Author Topic: Investment type change Australia  (Read 883 times)

Murdoch

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Investment type change Australia
« on: April 08, 2020, 06:17:55 PM »
Hi all,

I am currently invested in the wholesale Vanguard Diversified Growth Index Fund (90%) and Vanguard Diversified High Growth Index Fund (10%). The 10% is the kids future fund.
The 'Growth' fund is 70% shares and 30% bond/fixed interest.
The 'High Growth' fund is 90%:10% split.
I chose the 'Growth' fund when we started investing as I was unsure of risk tolerance. Started 2013.
I chose the 'High Growth' fund for the kids much later. Started 2016.

In the current market downturn I've avoided any panic, and have continued to invest.
For the past years I have considered selling the entire 'Growth' fund and buying immediately into the 'High Growth' fund.
I haven't triggered the switch yet because I worried this attitude was only due to the bull market.
Now we are a couple months into volatile bear market I am more sure of this decision, as well as my own risk tolerance.

What are the risks of this plan?
Capital gains tax will be minimised, as values at sale will be closer to purchase price than they would have been in January.
I am also in a position to tax deduct a lot this year, so will minimise the duties owed on this.

I'm looking for pitfalls to this plan.
I am not in any major rush, but if I do it I'd be keen to complete prior to end of June for tax reasons.

Cheers
Murdoch

marty998

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Re: Investment type change Australia
« Reply #1 on: April 10, 2020, 09:20:55 PM »
You could always just buy the international or Australian shares index and get largely the same result (on the basis that the growth and high growth funds are simply combinations of equity and bond index funds).

If you dig through a few historical superannuation return tables, you might find that a "balanced" fund typically outperforms a "high growth" fund over 10 years.

Despite the high growth fund having better "good years", they lose a lot more in bad years, so the sexier performance in good years tends to be off lower absolute bases, and therefore doesn't count for as much.

Past performance is no guarantee of future performance.

MustacheAndaHalf

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Re: Investment type change Australia
« Reply #2 on: April 12, 2020, 09:35:38 PM »
https://www.bloomberg.com/quote/VDGR:AU
42% international stocks
30% bonds (international and Australian)
28% Australian stocks

The bond allocation falls closest to Vanguard Target 2030.  If you're 20+ years from retirement, that might be too high a bond allocation, since you don't need the safety of bonds yet.


https://www.bloomberg.com/quote/VDHG:AU
54% international stocks
36% Australian stocks
10% bonds

That is closest to Vanguard Target 2045, or a retirement that is 25+ years away.

Andy R

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Re: Investment type change Australia
« Reply #3 on: April 12, 2020, 10:33:59 PM »
For the past years I have considered selling the entire 'Growth' fund and buying immediately into the 'High Growth' fund.
I haven't triggered the switch yet because I worried this attitude was only due to the bull market.
Now we are a couple months into volatile bear market I am more sure of this decision, as well as my own risk tolerance.

What are the risks of this plan?
Capital gains tax will be minimised, as values at sale will be closer to purchase price than they would have been in January.
I am also in a position to tax deduct a lot this year, so will minimise the duties owed on this.

I'm looking for pitfalls to this plan.

With CGT minimised, the one other pitfall I can think of is that with some brokerage accounts you need to wait for settlement before buying again, so selling one day, waiting for a day or two for funds and having the stock market rise like 5% (or more) before you can buy again would really suck. Someone did that in the US and they lost 23k from it. I mean their portfolio was substantial so it's not like it was crippling but the guy's wife was understandably upset as she thought of all the things she could have bought with so much money.

If you were say moving from a high expense ratio managed fund into indexing but keeping your stock to bond allocation, you would move over bits at a time so you kind of average the differential, so day 1 you might sell then buy 4% up 2 days later, then on day 2 you might sell then buy 2% down 2 days later, and so on and so on, hopefully giving something a bit more even.

But since you're not selling and buying a similar asset allocation, i'm not sure if this works the same or not. I mean it would work for the total amount of equities at the start and the total amount of bonds at the end, but the bit in between where you will be switching from bonds to stocks, the longer you delay, the more you potentially drift from where you would be if you bought right now, and this comes back to the lump sum vs DCA issue.

Just off the top of my head, I might move it over in 5 bits. Still face the problem above where it moves up 5 days in a row, but at least you get a lower average spread between the selling and buying day than the single worst 2-day increase happening by moving it all in one go.

Andy R

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Re: Investment type change Australia
« Reply #4 on: April 12, 2020, 10:34:57 PM »
You could always just buy the international or Australian shares index and get largely the same result (on the basis that the growth and high growth funds are simply combinations of equity and bond index funds).

If you dig through a few historical superannuation return tables, you might find that a "balanced" fund typically outperforms a "high growth" fund over 10 years.

Despite the high growth fund having better "good years", they lose a lot more in bad years, so the sexier performance in good years tends to be off lower absolute bases, and therefore doesn't count for as much.

Past performance is no guarantee of future performance.

This is a weird thing to say.

A 50/50 allocation has certainly outperformed a 90/10 over some 10 year periods, but it's certainly not "typical" as you phrased it.

marty998

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Re: Investment type change Australia
« Reply #5 on: April 12, 2020, 10:55:03 PM »
You could always just buy the international or Australian shares index and get largely the same result (on the basis that the growth and high growth funds are simply combinations of equity and bond index funds).

If you dig through a few historical superannuation return tables, you might find that a "balanced" fund typically outperforms a "high growth" fund over 10 years.

Despite the high growth fund having better "good years", they lose a lot more in bad years, so the sexier performance in good years tends to be off lower absolute bases, and therefore doesn't count for as much.

Past performance is no guarantee of future performance.

This is a weird thing to say.

A 50/50 allocation has certainly outperformed a 90/10 over some 10 year periods, but it's certainly not "typical" as you phrased it.

Most 'balanced' investment options in super funds have about 70% equities or growth assets. The 30% allocation to bonds and cash tends to contribute quite substantially to outperforming a more aggressive fund, because of the higher protection of capital in bad times.

Partly I think the reason for this is the natural rebalancing taking place. If stocks have grown substantially, the fund "sells high" to rebalance back to a higher proportion of fixed income.

When stocks fall substantially, the fund "buys low" to rebalance back to the required amount of equities.


Andy R

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Re: Investment type change Australia
« Reply #6 on: April 13, 2020, 01:30:50 AM »
Most 'balanced' investment options in super funds have about 70% equities or growth assets. The 30% allocation to bonds and cash tends to contribute quite substantially to outperforming a more aggressive fund, because of the higher protection of capital in bad times.

Partly I think the reason for this is the natural rebalancing taking place. If stocks have grown substantially, the fund "sells high" to rebalance back to a higher proportion of fixed income.

When stocks fall substantially, the fund "buys low" to rebalance back to the required amount of equities.

Oh right you're talking about super.
I read that a lot of super funds put property and infrastructure into their defenestrate defensive asset classes, which is why a "70/30" is often in the 80-90 equity range.
I think they're considering making regulations around that so that super funds can't claim they have a "balanced" fund the outperforms other balanced funds when really their balanced fund is an aggressive fund that out performs other balanced funds.

Mathematically, while rebalancing by buying low lowers the cost of having a less aggressive allocation (ie an 80/20 historically had 7% lower returns instead of 20% lower returns), it doesn't make sense for it to actually out perform in the long run unless they're some sort of genius market timers (or if they got lucky).

Edit: corrected from somehow typing "defenestrate" instead of "defensive"
« Last Edit: April 13, 2020, 02:02:20 AM by Andy R »

mrmoonymartian

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Re: Investment type change Australia
« Reply #7 on: April 13, 2020, 01:51:55 AM »
Most 'balanced' investment options in super funds have about 70% equities or growth assets. The 30% allocation to bonds and cash tends to contribute quite substantially to outperforming a more aggressive fund, because of the higher protection of capital in bad times.

Partly I think the reason for this is the natural rebalancing taking place. If stocks have grown substantially, the fund "sells high" to rebalance back to a higher proportion of fixed income.

When stocks fall substantially, the fund "buys low" to rebalance back to the required amount of equities.

Oh right you're talking about super.
I read that a lot of super funds put property and infrastructure into their defenestrate asset classes, which is why a "70/30" is often in the 80-90 equity range.
I think they're considering making regulations around that so that super funds can't claim they have a "balanced" fund the outperforms other balanced funds when really their balanced fund is an aggressive fund that out performs other balanced funds.

Mathematically, while rebalancing by buying low lowers the cost of having a less aggressive allocation (ie an 80/20 historically had 7% lower returns instead of 20% lower returns), it doesn't make sense for it to actually out perform in the long run unless they're some sort of genius market timers (or if they got lucky).
They should call them defensive instead of throwing them out the window. That's just lazy fund management.

Andy R

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Re: Investment type change Australia
« Reply #8 on: April 13, 2020, 02:03:22 AM »
Sorry I don't know how I got "defenestrate" from my typing! I meant defensive.
Edited.

Murdoch

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Re: Investment type change Australia
« Reply #9 on: April 13, 2020, 02:51:09 PM »
Cheers all.
This is not my superannuation.
I went the balance fund when I started as it made psychological sense and was simple.
I was and am aware of the downsides, but held tight in case I panicked in a downturn.
This hasn't happened so want to increase my shares allocation.

My superannuation (and the wifes) are 100% international shares option in our industry fund QSuper for some time now.

I'll call Vanguard today and see how quickly a sale can be re-invested.
With the recent wild fluctuations I may get lucky or unlucky, but I'd prefer a sell and buy the same day to avoid this risk.

The Vanguard International Shares Index Fund VAN0003AU looks like what I'm after.
They run a hedged option of the same, but I'm not sure of the advantages other than reduced volatility.

Cheers
Murdoch


Andy R

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Re: Investment type change Australia
« Reply #10 on: April 13, 2020, 06:47:56 PM »
I'll call Vanguard today and see how quickly a sale can be re-invested.

Ah right, yea I wonder if they can do the switch in one go when using their managed funds. In the US I think they can, so may be possible here.

The Vanguard International Shares Index Fund VAN0003AU looks like what I'm after.
They run a hedged option of the same, but I'm not sure of the advantages other than reduced volatility.

Those are completely different products.
Your other one is a diversified fund containing 7 funds within them shown below.

Code: [Select]
Vanguard Australian Shares Index Fund (Wholesale)
Vanguard Global Aggregate Bond Index Fund (Hedged)
Vanguard International Shares Index Fund (Wholesale)
Vanguard International Shares Index Fund (Hedged) - AUD Class (Wholesale)
Vanguard Australian Fixed Interest Index Fund (Wholesale)
Vanguard International Small Companies Index Fund (Wholesale)
Vanguard Emerging Markets Shares Index Fund (Wholesale)


If your intention to go to just one of those funds, then fine, but it's not an equivalent fund with less bonds, which is what the managed fund version of VDHG would be. I would suggest before doing anything, come up with an asset allocation for your combined inside and outside super assets.
Eg
  • Equities to bonds percent
  • Aus equities:W%
  • Int equities:X%
  • Int-hedged equities:Y%
  • EM equities:Z%

Murdoch

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Re: Investment type change Australia
« Reply #11 on: April 13, 2020, 11:49:39 PM »
Cheers AndyR.

Called Vanguard and they can switch the entire portfolio the same day, so won't run the risk of volatile movements during transaction.

I'm not chasing equivalent funds. I started with the diversified option to safeguard against a poor decision during a market downturn such as panicking and selling everything. I am now confident I will not do that, as I haven't and continue to invest. My 'position statement' was to hold index shares at 70% in accounts outside superannuation which I have done through the diversified option, but put this at 90% shares for the kids section given their longer term outlook. The Australian heavy shares option in the diversified fund was not my intention as I would have preferred a fund more representative of the global share market, but valued the 'psychology' over the 'maths' on this decision up until now.

Basically I would like to increase my asset allocation to a higher % of shares, and be more 'global' heavy.
For this reason the VAN003AU looked like the closest option.

Cheers
Murdoch

Andy R

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Re: Investment type change Australia
« Reply #12 on: April 14, 2020, 02:15:23 AM »
Ah right, yea fair enough.
The AUD is low so it kinda sux to put all your global allocation into VGS, so might be worth considering splitting in some VGAD.

Murdoch

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Re: Investment type change Australia
« Reply #13 on: April 14, 2020, 02:44:19 AM »
Hi AndyR,

You are right, and it's been on my mind about the switch.
Not sure when is a good time though.
Does the old adage 'now is the best time to invest' relate to this switch in asset allocation?
DCA sounds like a general PITA, so I'd rather do it all in one hit.
Both Aus and US markets are like to be volatile for a while yet, so trying to pick my moment feels a lot like market timing...

Cheers
Murdoch

Andy R

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Re: Investment type change Australia
« Reply #14 on: April 14, 2020, 04:12:34 AM »
Does the old adage 'now is the best time to invest' relate to this switch in asset allocation?

It's a tough one.

It's different if you think the AUD will eventually be a wash and keep hovering around 60-90c AUD because the stock market doesn't hover around the same number, it is ever increasing.
But it is the same in that it could go in one direction and stay there for a couple of decades for all we know.

If someone had a static allocation and who is just buying as normal every month, you would just naturally end up buying the one that is lower.

But with a significant lump sum, buying global (unhedged) equities when the AUD is low kinda sux because if the AUD does mean revert, it will end up in a loss relative to having some AUD-hedged equities.

I would at least split it between VGS and VGAD (or rather the wholesale equivalent funds in your case), but of course that's just my opinion and you'll need to decide for yourself if that makes sense to you.

Murdoch

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Re: Investment type change Australia
« Reply #15 on: April 15, 2020, 03:23:46 AM »
Cheers AndyR,

I am going to try look at it this way: I will have a lump sum payment on the entire sale of the shares portfolio. Long term investment research suggests that 'immediately' is the best time to invest it, and in a lump sum.

The only difference in my scenario, is that I am choosing to sell everything prior to the immediate re-purchase in order to change asset allocation to a heavier shares portfolio. And as far as I am aware there is no rule of thumb for that.

Muroch