.

In short, the accumulation index passed its pre-GFC high almost a year ago and hit an all-time high this month. Meanwhile, the S&P/ASX200 (price only) is still way below its pre-GFC high.

urbanista

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #97 on: February 23, 2015, 05:29:47 PM »
Houses are not expected to appreciate faster than inflation. 

The houses maybe not. But the land should be expected to appreciate faster than inflation. It should appreciate in line with average wages increase as least, which has been faster than inflation in Australia.


urbanista

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #98 on: February 23, 2015, 05:39:26 PM »
Are you seriously proposing we Aussies all sell up our houses, put 2% of our stash into the Aussie share market and the rest spread across world share markets? And the resultant increased portfolio volatility, currency risk and greater tax liability is less risky than diversifying some of your money into an asset that has a reasonable implied ROI at the time of purchase and puts a roof over your head for the rest of your life, regardless of what happens to its value in future? Maybe it's just me but are there any Aussies out there who would actually follow dodge's recommended strategy?

In short, the amount of risk with what you propose as an alternative is just not in-line with the possible gains.

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.

Ozstache

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Re: Australia/USA Mustachian Philosophy Differences
« Reply #99 on: February 23, 2015, 06:33:33 PM »
Are you seriously proposing we Aussies all sell up our houses, put 2% of our stash into the Aussie share market and the rest spread across world share markets? And the resultant increased portfolio volatility, currency risk and greater tax liability is less risky than diversifying some of your money into an asset that has a reasonable implied ROI at the time of purchase and puts a roof over your head for the rest of your life, regardless of what happens to its value in future? Maybe it's just me but are there any Aussies out there who would actually follow dodge's recommended strategy?

In short, the amount of risk with what you propose as an alternative is just not in-line with the possible gains.

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.

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.

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.

I did! I was in the military for 30 years and moved pretty much every two years. Not having to move ever again is one of those enjoyable intangible benefits of home ownership.
« Last Edit: February 23, 2015, 06:53:16 PM by Ozstache »