Investment Advice

[steveo]

I'd like some advice on general investment and what you think I should be doing. I understand it is my decision and I am not looking for someone to build me the perfect portfolio.

I think some key points are as follows:-

1. I live in Australia. House prices are dear but apart from that I think living expenses are fairly reasonable. Interest rates on mortgages are about 5.5%.
2. I would like to retire in 10 years time and I figure an income of 20k would be enough to live off assuming the mortgage is paid off. I would state that this is enough for myself and my wife to live off. We are living off about 50k at the moment but we have 3 kids and I think we haven't really been trying to be tight. We have 2 cars, we go on holidays (typically around Australia and not for a lot of money), we spend on the kids, I sometimes go out drinking etc. Basically I think we can be a lot tighter.
3. I think I will need spending money on top of my FI income to allow for travel and more expensive activities such as eating out etc. I'm not really a fan of travel or eating out but my wife likes it and to be fair she probably deserves a break considering she works harder than me and will probably retire later than me (she might not but she is more of a doer than me).

So for my first main move towards FI is to me to pay off the mortgage. I can do that assuming I keep my job within 5 years easily. The house isn't where I am a little confused though - my main area of concern is investments outside of real estate.

I want to make sure that I get a good return on my money and I really don't want to put anymore in real estate because the yield is low (say 5% excluding costs) and we will own our house. To me the best asset class is probably stocks to make a regular return and I think the best option is index funds. I also think the best option is to maximise those gains via using tax effective investments as much as possible (basically my superannuation fund).

Where it gets difficult to me is the following points:-

1. Do I just dollar-cost average invest over the course of the next 10 years ?
2. Do I try and time the market with some common sense. I could put money into cash and every year for instance post October or at any crash time chuck all the cash into the index fund.
3. Do I invest 100% in stocks or should I place some into bonds ?
4. Do I buy some other hedge such as gold ?
5. Should I invest in the Asian/US markets at all ?

I also trade foreign currency however trade is a funny way to describe it. I have taken one position this year and got out with a loss but not a significant one. My account is about $1000 only. Overall I am probably even over the course of 10 years but mainly because taxes kill you. Basically you get taxed on profits. For something that is for me at least a risky variable return taxes really hammer you here. Over time though this may help me hedge as per point 4 above.

[daverobev]

Where it gets difficult to me is the following points:-

1. Do I just dollar-cost average invest over the course of the next 10 years ?
2. Do I try and time the market with some common sense. I could put money into cash and every year for instance post October or at any crash time chuck all the cash into the index fund.
3. Do I invest 100% in stocks or should I place some into bonds ?
4. Do I buy some other hedge such as gold ?
5. Should I invest in the Asian/US markets at all ?

1. Yes
2. No
3. Your age as a %age for bonds
4. As a small part of a diversified portfolio
5. Yes

:)

[matchewed]

1) Yes
2) No(ish). If you see the market drop 2% in a day and think now is the time to buy you're just trying market timing. If you happen to have some cash hanging around and another dot com bubble or '08 recession hits go for it.
3) Depends on your risk tolerance, the general rule of thumb is more bonds is more conservative.
4) See above. Actually you should really come up with an investment policy which will detail what you're investing in and why.
5) I think so but then again I'm not great at other countries investing (US centric myself).

[daverobev]

And the longer version..!

1. Generally this has been the most prudent. It is not possible to know when the next bull, or bear, run will start, end, or do crazy things. You're not (I assume) an investment professional; and investment professionals get it wrong more often than not
2. What makes you think you know more than everyone else? IF you have really strong willpower, you can be a contrarian investor. It is safer to just buy what you can, when you can
3. This is all about having non-correlated asset classes. Bonds go up as stocks go down. If you rebalance twice a year, you get to sell high (yay!) and buy low (yay!!). "It may be that bonds are a bad buy right now" but people have been saying that for years (OTOH, if you can get something with a BETTER interest rate than a bond, but zero risk, take it - eg, your mortgage!!)
4. If you're buying the Australian index, aren't there a lot of miners in there already? IMHO - and it is just that - I'd buy a couple of thousand worth of precious metals just as a shit-hits-the-fan thing, for trading. Or, say, less than 5% of your portfolio.
5. You should be diverse, but as cheaply as possible. If you're already going to do stuff in US$, you might look at VXUS - which covers 'everything' except the US (I think it's something like 60% developed, 40% developing world). There is no point getting a fund that costs 1% just to add, say, Canada, if you already have Australia, the EU, the US and so on. 'Normal' percentages might be 20% Aus, 20% US, 20% rest-of-developed-world, 20% developing world, 20% bonds. Or if that's too complex - 30% home, 40% foreign, 30% bonds. Or 25% home, 35% foreign, 25% bonds, 5% precious metals, 10% REITs.

For 5, obviously you need to do some work to figure out where a) suits you best and b) is both tax and fee efficient.

Phew.

[steveo]

Thanks a lot for the responses.

I think you are all basically stating the same thing. Buy some bonds and invest via dollar cost averaging in an index fund. I think the last key point is to try to do this as tax effectively as possible.

I basically agree with this approach as well. The only thing is that it feels too simple. I suppose I'm also not a fan of having too much in bonds because I feel it is wasted money however I think some cash stashed away on the side is a good idea.

[GreenGuava]

The only thing is that it feels too simple.

Have you heard the expression "the majesty of simplicity"?

Check out this discussion about investing with simplicity if you're interested.  It turns out that, many times, simple investing beats various "sophisticated" investments.  Among other things, index funds tend to do better than hedge funds, if you're judging by return (although, in fairness for the comparison, the hedge funds have other goals beyond just return).

[zunachy]

I recommend you learn a bit (or a lot) about what you plan on buying -- just like you have probably done with every other purchase in your life.

The ideas on in this forum are very biased towards the "buy and hold index funds", and "heavy diversification."  Personally I think there are some really big faults with this strategy -- but, the faults do not outweigh the benefits if the alternative is to not invest at all. 

The ideas at the core are driven by statements like this: "2. What makes you think you know more than everyone else?"  At which point everyone stops thinking and just buys the index. 

Again, the advice in the above posts is a solid way to create wealth, but if you are willing to "think and learn" and not just give up, then it is possible to get a higher return.

[daverobev]

I recommend you learn a bit (or a lot) about what you plan on buying -- just like you have probably done with every other purchase in your life.

The ideas on in this forum are very biased towards the "buy and hold index funds", and "heavy diversification."  Personally I think there are some really big faults with this strategy -- but, the faults do not outweigh the benefits if the alternative is to not invest at all. 

The ideas at the core are driven by statements like this: "2. What makes you think you know more than everyone else?"  At which point everyone stops thinking and just buys the index. 

Again, the advice in the above posts is a solid way to create wealth, but if you are willing to "think and learn" and not just give up, then it is possible to get a higher return.

CCP's post yesterday is a good counter to your argument.

It IS possible to do better than the index. You can do it by picking a good stock in a good year - easy. But doing it year in, year out is very difficult. Statistically... no.

If everyone just bought the index.. yeah it's a tricky one. But not everyone does. If *everyone* just invested everything in the index (no rebalancing, which creates buyers and sellers), it would actually be very fair - more like one gigantic co-op where everyone shares the profits...

Anyway, CCP: http://canadiancouchpotato.com/2013/07/18/why-your-problem-is-not-your-funds/

[aclarridge]

I basically agree with this approach as well. The only thing is that it feels too simple. I suppose I'm also not a fan of having too much in bonds because I feel it is wasted money however I think some cash stashed away on the side is a good idea.

What's wrong with keeping it simple? You're buying many pieces of profitable companies, and holding them as a part owner for their long term profit potential.

Other people will brag about some hot stock they made great money on or whatever. Don't worry about that, it's just the same as if they'd won at the casino.

The main way you're going to make money is by saving - that's where the really big returns come from.

[steveo]

I recommend you learn a bit (or a lot) about what you plan on buying -- just like you have probably done with every other purchase in your life.

The ideas on in this forum are very biased towards the "buy and hold index funds", and "heavy diversification."  Personally I think there are some really big faults with this strategy -- but, the faults do not outweigh the benefits if the alternative is to not invest at all. 

The ideas at the core are driven by statements like this: "2. What makes you think you know more than everyone else?"  At which point everyone stops thinking and just buys the index. 

Again, the advice in the above posts is a solid way to create wealth, but if you are willing to "think and learn" and not just give up, then it is possible to get a higher return.

Some good points here. I think a strategy of buying prior to when typically the markets go up and selling prior to when typically they down for instance if done over the long term might beat the market. In saying that maybe there is a nice compromise that doesn't require too much effort. In some ways I prefer to be lazy. For instance if I had some bonds and some indexes (I would probably rather buy the index than individual stocks) and reallocated twice per year based on the market value that might force an approach of buying low and selling high.

[steveo]

What's wrong with keeping it simple? You're buying many pieces of profitable companies, and holding them as a part owner for their long term profit potential.

Other people will brag about some hot stock they made great money on or whatever. Don't worry about that, it's just the same as if they'd won at the casino.

The main way you're going to make money is by saving - that's where the really big returns come from.

I agree 100% with this. There is nothing wrong with the simple approach. I also get exactly what you are stating in that saving is what will help you move towards FI and hopefully retirement.