# SMSF Returns



## craft

That time of the year again. Sit up and watch the tour and do the superannuation return.

I use BGL’s simple fund to do the books. At this stage the books are not audited for 2011/2012 but everything balances.

The fund has two members both in accumulation phase for next 20 odd years. Only a very small amount of contributions/rollovers added this year. The fund is sufficient that we try to minimise contributions. 

Even though this is an anonymous forum I’m choosing to keep balance private - to put the returns and strategy into context it should be sufficient to indicate that the fund is in excess of a million dollars. The combination of fund balance and time until access allows for an aggressive risk profile. 

Strategy is basically to buy quality businesses at a price that I think makes sense and hold them for as long as the business continues to perform. If I can't find anything to buy at the right price I stay liquid and wait.

Cash & Interest rate securities currently stands at 13% of funds, the rest is invested in 9 Australian listed companies Not a lot of activity this year, one company sold in script offer and replacement is being sold down, some rebalancing of positions that have grown large and some accumulation of a couple of the other holdings.

2011/2012 results.

Gross Investment Return = 19.25%
(2010/2011 = 63.40%;   2009/2010 = 37.45%)

After tax and expense Return = 17.30%
(2010/2011 = 56.54%;   2009/2010 = 30.67%)

Due to unrealised gains there is a difference between tax expense and tax paid. This difference is accounted for as a ‘Deferred Tax Liability’ and is currently an additional $39,000 per Million of Net Assets that is available for investment. This amount is effectively a tax free loan from the tax office until a capital gains event occurs. If that event does not occur until after age 60 the tax office will kindly wave the liability.

Expenses:

Administration expenses including life insurance =   .08%	     [$800 per Million of Net Asset]

Brokerage = .03%					     [$300 per Million of Net Assets]




Anybody else like to share their SMSF thoughts, strategies or results.


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## bigdog

Craft,

What are the costs for BGL simple fund software?
-- assume that you get at least annual updates!


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## craft

bigdog said:


> Craft,
> 
> What are the costs for BGL simple fund software?
> -- assume that you get at least annual updates!




I buy a trustee licence. Just renewed and it cost $431 p.a. 
Your licence provides all updates throughout the year and there is quite a few to keep up with legislative changes etc.

Software is directed towards accounting users and you will need some understanding of double entry to be able to input the transactions. Once transactions are in you hit ‘create entries’ button and the software basically dose everything else – allocations, revaluations, reports, tax returns etc....

Export and email a file to the auditor who also uses simple fund and the job is done. 

I believe most accounting firms also use Simple fund – what I can’t understand is how they charge so much for so little work, especially when their software cost on a multi-fund licence would be just a few bucks per fund.


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## robusta

More than decent returns there Craft, your strategy of buying cash flow in decent businesses seems to be working just fine.


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## Julia

A good result in the current environment, Craft.   It may further cheer you to know that I was talking with a full service stockbroker a few days ago and was curious enough to ask her what sort of returns she'd been achieving for her clients.    She proudly announced that they'd done very well, with a 2% positive return for the FY.  That was before tax.

When you come to draw an income from your Fund will you continue what you describe as the fairly aggressive strategy you're presently using?

(I'm assuming you currently have an alternate source of day to day income.)


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## Ves

craft said:


> I believe most accounting firms also use Simple fund – what I can’t understand is how they charge so much for so little work, especially when their software cost on a multi-fund licence would be just a few bucks per fund.



We don't use Simple Fund where I work.  It's far from perfect - some of the numbers and tax calculations it spits out are wrong.  That being said, for straight forward calculations it usually does the job. 

Accountants charge so much because they (by rights) should pick up these anomalies. They also have more overheads like staff, leases, electricity... like any business. Time costs are high for starters becase educated staff aren't always cheap. Although the proliferation of cheap labour from India might have something to say about that. I digress. Software is generally more expensive in offices (because it is has more functionality than a "home version") You are paying for years of training, knowledge and expertise. You are also paying a firm a percentage of profit (Why would they open, otherwise?). In saying that, most accounting firms probably write off money on Funds that insist on being done cheap. 

Compliance for professional bodies (ie. internal review systems, preparation and archiving of workpapers) and administrative functions take up a lot of time. You just cannot skip it without risking potential professional indemnity claims being disregarded in the future or action taken by CPA or CA after one of their compulsory audit reviews.

By the way, it isn't the job of your Fund auditor to look at the tax return & the tax calculations in minute detail (and nor are they required to).  They may take sampling of source documentation and look at the headline figures, but in the main it is a compliance function  (has the Fund operated within the SIS legislation? has it operated within the rules of the Trust deed?).

I am sure there are more reasons. But that's why you can do your own Fund cheaper than I could in the workplace. You have far less hoops to jump through.


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## craft

Julia said:


> When you come to draw an income from your Fund will you continue what you describe as the fairly aggressive strategy you're presently using?




Depends on the balance at the time. If there isn't oodles of capital in excess of requirements then I would be a lot more conservative. Having the liquidity to meet minimum withdrawal requirements is going to become an issue at some stage once the minimum exceeds the dividend stream.




> (I'm assuming you currently have an alternate source of day to day income.)




Same source of income (ie investing) but obviously in a fund external to super.


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## craft

Ves said:


> We don't use Simple Fund where I work.  It's far from perfect - some of the numbers and tax calculations it spits out are wrong.  That being said, for straight forward calculations it usually does the job.
> 
> Accountants charge so much because they (by rights) should pick up these anomalies. They also have more overheads like staff, leases, electricity... like any business. Time costs are high for starters becase educated staff aren't always cheap. Although the proliferation of cheap labour from India might have something to say about that. I digress. Software is generally more expensive in offices (because it is has more functionality than a "home version") You are paying for years of training, knowledge and expertise. You are also paying a firm a percentage of profit (Why would they open, otherwise?). In saying that, most accounting firms probably write off money on Funds that insist on being done cheap.
> 
> Compliance for professional bodies (ie. internal review systems, preparation and archiving of workpapers) and administrative functions take up a lot of time. You just cannot skip it without risking potential professional indemnity claims being disregarded in the future or action taken by CPA or CA after one of their compulsory audit reviews.
> 
> By the way, it isn't the job of your Fund auditor to look at the tax return & the tax calculations in minute detail (and nor are they required to).  They may take sampling of source documentation and look at the headline figures, but in the main it is a compliance function  (has the Fund operated within the SIS legislation? has it operated within the rules of the Trust deed?).
> 
> I am sure there are more reasons. But that's why you can do your own Fund cheaper than I could in the workplace. You have far less hoops to jump through.




With Simple Fund being used to maintain over 75% of all SMSF funds it’s interesting to hear your perspective. I have never found one of the anomalies you refer to, touch wood, but I do double check it.

I’m glad it is you that have to jump through hoops and not me and I take on board what you say is pumping up the costs.  However in my view the industry is a long way from providing anything that resembles value for money.  (However I’m sure there are exceptions)

Cheers.


ps

Simple Fund renewal fee on 1000 Fund license is $2717 or $2.71 per fund. Every fund over 1000 costs $1.82!


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## Ves

craft said:


> With Simple Fund being used to maintain over 75% of all SMSF funds it’s interesting to hear your perspective. I have never found one of the anomalies you refer to, touch wood, but I do double check it.



The way I believe it should be used and the way that _most accountants_ use it may differ.  It should be used as a convenient way of preparing reporting requirements for SMSFs.  You should not have blind faith in accounting software because they will never be right all the time.  You should always be checking the figures with an understanding of the tax legislation. Sadly, in the industry my experience is different to this. Take from this what you will.

You could produce the same content on an Excel spreadsheet fairly easily given the knowledge, but because of all the excess legislation (and audit compliance) requirements you will not find that this is possible as a solution in practice.



> I’m glad it is you that have to jump through hoops and not me and I take on board what you say is pumping up the costs.  However in my view the industry is a long way from providing anything that resembles value for money.  (However I’m sure there are exceptions)
> 
> Cheers.



I completely agree - I don't want to derail your thread. But with AMP and some of the other majors buying up firms and consolidating the SMSF industry regular accountants will need to deal with the "value proposition" more than ever over the next decade or two - otherwise they will quickly find themselves out of Fund returns to prepare.  I am not sure whether it is the regulator, the legislation, the industry principles and professional standards - maybe it is all of these, but you are correct, why can't we prepare a simple set of Financials and Tax Return in a few hours?

I have to deal with this crap every day, and honestly I wish I could make a difference to it.  But it isn't the only industry with these problems.  I am not sure what it is like overseas, but costs in Australia for all services seem to be sky high in my eyes in terms of value.



> ps
> 
> Simple Fund renewal fee on 1000 Fund license is $2717 or $2.71 per fund. Every fund over 1000 costs $1.82!



Most accounting firms are lucky to have 50 SMSFs to prepare let alone 1000.  My firm has about 400. 600 if you include "part admin" funds where we do the compliance check.


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## Julia

Ves said:


> We don't use Simple Fund where I work.  It's far from perfect - some of the numbers and tax calculations it spits out are wrong.  That being said, for straight forward calculations it usually does the job.
> 
> Accountants charge so much because they (by rights) should pick up these anomalies. They also have more overheads like staff, leases, electricity... like any business. Time costs are high for starters becase educated staff aren't always cheap. Although the proliferation of cheap labour from India might have something to say about that. I digress. Software is generally more expensive in offices (because it is has more functionality than a "home version") You are paying for years of training, knowledge and expertise. You are also paying a firm a percentage of profit (Why would they open, otherwise?). In saying that, most accounting firms probably write off money on Funds that insist on being done cheap.
> 
> Compliance for professional bodies (ie. internal review systems, preparation and archiving of workpapers) and administrative functions take up a lot of time. You just cannot skip it without risking potential professional indemnity claims being disregarded in the future or action taken by CPA or CA after one of their compulsory audit reviews.
> 
> By the way, it isn't the job of your Fund auditor to look at the tax return & the tax calculations in minute detail (and nor are they required to).  They may take sampling of source documentation and look at the headline figures, but in the main it is a compliance function  (has the Fund operated within the SIS legislation? has it operated within the rules of the Trust deed?).
> 
> I am sure there are more reasons. But that's why you can do your own Fund cheaper than I could in the workplace. You have far less hoops to jump through.



Thanks for the comprehensive explanation, Ves.  
I think there's another factor that clients are prepared to pay for, and that's the shifting of the responsibility to a 'professional'.
Just from my own point of view, I'm prepared to pay for knowing someone is keeping up with all the changes in regulations and ensuring my Fund is compliant.   I also appreciate that what I pay annually includes any and all questions/chats with my accountant on what are sometimes quite general questions.
So I consider what I pay my accountant absolutely value for money.


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## nulla nulla

Julia said:


> Thanks for the comprehensive explanation, Ves.
> I think there's another factor that clients are prepared to pay for, and that's the shifting of the responsibility to a 'professional'.
> Just from my own point of view, I'm prepared to pay for knowing someone is keeping up with all the changes in regulations and ensuring my Fund is compliant.   I also appreciate that what I pay annually includes any and all questions/chats with my accountant on what are sometimes quite general questions.
> So I consider what I pay my accountant absolutely value for money.




+1


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## Intrinsic Value

craft said:


> That time of the year again. Sit up and watch the tour and do the superannuation return.
> 
> I use BGL’s simple fund to do the books. At this stage the books are not audited for 2011/2012 but everything balances.
> 
> The fund has two members both in accumulation phase for next 20 odd years. Only a very small amount of contributions/rollovers added this year. The fund is sufficient that we try to minimise contributions.
> 
> Even though this is an anonymous forum I’m choosing to keep balance private - to put the returns and strategy into context it should be sufficient to indicate that the fund is in excess of a million dollars. The combination of fund balance and time until access allows for an aggressive risk profile.
> 
> Strategy is basically to buy quality businesses at a price that I think makes sense and hold them for as long as the business continues to perform. If I can't find anything to buy at the right price I stay liquid and wait.
> 
> Cash & Interest rate securities currently stands at 13% of funds, the rest is invested in 9 Australian listed companies Not a lot of activity this year, one company sold in script offer and replacement is being sold down, some rebalancing of positions that have grown large and some accumulation of a couple of the other holdings.
> 
> 2011/2012 results.
> 
> Gross Investment Return = 19.25%
> (2010/2011 = 63.40%;   2009/2010 = 37.45%)
> 
> After tax and expense Return = 17.30%
> (2010/2011 = 56.54%;   2009/2010 = 30.67%)
> 
> Due to unrealised gains there is a difference between tax expense and tax paid. This difference is accounted for as a ‘Deferred Tax Liability’ and is currently an additional $39,000 per Million of Net Assets that is available for investment. This amount is effectively a tax free loan from the tax office until a capital gains event occurs. If that event does not occur until after age 60 the tax office will kindly wave the liability.
> 
> Expenses:
> 
> Administration expenses including life insurance =   .08%	     [$800 per Million of Net Asset]
> 
> Brokerage = .03%					     [$300 per Million of Net Assets]
> 
> 
> 
> 
> Anybody else like to share their SMSF thoughts, strategies or results.





My return has been very miserable Having said that I have been too busy making money to really look at my investments as much as I should have.

I am 65 percent cash and 35 percent shares. I havent bought anything for awhile and I putting all  my company earnings and personal earnings in interest bearng accounts until there are some real bargains and this euro crisis is resovled. My accountant does everything for me quite cheaply as he does my super, company and personal returns.

Craft, would you care to share any specific successes you have had in what has been a very difficult year?


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## craft

Ves said:


> The way I believe it should be used and the way that _most accountants_ use it may differ.  It should be used as a convenient way of preparing reporting requirements for SMSFs.  You should not have blind faith in accounting software because they will never be right all the time.  You should always be checking the figures with an understanding of the tax legislation. Sadly, in the industry my experience is different to this. Take from this what you will.
> 
> You could produce the same content on an Excel spreadsheet fairly easily given the knowledge, but because of all the excess legislation (and audit compliance) requirements you will not find that this is possible as a solution in practice.
> 
> 
> I completely agree - I don't want to derail your thread. But with AMP and some of the other majors buying up firms and consolidating the SMSF industry regular accountants will need to deal with the "value proposition" more than ever over the next decade or two - otherwise they will quickly find themselves out of Fund returns to prepare.  I am not sure whether it is the regulator, the legislation, the industry principles and professional standards - maybe it is all of these, but you are correct, why can't we prepare a simple set of Financials and Tax Return in a few hours?
> 
> I have to deal with this crap every day, and honestly I wish I could make a difference to it.  But it isn't the only industry with these problems.  I am not sure what it is like overseas, but costs in Australia for all services seem to be sky high in my eyes in terms of value.
> 
> 
> Most accounting firms are lucky to have 50 SMSFs to prepare let alone 1000.  My firm has about 400. 600 if you include "part admin" funds where we do the compliance check.




Hi V

Thanks for the picture from the inside - great insights. It appears from other responses I may be in a minority with my perception of value for money. 

On the accounting theme and out of curiosity have you ever had a look at WHK Group?


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## craft

Intrinsic Value said:


> My return has been very miserable Having said that I have been too busy making money to really look at my investments as much as I should have.
> 
> I am 65 percent cash and 35 percent shares. I havent bought anything for awhile and I putting all  my company earnings and personal earnings in interest bearng accounts until there are some real bargains and this euro crisis is resovled. My accountant does everything for me quite cheaply as he does my super, company and personal returns.




IV

Thanks for sharing your approach for the past year. A good income and a subdued market should put you in a pretty good place when you find your bargains. How are you going to identify the right time/company to capitalise on your liquidity?




> Craft, would you care to share any specific successes you have had in what has been a very difficult year?




Trying not to be flippant – the most specific thing I have done to produce the return is just stay exposed to good businesses and not medal by trying to improve the return through trading.

Change in Market Value was 11.16% pre tax/expenses. The largest contributor to market revaluation was MMS at 5.8% . The largest detractor was DTL at negative 2.5% . 7 companies had positive revaluation 2 had negative.  A financial year is really a pretty arbitrary period to measure results, so the revaluation figures are pretty meaningless. I concentrate on the cash flow (Dividend/Interest) return which was 8.08% on net assets and an awful lot higher on total contributions - the magic of compounding.


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## Ves

craft said:


> Hi V
> On the accounting theme and out of curiosity have you ever had a look at WHK Group?



I hadn't actually. I honestly didn't realise they were listed.  They have an office in Brisbane city.

I had a look at their financials on my lunch break. A breath of fresh air that they focus on cash profits. Their cash flow looks pretty steady. They are able to pay down debt and a relatively high dividend payout ratio from their FCF.

It seems that most of their revenue declines have been due to the drop-off in "consulting work." Clients are holding back on projects (and therefore advice on them). Consulting work is the cream for these firms. I have heard people senior to me commenting that the current economic environment is as bad as it has been for many years in respect of clients delaying payment of invoices (and bringing their work in) and being extremely fee conscious. This will show up in the margins when it improves. Compliance is the nuts and bolts and is low margin. You can see the decline in operating margins since 2008. They service high networth individuals and bigger business clients as priority.  So in this sense they are a smaller fish in the big waters dominated by the Big 4. Possibly why their return on equity / ROIC has never been much higher than the cost of capital. 

I will also note that many mid-sized practices (including regional and suburban) have seen a culture change towards the "value proposition" (which is accounting speak for trying to get more consulting work). They never used to chase it as hard, but firms are getting smarter with their marketing and image to accomodate this. The industry has changed a bit in this respect. It used to be more confined to the bigger firms.

All that said, I like accounting businesses.  Mainly because the clients are generally pretty sticky.  I also believe that they are sheltered somewhat from shock earnings events, their demise is generally a slow affair.  You can pick it up early because it is usually due to poor cash flow management (keep an eye on tardy receiveables, increasing working capital requirements and the employee remuneration compared to revenue).

In a sense compliance work is a recurring revenue stream, since the same thing is done for the same clients (in most cases) year in year out. The main problem with compliance work is that clients do not see the value. As you previously stated yourself with your own affairs.

I probably prefer CUP in this sector because the practices that they own, whilst profitable, seem to focus on those clients who the Big 4 (and other bigger firms) don't chase. They're both priced pretty similarly on basic metrics and neither are absolute bargains, but perhaps slightly on the cheap side.


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## Intrinsic Value

craft said:


> IV
> 
> Thanks for sharing your approach for the past year. A good income and a subdued market should put you in a pretty good place when you find your bargains. How are you going to identify the right time/company to capitalise on your liquidity?
> 
> 
> 
> 
> Trying not to be flippant – the most specific thing I have done to produce the return is just stay exposed to good businesses and not medal by trying to improve the return through trading.
> 
> Change in Market Value was 11.16% pre tax/expenses. The largest contributor to market revaluation was MMS at 5.8% . The largest detractor was DTL at negative 2.5% . 7 companies had positive revaluation 2 had negative.  A financial year is really a pretty arbitrary period to measure results, so the revaluation figures are pretty meaningless. I concentrate on the cash flow (Dividend/Interest) return which was 8.08% on net assets and an awful lot higher on total contributions - the magic of compounding.




MMS were a good stock for me a couple of years back. I havent had a look at them of late but then as I said I am not really looking at the moment.

My current holdings are BGL which has done reasonably. VOC which i am hoping will do better in the medium term. I am still holding FGE which I bought a long time ago and should have sold a few times but have kept. I also hold BHP, and ANZ. I havent really factored dividends into my return but am purely basing my return on any movement in share price.

However I am gun shy at the moment as i believe it is basically a short term traders market with all the uncertainty over the euro, China slow down, stuttering US recovery. I am prepared to get 5 percent until it appears there is a bit of a turnaround in market sentiment or a real good bargain comes along that cant be ignored. 

I will look at the usual things, cash flow, debt levels, competitive advantage, outlook, good track record, management record. 

I will have some spare time coming up as I have August off work so I will be sifting through the reporting season to see if there is anything that stands out as a BUY ME stock.


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## craft

craft said:


> Expenses:
> 
> Administration expenses including life insurance =   .08%	     [$800 per Million of Net Asset]
> 
> Brokerage = .03%					     [$300 per Million of Net Assets]





Appears the *cheapest* fund open to the general public is 'First State Super Personal Division' with a total expense ratio of .45% or $4,500 per million of net assets and that doesn’t include life insurance.

http://www.superguide.com.au/boost-your-superannuation/comparing-super-funds-check-out-the-cheapest-funds?utm_source=SuperGuide+Newsletter&utm_campaign=b304a8787d-Aug_2012_InvestmentPerformance_13_8_2012&utm_medium=email&gooal=eyJjaWQiOiJiMzA0YTg3ODdkIiwidGFnIjoiR29vYWxfVHJhY2tpbmdfMjE5ZjM3MzhiZCIsInVpZCI6ImRhNzE1NDFmYzM4ZDEzYjY5YWQwZTI3ZGQifQ%3D%3D|Z2J5ZUBiaWdwb25kLm5ldC5hdQ== 


I'll take that as a tick for cost control on the SMSF. 

$3000+ per million of assets, per annum, saved for 30 odd years, compounded at ---%...... ummm thats Big!


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## craft

craft said:


> After tax and expense Return = 17.30%
> (2010/2011 = 56.54%;   2009/2010 = 30.67%)




Looks like the top growth fund for 2011/12 was QSuper Balanced with a 6.4% return

http://www.superguide.com.au/superannuation-basics/top-10-performing-super-funds-20112012-year?utm_source=SuperGuide+Newsletter&utm_campaign=b304a8787d-Aug_2012_InvestmentPerformance_13_8_2012&utm_medium=email&gooal=eyJjaWQiOiJiMzA0YTg3ODdkIiwidGFnIjoiR29vYWxfVHJhY2tpbmdfMjE5ZjM3MzhiZCIsInVpZCI6ImRhNzE1NDFmYzM4ZDEzYjY5YWQwZTI3ZGQifQ%3D%3D|Z2J5ZUBiaWdwb25kLm5ldC5hdQ==

The average growth fund return was 0.5% whilst the average all growth(describes my approach) was – 2.5%

http://www.superguide.com.au/superannuation-basics/super-funds-returns-2011-2012-year?utm_source=SuperGuide+Newsletter&utm_campaign=b304a8787d-Aug_2012_InvestmentPerformance_13_8_2012&utm_medium=email&gooal=eyJjaWQiOiJiMzA0YTg3ODdkIiwidGFnIjoiR29vYWxfVHJhY2tpbmdfMjE5ZjM3MzhiZCIsInVpZCI6ImRhNzE1NDFmYzM4ZDEzYjY5YWQwZTI3ZGQifQ%3D%3D|Z2J5ZUBiaWdwb25kLm5ldC5hdQ==

Overall I think the results justify me continuing to manage the SMSF.


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## Julia

craft said:


> Appears the *cheapest* fund open to the general public is 'First State Super Personal Division' with a total expense ratio of .45% or $4,500 per million of net assets and that doesn’t include life insurance.



Still cheaper to do it yourself.


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## Ystress

Yes, you are right sometimes it is cheaper doing it yourself


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## nulla nulla

Julia said:


> Still cheaper to do it yourself.






Ystress said:


> Yes, you are right sometimes it is cheaper doing it yourself




And more satisfying when you see the performance of your self managed funds consistantly out performing the "professional" funds.


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## Julia

Link to ATO's report on latest stats on SMSFs.
http://www.superguide.com.au/compar...funds?utm_source=SuperGuide+Newsletter&utm_ca


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## sydboy007

From the looks of it using esuperfund is not terribly expensive then?

Also removes a lot of the burden of record keeping, unless you do some investments they can't track electronically

Think I'll be doing my first return shortly as I only set up my SMSF a few months back.

happy to have received $1365 in grossed up dividends last month.  Be a couple of leanish months before I get another bust of income flowing into the fund.

Must admit it's quite rewarding to be able to have complete visibility of where the income and capital gains is coming from.  can't wait for the end of the year comes to see if my strategy has worked out the way I'm planning.


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## craft

craft said:


> That time of the year again. Sit up and watch the tour and do the superannuation return.
> 
> I use BGL’s simple fund to do the books. At this stage the books are not audited for 2011/2012 but everything balances.
> 
> The fund has two members both in accumulation phase for next 20 odd years. Only a very small amount of contributions/rollovers added this year. The fund is sufficient that we try to minimise contributions.
> 
> Even though this is an anonymous forum I’m choosing to keep balance private - to put the returns and strategy into context it should be sufficient to indicate that the fund is in excess of a million dollars. The combination of fund balance and time until access allows for an aggressive risk profile.
> 
> Strategy is basically to buy quality businesses at a price that I think makes sense and hold them for as long as the business continues to perform. If I can't find anything to buy at the right price I stay liquid and wait.
> 
> Cash & Interest rate securities currently stands at 13% of funds, the rest is invested in 9 Australian listed companies Not a lot of activity this year, one company sold in script offer and replacement is being sold down, some rebalancing of positions that have grown large and some accumulation of a couple of the other holdings.
> 
> 2011/2012 results.
> 
> Gross Investment Return = 19.25%
> (2010/2011 = 63.40%;   2009/2010 = 37.45%)
> 
> After tax and expense Return = 17.30%
> (2010/2011 = 56.54%;   2009/2010 = 30.67%)
> 
> Due to unrealised gains there is a difference between tax expense and tax paid. This difference is accounted for as a ‘Deferred Tax Liability’ and is currently an additional $39,000 per Million of Net Assets that is available for investment. This amount is effectively a tax free loan from the tax office until a capital gains event occurs. If that event does not occur until after age 60 the tax office will kindly wave the liability.
> 
> Expenses:
> 
> Administration expenses including life insurance =   .08%	     [$800 per Million of Net Asset]
> 
> Brokerage = .03%					     [$300 per Million of Net Assets]
> 
> 
> 
> 
> Anybody else like to share their SMSF thoughts, strategies or results.




2012/13 Gross Investment return = 45.74%

2012/13 After tax return = 40.71%  

Administration expenses = .04% [$400 per Million of Assets]


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## craft

craft said:


> 2012/13 Gross Investment return = 45.74%
> 
> 2012/13 After tax return = 40.71%
> 
> Administration expenses = .04% [$400 per Million of Assets]




This is the equity curve for the year. (rebased to 100)




The blue straight line is just a linear regression line.


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## craft

This is the 10th set of financial reports since my wife and I switched our super into a SMSF.  So I can now extract 9 years worth of performance figures.

CAGR over those 9 years has been 34.4%. (after tax) The CAGR for the Allords accumulation index over the same period has been 7.9%

100K compounded at the index return over those 9 years would have grown to $197,716 (ignoring tax) whilst 100K in the SMSF has grown to $1,427,500. (after tax)



My focus is investing for future cash flow.  

The chart below shows the Income Stream and Net Value [different scales] 




Whilst mark to market valuation jumps around a bit in the short term and includes a negative year in 2009 the income stream is more stable and consistent; to date the income stream has grown at a CAGR of 42.3%. 

18 Years left until preservation age


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## McLovin

Well done craft. I only hope to be able to emulate your returns one day.

Your posts in the various threads on this forum have helped me immensly in reaching that goal, so thanks.


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## VSntchr

> Whilst mark to market valuation jumps around a bit in the short term and includes a negative year in 2009 the income stream is more stable and consistent; to date the income stream has grown at a CAGR of 42.3%.
> 
> 18 Years left until preservation age





Congratulations Craft. You have achieved a position that I am striving for.

Whilst I have 37 years (unless it changes, which it likely will) until preservation age, my goal is firmly set to get there MUCH faster. You are an inspiration for me!


----------



## Intrinsic Value

craft said:


> This is the 10th set of financial reports since my wife and I switched our super into a SMSF.  So I can now extract 9 years worth of performance figures.
> 
> CAGR over those 9 years has been 34.4%. (after tax) The CAGR for the Allords accumulation index over the same period has been 7.9%
> 
> 100K compounded at the index return over those 9 years would have grown to $197,716 (ignoring tax) whilst 100K in the SMSF has grown to $1,427,500. (after tax)
> 
> 
> 
> My focus is investing for future cash flow.
> 
> The chart below shows the Income Stream and Net Value [different scales]
> 
> View attachment 53108
> 
> 
> Whilst mark to market valuation jumps around a bit in the short term and includes a negative year in 2009 the income stream is more stable and consistent; to date the income stream has grown at a CAGR of 42.3%.
> 
> 18 Years left until preservation age




Congratualations. I should get you to manage my investments because you are doing a much better job than I am.


----------



## Huskar

craft said:


> This is the 10th set of financial reports since my wife and I switched our super into a SMSF.  So I can now extract 9 years worth of performance figures.
> 
> CAGR over those 9 years has been 34.4%. (after tax) The CAGR for the Allords accumulation index over the same period has been 7.9%
> 
> 100K compounded at the index return over those 9 years would have grown to $197,716 (ignoring tax) whilst 100K in the SMSF has grown to $1,427,500. (after tax)
> 
> 
> 
> My focus is investing for future cash flow.
> 
> The chart below shows the Income Stream and Net Value [different scales]
> 
> View attachment 53108
> 
> 
> Whilst mark to market valuation jumps around a bit in the short term and includes a negative year in 2009 the income stream is more stable and consistent; to date the income stream has grown at a CAGR of 42.3%.
> 
> 18 Years left until preservation age




Fascinating craft some stellar figures there!

Out of interest by "income stream" do you mean dividends/interest received? And what is your investment policy with respect to dividends: direct reinvestment (if available) or accumulate cash?


----------



## skc

craft said:


> Whilst mark to market valuation jumps around a bit in the short term and includes a negative year in 2009 the income stream is more stable and consistent; to date the income stream has grown at a CAGR of 42.3%.




Very well done Craft. Most impressive is the small drawdown during GFC and the spurt afterwards.

Question please: of the income stream growth, how much of the 42.3% is organic vs increased asset base? Rough estimates will do - don't need to do a co-variance analysis!


----------



## craft

McLovin said:


> Your posts in the various threads on this forum have helped me immensly in reaching that goal, so thanks.




I can’t accept credit for anything that you have managed to take from my posts – that belongs to you.  But I am pleased all the same that some of my dribble may have thrown a little light.


----------



## Klogg

Oh, wow. CAGR of 34.4% is insane!

Sorry to add to the list of questions, but do you invest in global companies, or just on the ASX?


----------



## craft

VSntchr said:


> Whilst I have 37 years (unless it changes, which it likely will) until preservation age, my goal is firmly set to get there MUCH faster. You are an inspiration for me!




37 Years I’m very envious.

I’m not sure about being an inspiration, but what I would be happy for my story to say is that if It can happen for me then it's within anybody's reach because I’m not special – but I am very passionate about investing and have put in a *lot* of time and been prepared to take a fair bit of risk.

- - - Updated - - -



Intrinsic Value said:


> Congratualations. I should get you to manage my investments because you are doing a much better job than I am.




Sorry marriage is a pre-requisite to have me manage anybody's money and I've already hit my 1 customer limit. 
- - - Updated - - -



Klogg said:


> Sorry to add to the list of questions, but do you invest in global companies, or just on the ASX?




Just ASX and my preference seems to be small but not tiny non-miners. things I can actually understand the books of. Sometimes bigger companies if I think there's a strong macro tailwind.

- - - Updated - - -



skc said:


> Very well done Craft. Most impressive is the small drawdown during GFC and the spurt afterwards.




Funny how a single year data point can gloss over so much. The monthly is much more volatile and the lived experience scared the crap out of me. Mostly the spurt was a result premature accumulation. The very bottom just saw me sitting there saying “what in the **** dose everybody know that I don’t understand?". The market since GFC has been the best that I have experienced as a stock picker, mainly I think because the P/E’s have been compressed so the prices move more in line with underlying business results.




skc said:


> Question please: of the income stream growth, how much of the 42.3% is organic vs increased asset base? Rough estimates will do - don't need to do a co-variance analysis!




Not a lot of capital has been added relatively speaking since the initial roll over.  A bigger impact on the number is that the first year wasn’t fully invested so more rust and less dividends. Using the second year as the start point drops the return to 35.9%.

Over the very long run cash flow drives capital growth. So ex asset base increase my best guess would be that the income stream growth is very similar to the long term investment return give or take a bit of PE difference between now and 2004.

- - - Updated - - -



Huskar said:


> Out of interest by "income stream" do you mean dividends/interest received? And what is your investment policy with respect to dividends: direct reinvestment (if available) or accumulate cash?




Yep dividends and interest.  Started the year at 13% cash finished at 6% cash. *I don’t like cash*. Always feel pressure to get it invested. The aim is to be near fully invested and reinvest dividends evenly over the year into the best value I can find at the designated time. Would only purposely build cash if I perceived it to offer a better long term return then investment options – hasn’t happened since 2007.

I haven’t been as disciplined in my reinvestment process as I should have been of late. Mucking around at the edges bringing forward and delaying cash deployment to try and add a bit of value in short term timing and in the process wasting thinking and effort without I feel adding any real value to the long term strategy. I put my increase in activity down to stimulation from forums etc which I was never involved in as I developed my approach.  

On that note – I’m trying to not come her to often so sorry if I miss a few posts.

Catch you infrequently.


----------



## Huskar

craft said:


> I haven’t been as disciplined in my reinvestment process as I should have been of late. Mucking around at the edges bringing forward and delaying cash deployment to try and add a bit of value in short term timing and in the process wasting thinking and effort without I feel adding any real value to the long term strategy. I put my increase in activity down to stimulation from forums etc which I was never involved in as I developed my approach.
> 
> On that note – I’m trying to not come her to often so sorry if I miss a few posts.
> 
> Catch you infrequently.




I couldn't agree more. 

The tendency to act is hard enough to resist at the best of times and the more you opinions you hear (and therefore respond to) the more you engage the heuristics of commitment and consistency or social proof: I say X therefore I must act in accordance with X; or they do Y therefore Y must be good.

Doesn't matter how much you know about such tendencies they are impossible to resist (see Cialdini, Influence for more).

We crave recognition (even if we don't like to admit it) because we are fundamentally social animals.

And as religion teaches us, abstinence is far easier than moderation.

Well that's my rant for the day...


----------



## craft

Equity curve for 2013 calendar year (rebased to 100)

White line (bottom) is the XSO accumulation index – this index probably best describes the tide that influences the stocks I tend to invest in.

Red line (middle) is the All ordinaries accumulation index. This index best describes the passive index tracking approach I would take if not managing my own super.

Yellow line (top) is the equity curve. Volatility has returned since May and I have been sitting through a period of consolidation.  MMS had a big impact in July.


----------



## Ves

Hi craft - welcome back,  hope you had a great Christmas and New Year period and that your travels were enjoyable.

My equity curve for 2013 looks fairly similar  to the Accumulation Index... although it's about 4-5% higher in total return for the year.   

What software are you using to generate the equity curves?   I'm still using MS Excel for mine,  and only enter the market data in manually at the end of the month and when I make a purchase (which is mechanially mid-month if there is value on offer). so there are far less data points,  anything more is very time consuming.


----------



## craft

Ves said:


> Hi craft - welcome back,  hope you had a great Christmas and New Year period and that your travels were enjoyable.




Thanks and same too you.



Ves said:


> What software are you using to generate the equity curves?   I'm still using MS Excel for mine,  and only enter the market data in manually at the end of the month and when I make a purchase (which is mechanially mid-month if there is value on offer). so there are far less data points,  anything more is very time consuming.




The portfolio manager module on a pretty basic bit of charting software called insight trader. Simple as pressing one button to generate/update the file and then charting it as per any other security.


----------



## Ves

craft said:


> The portfolio manager module on a pretty basic bit of charting software called insight trader. Simple as pressing one button to generate/update the file and then charting it as per any other security.



Thanks for that.  It's a shame that it is embedded within the trading / charting software and there is no option for a standalone version!  Looks really good,  I will have to keep an eye out for similar stand alone software packages with the same functionality.


----------



## craft

Is anybody using or familiar with the new simplefund 360 trustee edition administration software?

My renewal for simplefund desktop is due and it looks worthwhile migrating to the new cloud based version, just wondering if anybody has already made the move and if there was any hiccups.

Or is anybody using the client access version of simplefund 360 via their SMSF administrators? If so what are your thoughts?


----------



## lenny454

Thanks for starting this thread, Craft. It's really great to see the returns that you have been able to achieve.

My two friends and I started our SMSF a couple of years ago with esuperfund but have been very lazy in our investments. However, we have finally got our act together and have started investing our cash. 

We initially tried to get a loan to purchase a property but I moved overseas on a volunteer assignment and the bank would not lend to us for this reason. Most bank employees that I spoke to had not even heard of SMSFs and didn't know they could buy property.

I have been investing in both the Australian and US stock markets for a while and have started researching potential companies for the SMSF.

Thanks again for this thread and I hope you continue posting updates and what you are invested in.


----------



## sydboy007

I'd be interested to know what MER people are getting with their funds.

I was trying to get as complete a picture as I could so included all the basic fees like auditing / ATO / ASIC / brokerage costs.

Then I added in the MER from the ETFs / LICs I've got.

Pretty much assumed cash, hybrids and direct shares are costless.

I came up with 0.93% (just over $1800), where roughly 60% of that was just the auditing / ATO / ASIC

It's higher than I thought it would be, but with such a high "fixed" component it should come down as my balance grows.


----------



## craft

sydboy007 said:


> I'd be interested to know what MER people are getting with their funds.
> 
> I was trying to get as complete a picture as I could so included all the basic fees like auditing / ATO / ASIC / brokerage costs.
> 
> Then I added in the MER from the ETFs / LICs I've got.
> 
> Pretty much assumed cash, hybrids and direct shares are costless.
> 
> I came up with 0.93% (just over $1800), where roughly 60% of that was just the auditing / ATO / ASIC
> 
> It's higher than I thought it would be, but with such a high "fixed" component it should come down as my balance grows.




With costs being generally fixed on a SMSF the expense ratio for a fund holding direct shares is dependent on fund size.

My total expense ratio for software, admin, audit, brokerage etc is below .05% which is less then the lowest ETF I know of.


----------



## craft

craft said:


> Is anybody using or familiar with the new simplefund 360 trustee edition administration software?
> 
> My renewal for simplefund desktop is due and it looks worthwhile migrating to the new cloud based version, just wondering if anybody has already made the move and if there was any hiccups.
> 
> Or is anybody using the client access version of simplefund 360 via their SMSF administrators? If so what are your thoughts?




Finally stoped procrastinating and did the books in Simplefund 360. What a heap of Crap!!! at least in comparison to the original desktop version.

In 360's defence - I was never going to enjoy the learning curve of a new system and the automation problems that caused me so much drama's doing it as a batch approach shouldn't cause the same issue on an ongoing basis.

Overall I really don't think they had this product sorted on launch (or even yet). Interesting first hand experience of the difficulties that software companies face and how they can shoot themselves in the foot and Peeve their customers off no end.


----------



## Julia

craft said:


> With costs being generally fixed on a SMSF the expense ratio for a fund holding direct shares is dependent on fund size.



Can you clarify what you mean here?  When shopping for quotes from accountants I found a huge variation:  some simply charged % of fund value, regardless of activity, so you could have a client with $3 million mostly in cash, plus a couple of long term holds of say BHP, CBA, no trades, who could be charged 1% or more.  That would be a ridiculously high bill for minimal work.

At the other end of the scale quite small balance but large number of trades, therefore more work for the accountant, and charged on an hourly basis.



> My total expense ratio for software, admin, audit, brokerage etc is below .05% which is less then the lowest ETF I know of.



Mine also.


----------



## tech/a

You can't really trade an SMSF
Your only allowed 50 trades a year I think.


----------



## Julia

tech/a said:


> You can't really trade an SMSF
> Your only allowed 50 trades a year I think.




A SMSF is just another vehicle in which to hold assets in a tax advantaged environment.  I don't know how many people with SMSFs would actually want to engage in multiple short period trades, but my accountant has never placed any limit on number of trades or warned me against exceeding a given number.  The only very clear restriction I'm aware of is that the fund must be operated for the sole purpose of providing funds in retirement.  That's a pretty broad brief.


----------



## tech/a

Similar to mine.
But won't allow intraday futures
Which I'd like the tax advantage.

But if I'm at 50 trades in a portfolio I'm sure
Going to keep selling if I thought it was in m best interest.
Not really self managed other wise.


----------



## McLovin

tech/a]Similar to mine.
But won't allow intraday futures
Which I'd like the tax advantage.[/QUOTE]

Why not? The regulations allow derivatives trading as long as few bits and pieces are in place.

[QUOTE=Julia said:


> A SMSF is just another vehicle in which to hold assets in a tax advantaged environment.  I don't know how many people with SMSFs would actually want to engage in multiple short period trades, but my accountant has never placed any limit on number of trades or warned me against exceeding a given number.  The only very clear restriction I'm aware of is that the fund must be operated for the sole purpose of providing funds in retirement.  That's a pretty broad brief.




Yes, that's right, and there's no restriction to carrying on a business inside an SMSF, including share trading, provided the SPT is maintained (this stops small business owners from putting their business in their SMSF).


----------



## craft

McLovin said:


> Why not? The regulations allow derivatives trading as long as few bits and pieces are in place.
> 
> 
> 
> Yes, that's right, and there's no restriction to carrying on a business inside an SMSF, including share trading, provided the SPT is maintained (this stops small business owners from putting their business in their SMSF).




That is as I understand it also.

One thing to be carful of if using margined derivatives such as futures is that you stay within your asset allocation parameters in your investment strategy. for example if you have a 1 Million dollar fund with a max 70% exposure to equities in the investment strategy - the *full* exposure of the futures contract must not take you beyond that 700k. I'm not sure that increasing the exposure above 100% to allow for the margin ability will cut the mustard with the authorities, because the  exposure is not non-recourse .


This is just my interpretation so may not be correct.


----------



## McLovin

craft said:


> That is as I understand it also.
> 
> One thing to be carful of if using margined derivatives such as futures is that you stay within your asset allocation parameters in your investment strategy. for example if you have a 1 Million dollar fund with a max 70% exposure to equities in the investment strategy - the *full* exposure of the futures contract must not take you beyond that 700k. I'm not sure that increasing the exposure above 100% to allow for the margin ability will cut the mustard with the authorities, because the  exposure is not non-recourse .
> 
> 
> This is just my interpretation so may not be correct.




Interesting. I have never really looked into this, but I thought the general rule was to use unrealised gains and losses when measuring exposure (which seems pretty risky on the face of it). There doesn't seem to be a definitive answer, maybe Ves has some insight?


----------



## tech/a

Found this
http://www.apra.gov.au/super/documents/guidance-audit-report-derivatives-final.pdf
There is more


----------



## craft

tech/a said:


> Found this
> http://www.apra.gov.au/super/documents/guidance-audit-report-derivatives-final.pdf
> There is more




APRA doesn't regulate SMSF's - the ATO does.

The documents you are referring too are applicable to large retail/industry superfunds, though a lot of the underlying legislation is similar for SMSF's.


----------



## craft

craft said:


> Equity curve for 2013 calendar year (rebased to 100)
> 
> White line (bottom) is the XSO accumulation index – this index probably best describes the tide that influences the stocks I tend to invest in.
> 
> Red line (middle) is the All ordinaries accumulation index. This index best describes the passive index tracking approach I would take if not managing my own super.
> 
> Yellow line (top) is the equity curve. Volatility has returned since May and I have been sitting through a period of consolidation.  MMS had a big impact in July.
> 
> View attachment 56390




An update for 2014 Calender year. (again rebased to 100)

Lines and rational for tracking still the same as previous.




First half of the year I was convincingly underperforming my benchmark - especially the All Ords Accumulation which contain the large cap yield plays that I'm not exposed too.  I was also using that period to sell some stock that had good momentum and replace it with some unloved alternatives, so some of the underperformance in the short term was intentional to hopefully set up longer term out performance.

Not my best year, but I'm happy to have come up with some outperformance on the calendar year time frame - and more importantly I feel my portfolio is now the most undervalued (relatively) that it has been since 2007 - so good stored energy - but when will it be released?


----------



## Ves

McLovin said:


> There doesn't seem to be a definitive answer, maybe Ves has some insight?



Hmmm...   I don't really think a forum like this is the best place for this kind of discussion,  because there are so many different types of derivative instruments out there.  So I will just say "It depends."

I will say this though:  be very careful with derivative instruments like CFDs and how the collateral / margin is treated by the provider.   The ATO has continually stressed about breaches in relation to "charges over Fund assets"  and "recourse to other Fund assets."

You would also need a derivate risk statement (DRS)  to go with your investment strategy....


----------



## tech/a

Ves said:


> Hmmm...   I don't really think a forum like this is the best place for this kind of discussion,  because there are so many different types of derivative instruments out there.  So I will just say "It depends."
> 
> I will say this though:  be very careful with derivative instruments like CFDs and how the collateral / margin is treated by the provider.   The ATO has continually stressed about breaches in relation to "charges over Fund assets"  and "recourse to other Fund assets."
> 
> You would also need a derivate risk statement (DRS)  to go with your investment strategy....




Yes I agree.
But there replies have been helpful and opened up questions that I can ask those that advise me.
I'm sure those who are in a position similar would run it past their professionals.

Thanks for the help.


----------



## Boggo

I limit the derivatives in my SMSF to Instalment warrants.

Currently holding instaments on TLS and NCM. In the case of TLS the current dividend yield is  just over 12% and because it's fully franked I get a tax credit.

A reasonably safe process when used on some of the larger stocks if you keep you eye on the ball imo.


----------



## McLovin

Ves]Hmmm... I don't really think a forum like this is the best place for this kind of discussion said:


> I will say this though:  be very careful with derivative instruments like CFDs and how the collateral / margin is treated by the provider.   The ATO has continually stressed about breaches in relation to "charges over Fund assets"  and "recourse to other Fund assets."




As I understand it, and again I haven't spent much time investigating this because it's not relevant to my situation, a margin/collateral call on an open position is not considered a charge over an asset. If, however, you were required to maintain a cash account, or lodge any other fund asset, with your futures/options/CFD provider in order to fund any future margin calls this would fall foul of the rules because it would be considered a charge over the funds assets. (Some of this may be relaxed when there is a DRS in place???)


----------



## Ves

McLovin said:


> As I understand it, and again I haven't spent much time investigating this because it's not relevant to my situation, a margin/collateral call on an open position is not considered a charge over an asset. If, however, you were required to maintain a cash account, or lodge any other fund asset, with your futures/options/CFD provider in order to fund any future margin calls this would fall foul of the rules because it would be considered a charge over the funds assets. (Some of this may be relaxed when there is a DRS in place???)



As far as I recall:   the relevant rulings are ATO ID 2007/56  and  ATO ID 2007/57.    Just put them in a google search and it will bring up the rulings.

Your summation would be pretty close to these rulings,  except I think you are allowed to use cash (deposited into a CFD account) as collateral to meet future margin calls. But definitely not other fund assets.


----------



## McLovin

Ves said:


> As far as I recall:   the relevant rulings are ATO ID 2007/56  and  ATO ID 2007/57.    Just put them in a google search and it will bring up the rulings.
> 
> Your summation would be pretty close to these rulings,  except I think you are allowed to use cash (deposited into a CFD account) as collateral to meet future margin calls. But definitely not other fund assets.




Thanks for that. My reading of 57 seems to suggest that you cannot be required to deposit money for future margin calls. Para 3, below...Also a DRS makes this ruling different to futures and options (para 4, below)...So I was wrong, with a DRS in place you can have money on deposit with your futures/options broker and allow them to have a charge over it (as long as it's in accordance with an approved body, which would be short hand for the clearing house rules of a recognised exchange I'd guess), but not with a CFD provider.



> *The requirement to pay a deposit and meet margin calls in relation to the CFD does not represent borrowing by the trustee; they are rather contractual liabilities to make payments if and when required and are not repayments *( Prime Wheat Association Ltd v. Chief Commissioner of Stamp Duties (NSW) 97 ATC 5015; (1997) 37 ATR 479). Investing in the CFD did not therefore contravene the prohibition on borrowing in section 67 of the SISA. The obligations in relation to CFDs are distinguished from margin lending through a broker's margin account in relation to the purchase of shares by an SMSF, which does represent a prohibited borrowing under the SISA.
> 
> *The operation of the CFD bank account and the obligation to pay deposits and margins does not create a charge over any assets of the fund.* The parties are relying on the contract and not on any security interest to be created by the contract ( White v. Conroy (1921) 21 SR (NSW) 257; (1921) 38 WN (NSW) 63, Berrington v. Evans (1839) 3 Y & C Ex 384; 160 ER 73). Under the CFD, the monies in the CFD bank account are the property of the CFD provider and the fund (investor) has no beneficial interest in the account.
> 
> *However the trustee and the CFD provider entered into a separate written agreement under which fund assets were deposited with the CFD provider in fulfilment of the fund's obligation to pay margins. Regulation 13.14 of the SISR prohibits trustees from giving a charge over, or in relation to, an asset of the fund.* This regulation is an operating standard for regulated superannuation funds under section 31 of the SISA. Subsection 34(1) of the SISA requires that the operating standards are complied with at all times. The terms of the agreement stated the circumstances in which the fund's assets would be realised, and showed an intention to create a charge over the assets. By entering into the agreement with the CFD provider the trustee has contravened subsection 34(1) of the SISA.
> 
> *Regulation 13.15A of the SISR, which allows trustees to give a charge over fund assets in relation to options and futures contracts in accordance with the rules of an approved body, and in accordance with the fund's derivatives risk statement, does not apply.* A CFD is not an options contract or a futures contract, and the charge was not given in relation to the rules of an approved body.




Yes, it's still a slow time of the year for me.


----------



## Ves

To be honest,   I can count on the fingers on one hand the amount of clients that I have seen use CFDs in their SMSF,  so my understanding of the rules is more from my memory of something I read a fair while ago!   I am not sure whether that is the fact that the rules are fairly complicated in that environment, or people just don't see them as useful from a risk/reward perspective.

I'm a bit confused about the differences between the 56 and the 57 rulings.  Then again I don't use CFDs and I am probably missing a small difference in how they operate.

Seems to be OK to have a CFD bank account,   and be required to make further payments if you make losses,   but not OK,  if you have to enter into an agreement that forces you to reserve / guarantee further fund cash / assets that the CFD provider gains recourse over?


----------



## McLovin

Ves said:


> Seems to be OK to have a CFD bank account,   and be required to make further payments if you make losses,   but not OK,  if you have to enter into an agreement that forces you to reserve / guarantee further fund cash / assets that the CFD provider gains recourse over?




That's pretty much it. In the first instance (56) the creation of the cash account still makes the use of the CFD product non-recourse to the assets of the SMSF. In the second instance  (57) a charge has been placed over the assets of the fund to cover losses whether or not they happen to be in the client's cash account with the CFD provider doesn't matter.

I imagine the distinction between CFD's and options and futures traded on regulated exchanges is that CFD's have far less visibility and transparency.


----------



## craft

McLovin said:


> That's pretty much it. In the first instance (56) the creation of the cash account still makes the use of the CFD product non-recourse to the assets of the SMSF. In the second instance  (57) a charge has been placed over the assets of the fund to cover losses whether or not they happen to be in the client's cash account with the CFD provider doesn't matter.
> 
> I imagine the distinction between CFD's and options and futures traded on regulated exchanges is that CFD's have far less visibility and transparency.




Hi McLovin - you obviously know way more on this now than I do after killing a lazy day digging into it. But the point I was trying to make earlier and I still think it will limit the extent of use for even futures is the exposure limits in the investment strategy.  ie 1 the Million account and 70% max set for equity exposure - means you would have to keep *full face *value exposure of the future contracts (+ any other equities the fund owns) under the 700K.  or saying it another way you couldn't hold a couple of Million in future exposure just because you are able to fund it on margin. The non recourse rules might not pull you up in relation to futures but the investment strategy would and amending the investment strategy to allow for more than 100% exposure would not meet the obligations the legislation requires of an investment strategy to control and protect the funds financial position.   If it sounds risky (ie a 2 million futures exposure in a 500K fund etc) you can be pretty sure you can’t do it in a SMSF.

But if the *full face *value of the number of contracts you want to trade is *within your funds means and within the investment strategy asset allocation*, then with a derivatives risk statement in place you should be able to trade to your heart’s content within the fund.   

This is not advice - This is just a fool guessing.


----------



## Ves

craft said:


> This is not advice - This is just a fool guessing.



I believe that the APRA guidelines state that a Fund must make sure that the "net exposure" must is within the investment strategy bounds.

Whilst APRA is not the regulator of SMSFs,  the ATO has never publicly stated anything that contradicts this.    In fact I have never seen the ATO request to see a client's investment strategy in an audit or otherwise.

http://www.apra.gov.au/Super/PrudentialFramework/Documents/SPG-200-Risk-Management.pdf

Not to say that they won't. The ATO isn't interested until they're interested.  

Here's a good summary by some trusted industry experts:

http://www.dbalawyers.com.au/smsf-compliance/can-smsfs-invest-derivatives/


----------



## McLovin

craft said:


> Hi McLovin - you obviously know way more on this now than I do after killing a lazy day digging into it. But the point I was trying to make earlier and I still think it will limit the extent of use for even futures is the exposure limits in the investment strategy.  ie 1 the Million account and 70% max set for equity exposure - means you would have to keep *full face *value exposure of the future contracts (+ any other equities the fund owns) under the 700K.  or saying it another way you couldn't hold a couple of Million in future exposure just because you are able to fund it on margin. The non recourse rules might not pull you up in relation to futures but the investment strategy would and amending the investment strategy to allow for more than 100% exposure would not meet the obligations the legislation requires of an investment strategy to control and protect the funds financial position.   If it sounds risky (ie a 2 million futures exposure in a 500K fund etc) you can be pretty sure you can’t do it in a SMSF.
> 
> But if the *full face *value of the number of contracts you want to trade is *within your funds means and within the investment strategy asset allocation*, then with a derivatives risk statement in place you should be able to trade to your heart’s content within the fund.
> 
> This is not advice - This is just a fool guessing.




Yeah from reading around that seems to be the general rule. But then reading the link Ves provided there's this...



> Accordingly, in a roundabout way, the legislation and the case law come to a similar conclusion as APRA. Namely, holding derivatives in an SMSF is allowable for purposes such as hedging against risks. However, they should not be used for speculative purposes and ‘speculative purposes’ cover a lot of purposes!




Taking that statement at face value would mean things like synthetic ETF's could be called derivative speculation, it certainly would make trading futures a no go. It seems like they've taken a pretty narrow view, maybe too narrow?

ETA: This is from Australian Super, which appears to be "speculation" based on the above definition ie they're using index futures to make the portfolio seem like it's 100% invested...



> Our Australian and International Shares portfolio hold share index futures. With a small percentage
> of these portfolios held in cash to cover transactions, inflows and outflows, index futures are used
> to provide the equivalent returns as they would if they were 100% invested, while still holding cash.




http://www.australiansuper.com/~/me...tment/Fact sheet Derivatives_an overview.ashx


----------



## craft

McLovin said:


> But then reading the link Ves provided there's this...




And also this.



> APRA agrees that derivatives can play a role in a properly diversified portfolio. They set out their views in Prudential Practice Guide SPG 200. Importantly, APRA state that they consider:…
> 
> it inappropriate for trustees to use derivatives for ‘speculation’, which … refers to investment activity that results in one or more of the following:
> 
> a.  the net exposure of the fund to an asset class being outside the limits set out in the fund’s investment strategy. (Net exposure is exposure taking account of both physical and derivative exposure);
> 
> b.  the risk involved for the whole portfolio being outside that which the trustee considered appropriate when it developed and approved the fund’s investment strategy;
> 
> c.  the fund holding uncovered derivatives; and
> 
> d.   the fund’s total portfolio being ‘geared up’ through derivatives to circumvent the limitations imposed by ss. 67, 95 and 97 of the SIS Act on borrowings.
> 
> Naturally, APRA is not the regulator of SMSFs. The Commissioner of Taxation is the regulator of SMSFs. However, the Commissioner has not released anything as directly on point as APRA’s guide. Also, the Commissioner typically tries to be consistent with APRA. Accordingly, APRA’s comments should be borne in mind. - See more at: http://www.dbalawyers.com.au/smsf-compliance/can-smsfs-invest-derivatives/#sthash.0WkWWBUe.dpuf




a b & d are directed towards what I was saying about staying within the  funds means and strategy on the long side. c seems to indicate that a net short position would not be allowable. What c, really does is make futures only useful for hedging on the short side. 

I don't see the above casuing problems with gaining exposure via futures rather then directly as Australian super has done in your example. 

All in all - I would hate to be the poor sole that inadvertently gets dragged into a test case that determines where the line between speculation and investment lies.  The legislators and regulators want SMSF's to be run very conservatively - probably better boundaries to push out there then these ones.


which is the same conclusion in the document.



> Conclusion
> It is possible for SMSF trustees to hold derivatives. However, derivatives should only be used conservatively and not for purposes like speculation. If a financial planner has a client who wishes to speculate using derivatives, this will expose the financial planner to risk. - See more at: http://www.dbalawyers.com.au/smsf-compliance/can-smsfs-invest-derivatives/#sthash.0WkWWBUe.dpuf


----------



## McLovin

craft said:


> I don't see the above casuing problems with gaining exposure via futures rather then directly as Australian super has done in your example.




Yes, you're right. I was thinking speculation in this instance was anything other than hedging.


----------



## craft

craft said:


> more importantly I feel my portfolio is now the most undervalued (relatively) that it has been since 2007 - so good stored energy - but when will it be released?




Looks like the stored energy talked about in that last equity curve update might be starting to release.






This will probably be the last update I will make here.


The 12th set of financials for the SMSF will be produced in a bit over a month. CAGR on total funds over that period is still likely to be 35%+ and with 16 years to preservation age.  The snowball is starting to get ridiculous, I having trouble dreaming big enough and I don’t want the responsibility – Just some family financial security is all that we were trying to achieve.


----------



## VSntchr

craft said:


> Looks like the stored energy talked about in that last equity curve update might be starting to release.



The spring is doing it's thing, and yet it's only autumn!




> This will probably be the last update I will make here.







craft said:


> The 12th set of financials for the SMSF will be produced in a bit over a month. CAGR on total funds over that period is still likely to be 35%+ and with 16 years to preservation age.  The snowball is starting to get ridiculous, I having trouble dreaming big enough and I don’t want the responsibility – Just some family financial security is all that we were trying to achieve.



As I have said previously, inspirational.

Good work mate.


----------



## craft

craft said:


> Finally stoped procrastinating and did the books in Simplefund 360. What a heap of Crap!!! at least in comparison to the original desktop version.




I think I might have to retract this post somewhat – Simplefund 360 is still not as good as Simplefund desktop but the transaction automation now things are up and running is really nice. It’s very pleasant to get to the end of the year and have everything automatically up to date.  All that is then required is a quick review, the pressing of one button to create end of year entries, and an email with the log on credentials to the auditor - Job Done.

Software renewal cost $198.00


----------



## craft

craft said:


> This will probably be the last update I will make here.




I'll close this out with a final FY update.

FY14/15 return was 47.1% before tax 42% after tax although the difference between these two number to a large extent won’t be paid to the ATO any time soon as a lot of it stays in the fund as deferred tax liability until long term positions are sold.

This is what the performance statistics of the *closed* trades looks like for this fund this year.  Each individual parcel is counted as a trade. So the 162 trades is indicating more the multiple parcels nature of entries and exits rather than a high turnover of the portfolio.


----------



## peter2

Craft: You have done a remarkable job this year, well done. 

There's no doubt about it. You're doing something different. Traditional portfolio management techniques won't get anywhere near this performance.

I'm surprised by the number or transactions and therefore assume that you are taking advantage of price rallies to sell some and then wait for the dips to buy some back. This would see you realising profits and having cash to buy in the dips. 

I see that you only trade a small number of stocks that you know well. Considering the price movements in SRX this year, you've probably had a very interesting year. 

I'd love to learn a little more if you would like to share.


----------



## craft

peter2 said:


> Craft: You have done a remarkable job this year, well done.




Thankyou and return compliments to you on your momentum/trade management threads.



peter2 said:


> I'm surprised by the number or transactions





The fund has grown large so it generally takes multiple parcels to get a job done in the stocks that I tend to invest in; the software counts each parcel as a unique trade for calculating the performance statistics. So the 162 trades probably only relate to a couple of dozen specific actions. 



peter2 said:


> and therefore assume that you are taking advantage of price rallies to sell some and then wait for the dips to buy some back. This would see you realising profits and having cash to buy in the dips.





Not really I have stayed pretty well fully invested for quite a while now – Dividend stream is a source of ongoing liquidity however buys and sells are normally valuation vs price driven as opposed to liquidity for timing. I do have maximum exposure of 25% (marked to market) for the SMSF that causes some non value specific forced selling – MTU has been subject to this. I have participated in the DRP and re-brought based on my estimate of value, but it’s not an attempt at timing. MTU has bumped its head against the exposure limit many times this year causing quite a few transactions to exit and redeploy funds elsewhere.  A similar thing happened with SRX with amazing outcomes because of the volatility but it’s not held in the SMSF.

Sometimes if something is reasonably fully valued and I think I can see a near term catalyst for price correction I may do a little speculative selling in anticipation – but the fully valued pre-requisite must be there before I will try this on – I won’t risk getting too smart on something undervalued that I want exposure too.




peter2 said:


> I see that you only trade a small number of stocks that you know well.



Yep I tend to stick to a pretty small number of stocks. In fact I have a min 10(when fully invested) and Max 15 rule for the SMSF. I tend to think of my portfolio as a team and I’m the selector – new stocks have to force themselves in by being better businesses then already in the team. Although separate to this I do pick up small quantities of stocks that have the potential to make the top 15. I research better once I have even a small position – mostly they get put back down again after a bit of a feel (accounting for a few more transactions)



peter2 said:


> Considering the price movements in SRX this year, you've probably had a very interesting year.



Very interesting but not held in the SMSF - the range of possible out comes when I purchased SRX was too wide for SRX to make the SMSF team - However in hindsight (as I sit here doing my personal tax return - thanks for the distraction) I would have loved the 10% CGT rate just now. 



peter2 said:


> There's no doubt about it. You're doing something different. Traditional portfolio management techniques won't get anywhere near this performance.




The process is the ultimate cut you weeds water your flowers. You can get high multiple R wins. (MTU for example is being trimmed at around a 20 Bagger)  The risk is asymmetric as your max downside is 1R (I’ve never had a 1R loss by the way) you never have to react to price calling you offside. When you’re reacting to business performance as opposed to reacting to price it’s not that hard to flatter a good win/loss ratio with a decent win% and voila the highest expectancy I know how to generate and it’s scalable to boot. But there are substantial risks if your business analysis is not up to scratch of getting deep into the doo before you realise - No price stops for protection here.

I don’t think I’m doing anything startling – Just a long term focus on business performance. But I guess that does put me in a minority as most don’t see the businesses for the prices.

Cheers


----------



## kid hustlr

Craft this is phenomenal. Well done. 

I knew you were the man but to this extent I was unaware.

Just so I'm spelling it out correctly:

121*17808 = $2,154768
41*766 = $31,406

Return = *$2,123,362* in FY 14/15

Is that correct??:bonk:


----------



## craft

kid hustlr said:


> Craft this is phenomenal. Well done.
> 
> I knew you were the man but to this extent I was unaware.
> 
> Just so I'm spelling it out correctly:
> 
> 121*17808 = $2,154768
> 41*766 = $31,406
> 
> Return = *$2,123,362* in FY 14/15
> 
> Is that correct??:bonk:



  For *closed* positions yes - But for all you know I may have equal loses still in open positions so you shouldn't really draw too many conclusions. I won't be putting up open+close statistics because cleaver calculators like you could deduce to much that I would prefer to keep private.


----------



## hiddencow

12 years at over 35% returns, that is amazing. Can I ask if there a few stocks which have been responsible for the majority of those returns? If you took out the too 3 performers, what would your returns look like?

You mentioned you haven't been adding much money to the funds since the rollover. Do you have holdings invested outside of super then? I have many years left to preservation age so I am still trying to balance things. Any insight to how you manage it would be great.

If you had been contributing all these years and generating those returns, you would make Don Argus look small.


----------



## craft

hiddencow said:


> Can I ask if there a few stocks which have been responsible for the majority of those returns? If you took out the too 3 performers, what would your returns look like?




Probably pretty ordinary – but you can’t help but have a top three.

The 80/20 principle is alive and well in my portfolio. The top three holdings currently represent 56% of the portfolio and 81% of the open profit.

The top three represent luck – I did not envisaged when buying them that they would do better than my other picks. 

I don’t have to do much to manage the ones I get lucky with – I think to the extent that I possibly add anything beyond luck, it’s in the ongoing management of my picks that don’t turn out to be so lucky and running a strategy that holds tight to a business whilst it remains a good businesses. 

I'll get back to the rest of your question later.


----------



## tech/a

> *I don’t think I’m doing anything startling* – Just a long term focus on business performance. But I guess that does put me in a minority as most don’t see the businesses for the prices.




*I disagree.*

This has to be the best long term trading result I've *EVER* seen anywhere by anyone. 42% after tax is stellar.

162 Trades and NEVER losing 1R is mind boggling.
That means EVERY SINGLE trade you take either a new position or adding to an old one (majority)---never pulls back 1R from your entry
You take 14 trades a month yet hold on *average *909 days---clearly showing that your trading inside your holdings
and really well. What I find truly amazing is that not one entry falls below 1R. So the initial entry doesn't nor do any additional entries. 
The only solution my pea brain can come to is you don't have stops.
Your timing in and out to build the return is astounding. Reflected by the 75% win rate.

I really like the way you've structured the internals --- Pareto principal usage 75/25 is pretty close.
The constant attention to the portfolio.

While you attribute a lot to luck I don't think its ALL luck.
Clearly its very sound management.
Its milking profit out of excellent performers which you *ORIGINALLY* identified.
Just because they out performed your expected performance doesn't make it luck.
To my mind it makes it opportunistic. Also un canny that you've been able to continue to hold these rather than cull them as they have reached a valuation you expected---hard to do particularly if they pull back.

Really has me ( and many others ) thinking.



> No price stops for protection here.




If you've not taken a 1R hit are you saying that you don't apply any stops?
I must be reading this wrong---you achieve this with absolutely no stops and your average win loss ratio is 23.2:1
That---is---beyond freak.

If I'm off the mark can you explain.


----------



## hiddencow

craft said:


> Probably pretty ordinary – but you can’t help but have a top three.
> 
> The 80/20 principle is alive and well in my portfolio. The top three holdings currently represent 56% of the portfolio and 81% of the open profit.
> 
> The top three represent luck – I did not envisaged when buying them that they would do better than my other picks.
> 
> I don’t have to do much to manage the ones I get lucky with – I think to the extent that I possibly add anything beyond luck, it’s in the ongoing management of my picks that don’t turn out to be so lucky and running a strategy that holds tight to a business whilst it remains a good businesses.
> 
> I'll get back to the rest of your question later.




A lot of it is luck with ending up with those extraordinary ones but you have stacked the odds in your favour by choosing good businesses. Still, your return is out of this world. You've mention various times that your style is to buy good businesses and hold them. In the long run though, I would not think it would be possible to sustain those levels of returns unless you sell out and invest the proceeds again. No business can keep pumping out 35% growth in the long run. You've managed to do it for 12 years now though, do you think you could sustain it into the future?


----------



## craft

hiddencow said:


> You mentioned you haven't been adding much money to the funds since the rollover. Do you have holdings invested outside of super then? I have many years left to preservation age so I am still trying to balance things. Any insight to how you manage it would be great.




We originally set a target of 30 times ordinary earnings to accumulate in Super. We got started early and had 40years to achieve it, we made an assumption of 3% real return. (ie return after wage inflation, tax & expenses) From there it’s just a PV calculation to work out the required % of ordinary earnings needed to be contributed each year. We made the appropriate contributions until it become obvious we had made a mistake on the rate of return at which point we reduced and have now stopped contributions (except for a small amount of super guarantee which is left in an index option in an industry fund, we don’t bother rolling it into the SMSF)   – whilst I think reasonable savings in super will retain their favourable tax treatment, excessive amounts will constantly be under attack, so I don’t see any benefit in adding further.  In hindsight we struggled harder than necessary to make those early contributions but who knows how things are going to turn out. 

I don’t think people should be too scared of legislative change in super. Set a reasonable goal, pick a realistic target return and make the appropriate contributions – leave the rest out of super.

I’ve got 16 years left until preservation – If they massively change the rules in that time I might change my opinion.


----------



## craft

hiddencow said:


> A lot of it is luck with ending up with those extraordinary ones but you have stacked the odds in your favour by choosing good businesses. Still, your return is out of this world. You've mention various times that your style is to buy good businesses and hold them. In the long run though, I would not think it would be possible to sustain those levels of returns unless you sell out and invest the proceeds again. No business can keep pumping out 35% growth in the long run. You've managed to do it for 12 years now though, do you think you could sustain it into the future?




You are right my holding period is not 12 years on average so some return is probably attributable to harvesting earning multiple changes and re-investing and into fresh undervalued opportunities.  I never thought I could archive it in the first place so I have no expectation of it continuing.  In a burst of ego driven overexcitement I have recently lifted my future expectations of a real 3% return after inflation, tax & expenses to 4%. The extra 1% real is what I think I can add long term for stock selection & portfolio management.


----------



## craft

tech/a said:


> *I disagree.*
> 
> This has to be the best long term trading result I've *EVER* seen anywhere by anyone. 42% after tax is stellar.




Just to clarify - the 42% is 14/15 FY year return.


----------



## craft

tech/a said:


> 162 Trades and NEVER losing 1R is mind boggling.




162 trades are the closed parcels for FY14/15.  The performance statistics are for closed14/15 trades..


I don't use stops 1R for me is total wipe-out of the parcel - I have never held a stock when it has folded. Not last year not ever. But you can make many times your original investment. There is asymmetrical risk return inherent in holding good businesses long term.


----------



## craft

tech/a said:


> You take 14 trades a month yet hold on *average *909 days---clearly showing that your trading inside your holdings




You have to get your head around doing things in multiple parcels - its not trading as such. For instance there's probably been 20-30 or more sell parcels of MTU, really only one deliberate action - to control portfolio concentration.


----------



## craft

hiddencow said:


> A lot of it is luck with ending up with those extraordinary ones but you have stacked the odds in your favour by choosing good businesses. Still, your return is out of this world. You've mention various times that your style is to buy good businesses and hold them. In the long run though, I would not think it would be possible to sustain those levels of returns unless you sell out and invest the proceeds again. No business can keep pumping out 35% growth in the long run. You've managed to do it for 12 years now though, do you think you could sustain it into the future?




I have to clarify the 35% for 12 years - you got that from my post in May no doubt.  Its the twelfth set of books so only 11 complete years of record.  I over optimistically guessed 35% the actual after tax return is 31.6% so its already coming back from the 34% when I last posted the long term result for 9 years. The 13/14 FY return (which I must have forgotten to post) was barley break even at 0.52%


----------



## hiddencow

Thanks for the detailed responses craft. At the moment I've started to take advantage of concessional contributions to super. In the past I thought that by preservation age I would have compounded my wealth to a point where it wouldn't matter but the tax advantages are too much to ignore. I run the risk of having way too much in super and not enough outside but that will not be an issue as long as I have enough investments outside as well.

I'm aiming for something similar to you, but slightly different. 30 times expenses outside and then the rest in super. I figure that, every dollar that I won't need to meet my living expenses is better off compounding inside super instead of outside. 

Any thoughts on what your after tax returns would have been if the portfolio had been outside of super?


----------



## skc

kid hustlr said:


> Craft this is phenomenal. Well done.
> 
> I knew you were the man but to this extent I was unaware.




+100



craft said:


> This is what the performance statistics of the *closed* trades looks like for this fund this year.  Each individual parcel is counted as a trade. So the 162 trades is indicating more the multiple parcels nature of entries and exits rather than a high turnover of the portfolio.




Thanks Craft... truely inspirational.

I am guessing that, if you were to detail the same set of statistics on a marked-to-market basis (which I understand is pointless in your strategy), it would be a lot less freakish? 

P.S. If you ever start a managed fund can you PLEASE send me an application form?


----------



## systematic

I'm with the others, craft - you are _the man._

From your perspective, could I ask how "systematic" or how subjective your approach is?  I simply mean, how much of a process/checklist do you follow?  Or perhaps; how easy or difficult would it be for you to teach your stock selection (including buying / selling process) to, say, your adult child or a best friend?


----------



## craft

hiddencow said:


> Any thoughts on what your after tax returns would have been if the portfolio had been outside of super?




Interesting question

At a guess I would say 50% of return is dividend or short term capital gain subject to 15% tax rate and the remainder is long term Capital Gain subject to 10% so a effective tax rate of ~12.5% in the SMSF.

If your aim was to accumulate a decent amount outside super the logical tax structure would be a company (probably linked to a trust for distribution flexibility) so worst case tax rate would be 30% whilst accumulating and marginal rates when drawing down.

If we make the same accrual for tax on unrealised capital gains like is done in the SMSF then the after tax return outside super by my calcs would come down to 25.3% (31.6%/.875*.7)

100K compounded @ 25.3% for 11 years = 1.195Million.
100K compounded @ 31.6% for 11 years = 2.050Million.

The tax structure is *very significant to the balance *of the fund even if the difference in the after tax rates doesn’t seem that huge.  If you add in the benefit of concessional contribution the effect would be even larger. 

It’s worth also not forgetting that the accrued tax liability on unrealised gains will eventually be treated very differently – current legislation sees any liability forgiven in the SMSF when you move to pension phase, not so in the company, ie the true after tax return in the SMSF is probably higher than 31.6% depending on how much capital gain is eventually carried through to pension phase.

Eventually the capital accumulated in the company will have to be distributed at marginal rates in retirement. Currently distribution from super in retirement are tax free. (I suspect that can't & probably shouldn't last - at least not for large balances)


----------



## craft

systematic said:


> I'm with the others, craft - you are _the man._
> 
> From your perspective, could I ask how "systematic" or how subjective your approach is?  I simply mean, how much of a process/checklist do you follow?  Or perhaps; how easy or difficult would it be for you to teach your stock selection (including buying / selling process) to, say, your adult child or a best friend?





I'm not the man - I'm just me.

Its not systematic - It does involve judgement.

I learnt it so it can be learnt, I seriously doubt that I could teach it - communication doesn't appear to be my strong suit.

From what I have observed you have to have a pre-inclination towards long term investing before any of the concepts seem to stick. If you have this pre-inclination there is plenty of great information out there - dare I say it just start with Buffett.


----------



## systematic

craft said:


> I'm not the man - I'm just me.
> 
> Its not systematic - It does involve judgement.
> 
> I learnt it so it can be learnt, I seriously doubt that I could teach it - communication doesn't appear to be my strong suit.
> 
> From what I have observed you have to have a pre-inclination towards long term investing before any of the concepts seem to stick. If you have this pre-inclination there is plenty of great information out there - dare I say it just start with Buffett.




Thanks craft.

I'd assumed that what you do was definitely not  "step by step" but rather involved subjective judgement.  Was curious as how to far your "usual" or "initial" approach got you, before using judgement.  Whether you had quick ways of short listing a group of candidates, for example - or not even that.  My question is pure interest in how different investors think.

I could not do the approach that you do.  I think that if a person can actually pull it off (as you have) - your approach can beat a purely systematic approach.  That's why my hat is off to you


----------



## craft

skc said:


> I am guessing that, if you were to detail the same set of statistics on a marked-to-market basis (which I understand is pointless in your strategy), it would be a lot less freakish?




The open+close is not that dissimilar, but that is the point of long term investing - you can produce these sorts of expectancies. Obviously I can still **** the open expectancy up. 

BUT what you haven't got with LT is the opportunities. The compounding is done internally by high and constant exposure to a few opportunities.  traders will typically have lower expectancies but compound externally by taking advantage of many opportunities.


Nobody should read too much into the one year figures posted on this thread, I certainly don't, even the 11 year record is a bit short for my liking to draw conclusions from without reference to the expectations arising from the investment process. 




skc said:


> P.S. If you ever start a managed fund can you PLEASE send me an application form?




If I ever decide to take on the stress and hassle of managing other peoples money you can be sure that I have lost my ability to make enough money from the market and have to resort to fee based income - As such, If I ever offer you would be best served to decline.


----------



## rb250660

I trade completely systematic using a system I wrote in Amibroker to generate my signals. For my FY14/15:

105 Trades
Compound return = 40.8%
Risk adjusted return = 219%

I use AustralianSuper to trade and it's a nightmare sometimes. When I have enough capital I will go the SMSF option.


----------



## hiddencow

craft said:


> Interesting question
> 
> At a guess I would say 50% of return is dividend or short term capital gain subject to 15% tax rate and the remainder is long term Capital Gain subject to 10% so a effective tax rate of ~12.5% in the SMSF.
> 
> If your aim was to accumulate a decent amount outside super the logical tax structure would be a company (probably linked to a trust for distribution flexibility) so worst case tax rate would be 30% whilst accumulating and marginal rates when drawing down.
> 
> If we make the same accrual for tax on unrealised capital gains like is done in the SMSF then the after tax return outside super by my calcs would come down to 25.3% (31.6%/.875*.7)
> 
> 100K compounded @ 25.3% for 11 years = 1.195Million.
> 100K compounded @ 31.6% for 11 years = 2.050Million.
> 
> The tax structure is *very significant to the balance *of the fund even if the difference in the after tax rates doesn’t seem that huge.  If you add in the benefit of concessional contribution the effect would be even larger.
> 
> It’s worth also not forgetting that the accrued tax liability on unrealised gains will eventually be treated very differently – current legislation sees any liability forgiven in the SMSF when you move to pension phase, not so in the company, ie the true after tax return in the SMSF is probably higher than 31.6% depending on how much capital gain is eventually carried through to pension phase.
> 
> Eventually the capital accumulated in the company will have to be distributed at marginal rates in retirement. Currently distribution from super in retirement are tax free. (I suspect that can't & probably shouldn't last - at least not for large balances)




Thank you for such a detailed and quality response. I have thought about using a trust and company structure to minimise tax but there are some downsides to it. Firstly the fees involved for 2 companies (1 a corporate trustee and one to hold investments) and a trust mean that a significant enough amount will be needed before it pays off. One also cannot move existing investments into a turst without triggering a CGT event so I cannot simply convert to the structure later. The second downside as that any investments in the company would not be eligible for the CGT discount. Investments would initially be in the trust so it won't matter much initially but dividends would be paid to the company where the money will remain and be invested. Also to note the corporate tax rate for small companies has been lowered to 28.5% so that provides a bit more benefit

Your example shows just how effective the low rates of tax in super are. This is why I have decided to maximise my concessional contribution even though I have many years left. Along with the initial benefit, it is too good to pass up. No matter how much I have in super though, I only consider it as a safety net as this stage as I intend to stop work a lot earlier than preservation age so will need enough outside of super. Since I am conservative I will aim for more than enough and it will likely keep compounding as well that by the time I reach preservation age, I can start thinking about other things than investments and tax. 

So back to my thoughts on how to minimise tax and maximise returns outside of super. Without the tax benefits of super, I think switching investments for profit becomes a lot harder. Any decision to sell needs to be thought of as can the proceeds from selling minus any applicable tax buy something that has more value than what you are currently holding. For investments which have risen significantly, you may lose over 20% of the proceeds to tax even with discounted CGT. One has to be very confident in the value differential to give up 20%. This means a lot more holding and a lot less trading. 

Once I am no longer working and if I choose to move away from Australia, it's possible to minimise tax very effective by living in a jurisdiction that doesn't tax foreign shares. For example one could live in Singapore and buy and trade shares on the ASX without incurring any CGT, in either country. You lose access to the franking credit but there is no withholding tax on fully franked dividends or conduit foreign income and Singapore doesn't tax it either. Effectively the only tax paid is the corporate tax by the company. Not quite as good as being in super pension phase with full franking credits refunded but you don't have to be 60 so that is a big plus. Super is unlikely to be so generous in the future either. Also if you invest in shares in other countries the corparate tax rate may be lower. The UK corporate tax rate is 20% and there is no withholding tax on dividends either.

Sorry to go off topic on your thread but would love to hear your thoughts on any other way to structure investments to maximise returns.


----------



## DeepState

craft said:


> FY14/15 return was 47.1% before tax 42% after tax although the difference between these two number to a large extent won’t be paid to the ATO any time soon as a lot of it stays in the fund as deferred tax liability until long term positions are sold.






craft said:


> I have stayed pretty well fully invested for quite a while now.
> 
> 
> Yep I tend to stick to a pretty small number of stocks. In fact I have a min 10(when fully invested) and Max 15 rule for the SMSF. I tend to think of my portfolio as a team and I’m the selector – new stocks have to force themselves in by being better businesses then already in the team. Although separate to this I do pick up small quantities of stocks that have the potential to make the top 15. I research better once I have even a small position – mostly they get put back down again after a bit of a feel (accounting for a few more transactions)







Temporary said:


> This is craft ...
> 
> Thing is I have made 10’s of Millions from very little in the market on purely a private account. Maybe subconsciously I just want acknowledgement from people who understand how difficult and I suspect rare that is (yet I had never quantified the amount before)






For the 2014/15 FY *alone*, the probability of a 47.1% year total pre-tax return outcome is crudely estimated at 0.5%.

On the basis of a fully invested, unlevered, buy-hold portfolio (days held average for realised positions is well above this period) with an effective diversification of 8 stocks (to allow for concentration into a smaller number of names within the portfolio) drawn from the ASX 200 which survived the year.




craft said:


> The 12th set of financials for the SMSF will be produced in a bit over a month. CAGR on total funds over that period is still likely to be 35%+ and with 16 years to preservation age.  The snowball is starting to get ridiculous, I having trouble dreaming big enough and I don’t want the responsibility – Just some family financial security is all that we were trying to achieve.




Rinse and repeat, roughly, eleven more times.  ASX 200 Accum 11 years to FY2014  compound approx 10% per annum, realised approx. 35% pa.  Very very rough likelihood *per year* 2-5%. No more than 15%. Allows full rebalancing each year. Fully invested...



Temporary said:


> Happy journeys.




Indeed. Welcome back.


----------



## Triathlete

DeepState said:


> *For the 2014/15 FY alone, the probability of a 47.1% year total pre-tax return outcome is crudely estimated at 0.5%.*
> 
> On the basis of a fully invested, unlevered, buy-hold portfolio (days held average for realised positions is well above this period) with an effective diversification of 8 stocks (to allow for concentration into a smaller number of names within the portfolio) drawn from the ASX 200 which survived the year.




Are you able to explain how the above probability is calculated in simple terms...??? thanks in advance...


----------



## DeepState

Triathlete said:


> Are you able to explain how the above probability is calculated



Yes.



Triathlete said:


> in simple terms...???



Tough challenge...

Goes a little like this.

2,000 investors arrive at an ASF convention.

There is an urn at the front containing identically shaped and weighted balls (think like bingo) each with stock tickers and returns for the FY15 year, inclusive of dividends, written on them.  Each of these tickers was a stock which was a member of the ASX 200 and been around for the full year.  Hence only there are slightly less than 200 balls are in the urn. 

Each investor takes a turn to select 8 balls from the urn whilst blindfolded.  The straight average of these returns is taken.  The investors are ranked on a league table.

Of these investors, only about 10 will have delivered a return higher than what Craft has reported for FY14/15.

------

The above is for a single year only.  It becomes progressively more uncommon as more years of outsized returns are achieved.  For example, and Craft has made no claims of this particular outcome, if this kind of result was achieved on a per annum basis for just two consecutive years, were we to line up the crowd attendance at the AFL Grand Final today (~100k), only about 3 to 10 of the spectators would be able to generate such a result (per annum, over the full two year period).  Craft has produced outstanding returns relative to what has been available in the market on a fully invested, long only, unlevered, Australian equity universe over long period of time.  

The use of 8 stocks and equally weighted is a way of approximating a portfolio with 10-15 stocks held with some concentration into a smaller number.  If this number were concentrated even further to 6 (roughly meaning that there may be 15+ names in a portfolio, but 6 totally dominate), the number of people producing the back to back outcome above would be around 25-30, just to give you a sense  of how important this assumption is to the picture.  

Everything else is just assuming full investment with no leverage and a one year holding period, after which a new selection of X stocks is made.  It is even harder to achieve this outcome if your holding period is constrained to be longer.


----------



## Ves

Hey craft

I'm not sure if relevant.   But have you ever compared the underlying (weighted) P/E ratio of your portfolio to the ASX 200 or 300?

I'd be curious to see how this had tracked over time if you keep this data.  A statistical experiment,  if nothing else.


----------



## craft

DeepState said:


> probability




Lucky bastard aren't I - you know it, I know it  - everybody should understand it.  I have one outcome from a whole distribution of what I do could have resulted in. I think luckily to date I've got something quite high in that distribution. Might not be the case in the future and to mitigate that possibility a core of index funds will be introduced to my SMSF over time.

You only have to build it once if you don't wreak it.


----------



## craft

Ves said:


> Hey craft
> 
> I'm not sure if relevant.   But have you ever compared the underlying (weighted) P/E ratio of your portfolio to the ASX 200 or 300?
> 
> I'd be curious to see how this had tracked over time if you keep this data.  A statistical experiment,  if nothing else.




Sorry 

Don't track it and don't have the inclination to work it out.


----------



## sinner

craft said:


> Lucky bastard aren't I - you know it, I know it  - everybody should understand it.  I have one outcome from a whole distribution of what I do could have resulted in. I think luckily to date I've got something quite high in that distribution. Might not be the case in the future and to mitigate that possibility a core of index funds will be introduced to my SMSF over time.
> 
> You only have to build it once if you don't wreak it.




Was trawling through a particular investing blog recently (the author is a long only FA type guy) and read a post from the end of Dec 2005. 

http://www.crossingwallstreet.com/archives/2005/12/its-over.html


> ...At today’s close, the S&P 500 rose by 3.001% for the year (not including dividends). Also, Bill Miller’s Legg Mason Value Trust beat the market for the 15th straight year, although it was close. The fund returned 6.02% beating the S&P 500 with dividends by just 0.59%. ...




That caught my eye, I have heard of the Legg Mason Value Trust previously and thought I would pull it up. After all, beating the market for 15 straight years in 2005, wonder how it did from 2005-2015?




Now the comparison isn't perfect because it's not total return but the gist of the chart is that when the line is going up the Value fund is outperforming and when it's going down the fund is underperforming (not to show that LMVTX crashed out or anything).

Thought you might enjoy that one


----------



## craft

sinner said:


> Thought you might enjoy that one




Hi Sinner

Yes the Bill Miller 2008 story where all the LMVT outperformance was given back is very interesting. 

This is a descriptive article on it written at the end of 2008. 

http://www.wsj.com/articles/SB122886123425292617


----------



## craft

craft said:


> Anybody else like to share their SMSF thoughts, strategies or results.




This was from the opening post, still hopeful that some more people will chime in with their picture one day. In the mean time I’ll give a bit of an update as I have been thinking about the SMSF a bit following the Budget.



craft said:


> a core of index funds will be introduced to my SMSF over time.




This has been gradually occurring, I’m reasonably comfortable accumulating the index under 5000.  Otherwise stock picking on valuation and business analysis grounds remains the predominant strategy.

Equity curve for this FY to date. (+15.5% vs XAO accumulation +1.1%)  







The proposed budget changes have altered my long term strategy to an extent. I had planned to continue investing all possible funds in the tax free SMSF environment after preservation age until distributing excess to our retirement needs when I could no longer invest well, keeping the index fund proportion and distributing the rest. The distribution would be to our kids and to our Private Ancillary Fund (PAF). 

Distribution of the excess will now be bought forward to preservation age.  The intention was always to give the kids a set amount one day– They will simply get it earlier now.  The PAF will receive the rest, effectively it gets the balance, but the balance will be less because of not being able to realise all capital gains in the zero tax environment and the earlier distribution, however I will continue to invest for the PAF as I did the SMSF for as long as I can.


----------



## McLovin

craft said:


> This has been gradually occurring, I’m reasonably comfortable accumulating the index under 5000.  Otherwise stock picking on valuation and business analysis grounds remains the predominant strategy.




If you don't mind me asking, what sort of % of the SMSF is index tracking, and do you have a strategy on where it you want it to be or is it more about parking excess reserves when the index is priced right? Conversely, if the index goes above a certain point to you reduce your index exposure and go into cash?

FWIW, I don't put much into super, but my out of super returns, that have a market price, is 6.2% for the FY to date. The off market stuff I think I've done very well on, but I don't count my chickens...


----------



## craft

McLovin said:


> If you don't mind me asking, what sort of % of the SMSF is index tracking, and do you have a strategy on where it you want it to be or is it more about parking excess reserves when the index is priced right? Conversely, if the index goes above a certain point to you reduce your index exposure and go into cash?
> 
> FWIW, I don't put much into super, but my out of super returns, that have a market price, is 6.2% for the FY to date. The off market stuff I think I've done very well on, but I don't count my chickens...




Not going to trade the index – just accumulate when it doesn’t look to expensive and hold till we have to liquidate to make minimum withdrawals or the executor deals with it.  Target _(now)_ will be to have index holdings equalling tax free cap at preservation age.  Obviously some assumptions in saying this but it won’t be a big % of the fund on that day.  As of today Index holdings = 1.9% of the fund.


----------



## McLovin

craft said:


> Not going to trade the index – just accumulate when it doesn’t look to expensive and hold till we have to liquidate to make minimum withdrawals or the executor deals with it.  Target _(now)_ will be to have index holdings equalling tax free cap at preservation age.  Obviously some assumptions in saying this but it won’t be a big % of the fund on that day.  As of today Index holdings = 1.9% of the fund.




That's some long term thinking. Nice.


----------



## Ves

I'm at about 45% index (split roughly 63% VGS,  37% VAS as at today's prices) and 55% stock picking.

Rough long-term target is about 60-70% index 30-40% stock picking.

I initially did a sell down of some of the stock picking portfolio 18 months ago to start the indexing off.   

Been topping it up with savings from my wage every six months or so ever since.  It'll slowly get there.

I introduced an indexing component due to wanting more piece of mind after lack of confidence in being entirely self-reliant on my own ability.    

If anything that theory has worked very well in practice, I don't care about market movements and would be lucky to check the prices once a week these days.

I always intended to back businesses for the long-term,  unless my investment thesis was proved to be severely broken, and this has made it much easier to do it.


----------



## craft

Ves said:


> I'm at about 45% index (split roughly 63% VGS,  37% VAS as at today's prices) and 55% stock picking.
> 
> Rough long-term target is about 60-70% index 30-40% stock picking.
> 
> I initially did a sell down of some of the stock picking portfolio 18 months ago to start the indexing off.
> 
> Been topping it up with savings from my wage every six months or so ever since.  It'll slowly get there.
> 
> I introduced an indexing component due to wanting more piece of mind after lack of confidence in being entirely self-reliant on my own ability.
> 
> If anything that theory has worked very well in practice, I don't care about market movements and would be lucky to check the prices once a week these days.
> 
> I always intended to back businesses for the long-term,  unless my investment thesis was proved to be severely broken, and this has made it much easier to do it.




I know how much you have thought about this - so no doubt it will suit you well over the long term.

In relation to VGS, I know we have talked previously about the merits of the international ETF being Australian Domiciled and I also went VGS for international component based on that discussion.  But I have forgotten most of the reasons - any chance you want to detail it again so next time I forget I can refer back here.

Cheers
Cant Remember A .........


----------



## fraa

Been considering VGS vs US domiciled alternatives myself, I am not Ves but from what I read and assuming your alternative is USA domiciled vanguard funds

1. You lose 1 level of withholding tax paid from a US domiciled fund vs Aus that directly holds the underlying assets.

2. Estate taxes on Non Residental Aliens (i.e. aussie citizens) is very high compared to US citizens. Aussies have a tax treaty with USA that provides relief on this but if you are thinking very long term... well treaties can change.

3. Not sure if franking credits of the aussie portion of the international holding comes through the US domiciled fund ? 

4. ASX CHESS vs broker name holding in US I believe ?

no. 2 can be avoided by using the Irish domiciled vanguard funds instead. 

Are there any other differences (outside of explicit ones like MER, liquidity/spreads and who does the forex conversion ?). Wonder if I have missed anything.



craft said:


> I know how much you have thought about this - so no doubt it will suit you well over the long term.
> 
> In relation to VGS, I know we have talked previously about the merits of the international ETF being Australian Domiciled and I also went VGS for international component based on that discussion.  But I have forgotten most of the reasons - any chance you want to detail it again so next time I forget I can refer back here.
> 
> Cheers
> Cant Remember A .........


----------



## Ves

Re US Estate Taxes on US Domiciled investments.

I did a bit of research at the time,  and it's a pretty complicated area.  Wasn't 100% sure I had the answer,  but my understanding of it was explained in private message I sent to you, craft:



			
				Ves said:
			
		

> The exemption threshold for the 2014 fiscal year for US residents on estate assets was $5.34m.   Anything above is a flat rate of 40%.
> 
> http://en.wikipedia.org/wiki/Estate_tax_in_the_United_States
> 
> Please note that this threshold and the tax rate are constantly changing & there is heaps of current debate.  It is liable to keep changing.
> 
> My understanding is that the (1954) tax treaty between the USA and Australia means that we are allowed the same threshold as a US resident on any US based assets.  I did read that document,  but I can't remember where I found the bloody thing.  There was a line in there that mentioned something along the lines of taxes levied on residents of both of those countries would be treated as if they were a resident of the country applying the tax.
> 
> There are also gift taxes.  I don't think the US has exemptions for those to stop people from gifting assets before they die.
> 
> Also unsure if company / trust structures avoid the issue altogether.
> 
> I'm not 100% comfortable that this is the exact answer for individuals,   and considering that the amount could potentially be big hit on the portfolio if I were to pass away after a very long and fruitful investing period  I decided to limit my exposure to Australian domiciled ETFs   (in particular VAS, VGS & VGE). It limits the options / flexibility for international exposure,  but more peace of mind at this stage.
> 
> Would be very interested if you find anything else on this issue and if it influenced your thinking in ETF choice.
> 
> Cheers
> Ves



At the end of the day,  the extra complication with US domiciled assets,  and some extra paperwork for US foreign tax credits,  meant that I thought it'd be easier to go with the AU domiciled ETF.

I believe there was a lower Estate asset threshold for foreign residents,  indeed as low as $60k in assets,  if the US/AU tax treaty does not apply. Hence there is a fair bit of tax risk if the answer to the question is not correct.

I agree with fraa,   they are very liable to change and I don't have the time to keep track of them, in what is essentially a passive investment option.


----------



## hiddencow

craft said:


> The proposed budget changes have altered my long term strategy to an extent. I had planned to continue investing all possible funds in the tax free SMSF environment after preservation age until distributing excess to our retirement needs when I could no longer invest well, keeping the index fund proportion and distributing the rest. The distribution would be to our kids and to our Private Ancillary Fund (PAF).
> 
> Distribution of the excess will now be bought forward to preservation age.  The intention was always to give the kids a set amount one day– They will simply get it earlier now.  The PAF will receive the rest, effectively it gets the balance, but the balance will be less because of not being able to realise all capital gains in the zero tax environment and the earlier distribution, however I will continue to invest for the PAF as I did the SMSF for as long as I can.




As I understand it you intend to take out everything above the $1.6m tax free pension limit, $3.2 if divided with your wife as well.
Would there not still be a benefit in keeping some excess in the accumulation phase being taxed at 15%?


----------



## craft

Ves said:


> Re US Estate Taxes on US Domiciled investments.
> 
> I did a bit of research at the time,  and it's a pretty complicated area.  Wasn't 100% sure I had the answer,  but my understanding of it was explained in private message I sent to you, craft:




Thanks Ves

That's exactly what I was after. Stupidly lost track of that post, should have filed it for reference.


----------



## craft

hiddencow said:


> As I understand it you intend to take out everything above the $1.6m tax free pension limit, $3.2 if divided with your wife as well.
> Would there not still be a benefit in keeping some excess in the accumulation phase being taxed at 15%?




Hi Hidden

For us, If I look at our intentions of what we want to do there doesn't seem to be much attraction with retaining above the 3.2M. 

For estate planning purposes, the risk of leaving money in SMSF is that our kids will be non-dependant for tax purposes by the time we reach preservation age therefore any money going to them from the fund on our death would incur a 15% (+ 2% Medicare) death duty.  And the PAF is tax exempt so any money channelled to that on death would also incur death duty.

Makes more sense to me to avoid the death duty, the kids can get some money in their 20-30's when it will be more useful to them and then maybe they won't be so eager for us to die.

The PAF is tax exempt so the earlier we can get money into there the better. In fact if we weren't locked into super I would switch funds surplus to our retirement needs straight away.  But I'm not allowed so (according to most) I have to keep abusing the super system.


----------



## Junior

craft said:


> For estate planning purposes, the risk of leaving money in SMSF is that our kids will be non-dependant for tax purposes by the time we reach preservation age therefore any money going to them from the fund on our death would incur a 15% (+ 2% Medicare) death duty.  And the PAF is tax exempt so any money channelled to that on death would also incur death duty.




Hi craft,

Is there an opportunity to manage the taxable and tax-free components in your Fund?  Tax free component isn't subject to death duties.  

Can potentially create more than one pension and draw down on the pension with higher taxable component first, depending on your situation.


----------



## craft

Junior said:


> Hi craft,
> 
> Is there an opportunity to manage the taxable and tax-free components in your Fund?  Tax free component isn't subject to death duties.
> 
> Can potentially create more than one pension and draw down on the pension with higher taxable component first, depending on your situation.




Hi Junior - thanks for the thought.

Tax free proportion of the fund is only 1.3%. We will both have the full 500K cap remaining. Doesn’t make much sense to me to make the non-concessional contributions now due to the proportioning rules on lump sums.  So if nothing changes in the next 15 years until preservation age is reached we will re-contribute 500K each after taking the lump sum to at least shield a bit of the remaining 3.2 from Death Duties.

In hind sight we should have been maxing out yearly non-concessional contributions as a shield against the death duties. Oh well, live and learn. (or maybe we'll get a transitional free kick )


----------



## leyy

Im sitting at 8.36% return this financial year YTD including dividends (5.73% CG and 2.63% Dividend income).

previous financial year 14-15 I had a 8.40% return including dividends.


----------



## hiddencow

Your PAF would be a discretionary trust?

I would take advantage of your 500k NCC limits when you can immediately convert them to pensions. That way you can keep the non-taxable components at 100%. Just compound that at 30% until you die


----------



## craft

leyy said:


> Im sitting at 8.36% return this financial year YTD including dividends (5.73% CG and 2.63% Dividend income).
> 
> previous financial year 14-15 I had a 8.40% return including dividends.




Well done levy - that's better than the accumulation index over that period. It would be nice to hear at some stage how you have gone about things.


----------



## craft

hiddencow said:


> Your PAF would be a discretionary trust?





Not really a discretionary trust as such - A bit of an overview on this link. 
http://australianphilanthropicservices.com.au/wp-content/uploads/2014/05/Private-Brochure.pdf




hiddencow said:


> I would take advantage of your 500k NCC limits when you can immediately convert them to pensions. That way you can keep the non-taxable components at 100%. Just compound that at 30% until you die


----------



## skc

craft said:


> This was from the opening post, still hopeful that some more people will chime in with their picture one day.




This is my portfolio return since inception about 2 year ago. Red line is the XJOAI index. The return charted includes dividend and franking credits, but excludes interest and tax... so it's EBIT.




The portfolio currently has ~24 positions... 15 are "core" holdings while remaining ones are speculative. I try to keep transactions low, but I had a change of strategy about 12 months ago which resulted in a bit of turnover. I initially allocated ~40% of the funds to buy income stocks (REITs, utilities, infrastructure etc) whose dividends will more than cover the funds interest costs... but I had a change of heart when I thought the US rates cycle would turn up and affect this strategy negatively (I was wrong!). 

The portfolio is housed under a discretionary family trust structure which improves the tax effectiveness somewhat. I don't actually have a SMSF as yet - my super balance is not large and it's simply sitting there in some sort of standard balanced fund. It is something for down the track (although the new budget changes may render it less attractive)... but I am just a bit too busy to want to do that right now.

Overall this is my first real attempt at being a long term investor... so whilst performance is good over the first 2 years, it really hasn't even brush on the potential of long term compounding yet.


----------



## craft

skc said:


> This is my portfolio return since inception about 2 year ago. Red line is the XJOAI index. The return charted includes dividend and franking credits, but excludes interest and tax... so it's EBIT.
> 
> View attachment 66641
> 
> 
> The portfolio currently has ~24 positions... 15 are "core" holdings while remaining ones are speculative. I try to keep transactions low, but I had a change of strategy about 12 months ago which resulted in a bit of turnover. I initially allocated ~40% of the funds to buy income stocks (REITs, utilities, infrastructure etc) whose dividends will more than cover the funds interest costs... but I had a change of heart when I thought the US rates cycle would turn up and affect this strategy negatively (I was wrong!).
> 
> The portfolio is housed under a discretionary family trust structure which improves the tax effectiveness somewhat. I don't actually have a SMSF as yet - my super balance is not large and it's simply sitting there in some sort of standard balanced fund. It is something for down the track (although the new budget changes may render it less attractive)... but I am just a bit too busy to want to do that right now.
> 
> Overall this is my first real attempt at being a long term investor... so whilst performance is good over the first 2 years, it really hasn't even brush on the potential of long term compounding yet.




Awesome Job SKC. 

The change of strategy 12 Months ago looks promising on the equity curve.

It’s nice to see a trader building another string to their bow.  The compounding may seem slow at the start but it keeps plodding even while you living your life and doing your day job – chuck a few free bucks at it when you can and maybe snag a winner or two in your travels and you never know what may happen. You are certainly off to a promising start.

Big thumbs up on monitoring and bench marking the performance - Par for the course, I know to somebody trading for a living but a discipline not seen often enough in longer term investing.

Just a thought - Maybe worth seeing if your super fund has an Equity Index Option – probably have a lower MER give you more appropriate growth exposure for your age and do you really want the long term exposure to bonds that a balanced fund has? If it’s going to tick away un-monitored it’s probably still worth giving it 10 Minutes thought so that it ticks away as efficiently as possible.   10-20 years of ticking away more efficiently than maybe it is now will make a difference.

Cheers


----------



## Huskar

craft said:


> Awesome Job SKC.
> 
> The change of strategy 12 Months ago looks promising on the equity curve.
> 
> It’s nice to see a trader building another string to their bow.  The compounding may seem slow at the start but it keeps plodding even while you living your life and doing your day job – chuck a few free bucks at it when you can and maybe snag a winner or two in your travels and you never know what may happen. You are certainly off to a promising start.
> 
> Big thumbs up on monitoring and bench marking the performance - Par for the course, I know to somebody trading for a living but a discipline not seen often enough in longer term investing.
> 
> Just a thought - Maybe worth seeing if your super fund has an Equity Index Option – probably have a lower MER give you more appropriate growth exposure for your age and do you really want the long term exposure to bonds that a balanced fund has? If it’s going to tick away un-monitored it’s probably still worth giving it 10 Minutes thought so that it ticks away as efficiently as possible.   10-20 years of ticking away more efficiently than maybe it is now will make a difference.
> 
> Cheers




Always love following you SKC - for your disciplined focus on performance measurement as much as your market insights. But I recall you doing some relative value investing a few years ago which could probably fall into the longer term / value investing bucket? 

One thought on super holdings: I don't have enough for SMSF either but hold in what is effectively a semi-SMSF without the hassle with ING Super. I can invest in ASX300 stocks (although max 20% of portfolio in any stock and max of 80% of portfolio in equities). Brokerage more expensive (~$25 per trade) so doesn't suit a trader but I just hold ETFs and Bob's your uncle. Costs are comparable or lower than even industry super funds (all other things equal). Each basis points of fees you can claw back are an edge.


----------



## skc

craft said:


> Awesome Job SKC.
> The change of strategy 12 Months ago looks promising on the equity curve.




Thanks. It's not an equity curve, but a unit price chart. Total $$ profits would have been higher if I stayed with the income strategy, although the percentage return would be lower. Since selling those income stocks I have yet to re-deploy all the freed-up capital.



craft said:


> Big thumbs up on monitoring and bench marking the performance - Par for the course, I know to somebody trading for a living but a discipline not seen often enough in longer term investing.




There are pros and cons of monitoring along side the benchmark. If you continuously underperform then at some stage it would be irrational not to just buy the index. At the same time, you don't want to jump at shadows either.



craft said:


> Just a thought - Maybe worth seeing if your super fund has an Equity Index Option – probably have a lower MER give you more appropriate growth exposure for your age and do you really want the long term exposure to bonds that a balanced fund has? If it’s going to tick away un-monitored it’s probably still worth giving it 10 Minutes thought so that it ticks away as efficiently as possible.   10-20 years of ticking away more efficiently than maybe it is now will make a difference.




I am still waiting for a crash to do the switch  



Huskar said:


> Always love following you SKC - for your disciplined focus on performance measurement as much as your market insights. But I recall you doing some relative value investing a few years ago which could probably fall into the longer term / value investing bucket?




Thanks. That was almost 7 years ago believe it or not. That effort was neither long term or true value investing... it was short term market opportunity capturing using fundamentals. To illustrate I think I bought the AZJ IPO and sold in the first day or 2.



Huskar said:


> One thought on super holdings: I don't have enough for SMSF either but hold in what is effectively a semi-SMSF without the hassle with ING Super. I can invest in ASX300 stocks (although max 20% of portfolio in any stock and max of 80% of portfolio in equities). Brokerage more expensive (~$25 per trade) so doesn't suit a trader but I just hold ETFs and Bob's your uncle. Costs are comparable or lower than even industry super funds (all other things equal). Each basis points of fees you can claw back are an edge.




Yes my superfund has similar options... but I am usually too busy during market hours that anything requiring more than 2 seconds for order entry is just too long. I still can't shake the trader mindset where every tick counts. So when it comes to investing I actually struggles with my order entry. I can't get over missing a trading opportunity that could make me 10x in the next 5 minutes because I have to enter an order to make 1x in my Superfund in the 6 months.


----------



## DeepState

SKC, well done.  Naturally, I have to pepper you with a questionnaire because whatever you are thinking is required reading:

1. Are you now long-only?  Done with pairs etc...

2. What leverage are you using?

3. Do you have any stats on portfolio characteristics?
- eg. Capitalisation bands, value metrics, GICS weights vs benchmark etc

4. Do you invest with a view to the benchmark at all or it is just something whose total return you look at as well from time to time just for interest?

5. You caught a major updraft upon change of strategy.  How to do attribute that outcome? ie. Great individual stock picks, sector rotation outcome etc.  In your judgment, skill/luck/style/specific.. You've always been a very objective person so I am curious as to how you thought about that period.

6. When you say that you try to control turnover...what turnover are you now thinking of and where did it come from?  

7. What has prompted the change in strategy in the last 12 months?  Why did you decide to give a long term value approach a guernsey?

8. The concept of Value is an interesting one, subject to definition by the user.  You indicated that you tilted (heavily?) into REITs and Utils for running yield.  However running yield and "value" can be two different things.  For example, Dimensional Fund Advisors and RealIndex are regarded as quant value style investors.  Both are materially underweight REITs and Utilities, deeming them not 'value' sectors at this time.  These have been amongst the strongest performers, sector-wise. in the last 12 months [along with Healthcare and Industrials]. At a guess, the market started to reward earnings stability and increased international competitiveness.  Awesome for you!  What is your definition of a 'value' situation?


----------



## skc

DeepState said:


> SKC, well done.  Naturally, I have to pepper you with a questionnaire because whatever you are thinking is required reading:




Let me first clarify the chart I posted. It's a "unit price" performance.... not absolute return or current open profits or anything like that. I only worked out the month-end unit price based on cash in/out and portfolio value... so it's not perfect (and likely slightly over estimate performance), although it should be representative enough.

For example.. say my portfolio is $100k on 1 Jan, and the portfolio has equivalent of 10k units @ $10 each. I bought $25k of shares during Jan and my end of Feb portfolio valuation was $130k. I approximated that the $25k addition was done at a unit price of $10, creating 2500 new units. So now my portfolio has 12.5k units valued at $130k/12.5k = $10.4.

Similarly, if I sold $10k of shares during Feb, and my end of Mar portfolio valuation was $125k. I approximated that the $10k subtraction was done at a unit price of $10.4, resulting in 961.5 fewer units. So my portfolio at end of Mar has 11,538.5 units each valued @ $125k / 11538.5 = $10.833.

So in this illustration, my "charted return" shows +8.33%. But the total open and realised profits are actually $10k. So you can calculate a different return number depending on what number you choose to put in the denominator (average equity, starting equity, time-weighted equity etc etc). 

Apologies for the long winded explanation... but it's actually the first time I use this unit price performance method  so if I made any gross error then please kindly point it out.

Other response in blue below.



DeepState said:


> 1. Are you now long-only?  Done with pairs etc...
> This portfolio is long only. This is not my trading portfolio. Trading is my day job. This is sort of like the investment everyone else do aside from their day job.
> 
> 2. What leverage are you using?
> There is no leverage in the portfolio. It is debt funded but the return calculations did not include any leverage.
> 
> 3. Do you have any stats on portfolio characteristics?
> - eg. Capitalisation bands, value metrics, GICS weights vs benchmark etc
> I don't keep track of these. I can certainly find the answer but I am not sure there'd be much meaning. Holdings are however mostly smaller companies outside ASX200.
> 
> 4. Do you invest with a view to the benchmark at all or it is just something whose total return you look at as well from time to time just for interest?
> 
> No I don't really set out to beat the benchmark. I wanted this to be a growing portfolio and a constant exposure to companies that I thought should grow their businesses and go up in price (as opposed to micro trading them to pinch a few % here and there). I would probably reassess if I underperform the index over say 3-4 years... but frankly I didn't really have a firm plan there.
> 
> 5. You caught a major updraft upon change of strategy.  How to do attribute that outcome? ie. Great individual stock picks, sector rotation outcome etc.  In your judgment, skill/luck/style/specific.. You've always been a very objective person so I am curious as to how you thought about that period.
> 
> Some part of that was mathematical (I think). Initially I allocated some 40% to the income strategy. I bought stocks yielding 7-8% while expecting minimal capital growth. As I exited these income stocks.. some of which I would have collected the 7% yield while selling at breakeven after holding for 8-9 months, boosted the percentage return while permanently added to the unit price. I am guessing the unit price method works better with smoother changes in number of units.... but a more abrupt change could throw out slightly funny numbers.
> 
> Another part was due to some good luck with a few capital raising on some of the winners. The market liked the raising, I oversubscribed for more shares and held onto these oversized winners. The portfolio performance would have been worse if I didn't add to these winners (or if I sold them for a quick profit).
> 
> 6. When you say that you try to control turnover...what turnover are you now thinking of and where did it come from?
> 
> By turnover I meant I don't want to do too much buying or selling. In the past I often adjust my market exposure during downturns... I tried to avoid that in this portfolio. Craft has a mantra of "buy right - hold tight" - I want to at least practice the "hold tight" part even if I am still refining the "buy right".
> 
> 7. What has prompted the change in strategy in the last 12 months?  Why did you decide to give a long term value approach a guernsey?
> 
> As I said, I ditched the income strategy because I didn't think the reward justified the risk, in a rising rates environment. I was always going to end the yield-interest arbitrage game when I start feeling uncomfortable doing so. I reasoned that I could handle missing out on 3-4% return, but I can't accept -20% capital loss chasing those 3-4% return.
> 
> I don't know what you meant by guernsey
> 
> 8. The concept of Value is an interesting one, subject to definition by the user.  You indicated that you tilted (heavily?) into REITs and Utils for running yield.  However running yield and "value" can be two different things.  For example, Dimensional Fund Advisors and RealIndex are regarded as quant value style investors.  Both are materially underweight REITs and Utilities, deeming them not 'value' sectors at this time.  These have been amongst the strongest performers, sector-wise. in the last 12 months [along with Healthcare and Industrials]. At a guess, the market started to reward earnings stability and increased international competitiveness.  Awesome for you!  What is your definition of a 'value' situation?
> 
> I don't have a firm definition. In my half page "strategy" I simply said "Companies with strong growth potential irrespective of market direction. Should mostly be profitable and attractively priced.". There was no more than that.
> 
> Yes the market is handsomely rewarding these seemingly stable sectors at the moment. AFR just had an article about exactly what you described. But I am comfortable to not be involved (in this portfolio) for the reason I outline in 7 above. To buy these with a view to trade them as long as the trend holds is fine... but I find that to be in conflict with the rest of the portfolio's "buy right - hold tight" approach. To achieve "hold tight" one must ignore certain market noises and short term feedback... but I am worried that if I get too good at "holding tight" with the income stocks I will simply hold them till it's too late if and when the music stops.
> 
> If I was to re-participate in this yield chase I will do so with a different setup...




Thanks for the questions. You made me think hard about what I am actually doing.


----------



## galumay

skc said:


> ... but it's actually the first time I use this unit price performance method  so if I made any gross error then please kindly point it out.




I don't see any particular errors with your use of this method. I track my SMSF with a TWIRR method (time weighted, internal rate of return.) that I built a spreadsheet for. It works in a similar manner by ending up with a unit price. I believe this is basically the methodology that managed funds use.

I do use a benchmark for comparison, the SPAX2F0 which is the ASX 200 FRANKING CREDIT ADJUSTED ANNUAL TOTAL RETURN INDEX (TAX-EXEMPT) - but like you I don't get too fixated on it because my SMSF is a long term strategy and I am also a bit wary of the weighting with an ASX 200 index.


----------



## craft

galumay said:


> I do use a benchmark for comparison, the SPAX2F0 which is the ASX 200 FRANKING CREDIT ADJUSTED ANNUAL TOTAL RETURN INDEX (TAX-EXEMPT) - but like you I don't get too fixated on it because my SMSF is a long term strategy and I am also a bit wary of the weighting with an ASX 200 index.




My data supplier doesn't provide data for SPAX2F0 - wasn't even aware it existed until your post. Do you have a source for the data? Thanks

On benchmarking, I think it is critical. If you can't beat the low input indexing option then get the hell out of active management and get on with something else - your are not only wasting your time but also your money. 

The big difficulty when comparing to the benchmark is in distinguishing between a normal period of underperformance for your approach and permanent poor performance that the approach is not going to come back from.  People/approaches that are probably most at risk are those that have had ability(luck) but subsequently lost it - Its the recipe for digging a really big hole before the penny drops that something has permanently changed.


----------



## craft

skc said:


> Let me first clarify the chart I posted. It's a "unit price" performance.... not absolute return or current open profits or anything like that. I only worked out the month-end unit price based on cash in/out and portfolio value... so it's not perfect (and likely slightly over estimate performance), although it should be representative enough.
> 
> For example.. say my portfolio is $100k on 1 Jan, and the portfolio has equivalent of 10k units @ $10 each. I bought $25k of shares during Jan and my end of Feb portfolio valuation was $130k. I approximated that the $25k addition was done at a unit price of $10, creating 2500 new units. So now my portfolio has 12.5k units valued at $130k/12.5k = $10.4.
> 
> Similarly, if I sold $10k of shares during Feb, and my end of Mar portfolio valuation was $125k. I approximated that the $10k subtraction was done at a unit price of $10.4, resulting in 961.5 fewer units. So my portfolio at end of Mar has 11,538.5 units each valued @ $125k / 11538.5 = $10.833.
> 
> So in this illustration, my "charted return" shows +8.33%. But the total open and realised profits are actually $10k. So you can calculate a different return number depending on what number you choose to put in the denominator (average equity, starting equity, time-weighted equity etc etc).
> 
> Apologies for the long winded explanation... but it's actually the first time I use this unit price performance method  so if I made any gross error then please kindly point it out.




Ah, Intricacies of determining the return.

On one hand you may judge yourself by return on funds deployed. In the case you describe of borrowing money it probably makes most sense to use Time Weighted Return.  In which case you are determining the return for the period and amount of money you have drawn.

But you could also take the view you have 200K credit limit available and judge yourself on an IRR basis with 200K starting capital – this makes you responsible for not only the money deployed but responsibility for the funds underutilised.  This more aligns with how you would probably see your return if you had 200K equity and held yourself accountable not only for the return on investments made but in getting the money invested. Having only 10K invested out of a 200K pot even if that 10K makes 300% is not a great total return on 200K if the other 190K is sitting in an at call bank account gathering rust.  (or in the case of debt making 50% on a 10K loan might not be as good as making 10% on a 200k loan)

For an SMSF I feel I'm responsible for the return on total equity available so the return measure should be return on time weighted equity (XIRR)


----------



## skc

craft said:


> For an SMSF I feel I'm responsible for the return on total equity available so the return measure should be return on time weighted equity (XIRR)




Yes and I do keep track of that as well... and return / funds available is a smaller number for obvious reason. But the difference is less pronounced if you compare NPAT as opposed to EBIT... 

My funds deployed was up to 85% of funds available. The sale of income stocks reduced that number a lot and it is now around 65%. The aim is to build it back to 85%+ when the time is right.

If I am comparing to the benchmark then it makes sense to use "funds deployed" as the denominator... as you are measuring how well your own decisions perform against the alternative of an index fund.


----------



## craft

skc said:


> If I am comparing to the benchmark then it makes sense to use "funds deployed" as the denominator... as you are measuring how well your own decisions perform against the alternative of an index fund.





To me it makes sense to compare return on total equity available against the benchmark, That's the encapsulation of everything I take responsibility for as an active manager as opposed to the passive alternative.


But I can see a big difference in my thinking when looking at equity perspective as opposed to a borrowing perspective (which agrees with your above statement). Maybe that's a contradiction in my own mind?  Maybe its because there is no obvious detriment from borrowings not made whereas there is from equity not efficiently employed? If I held myself accountable for borrowing capacity not utilised maybe I would give borrowing a bit more thought???????????

Sorry probably running off on a tangent here - you just got me thinking.


----------



## skc

craft said:


> To me it makes sense to compare return on total equity available against the benchmark, That's the encapsulation of everything I take responsibility for as an active manager as opposed to the passive alternative.
> 
> But I can see a big difference in my thinking when looking at equity perspective as opposed to a borrowing perspective (which agrees with your above statement). Maybe that's a contradiction in my own mind?  Maybe its because there is no obvious detriment from borrowings not made whereas there is from equity not efficiently employed? If I held myself accountable for borrowing capacity not utilised maybe I would give borrowing a bit more thought???????????
> 
> Sorry probably running off on a tangent here - you just got me thinking.




I think calculating performance against funds that has been designated to be deployed (the entire facility in my case) is a fair enough metric.

Calculating performance against all potential / possible funds deploy-able, however, is probably a bit too much. How far do you go? May be you could have applied for another facility (I know I still have plenty of untapped equity in properties), or buy a less expensive PPOR, or take an unsecured loan from your friend, or sell your old furniture etc etc. It is only limited by your imagination.

The amount allocated to the market should be a separate consideration under one's overarching wealth strategy... but has nothing to do with investment performance. And it comes down to different life circumstances and ambitions as much as anything else. Some want a nice beach holiday, some want a new house, some want inter-generational wealth. There's no right answer there...


----------



## galumay

craft said:


> My data supplier doesn't provide data for SPAX2F0 - wasn't even aware it existed until your post. Do you have a source for the data? Thanks
> 
> On benchmarking, I think it is critical. If you can't beat the low input indexing option then get the hell out of active management and get on with something else - your are not only wasting your time but also your money.
> 
> The big difficulty when comparing to the benchmark is in distinguishing between a normal period of underperformance for your approach and permanent poor performance that the approach is not going to come back from.  People/approaches that are probably most at risk are those that have had ability(luck) but subsequently lost it - Its the recipe for digging a really big hole before the penny drops that something has permanently changed.




Hi craft, thanks for sharing your thoughts. Its always a pleasure (and informative) to read your thoughts. SPAX2FO is a bit of a hidden one! Spindices is where I sourced it - but had to also get it pointed out to me! http://eu.spindices.com/indices/equ...adjusted-annual-total-return-index-tax-exempt

My caution with benchmarking as a long term value investor is that the first few years of running such a portfolio it can be very dangerous to pay to much attention to relative performance - just as it would be very dangerous to totally ignore it! For me, in the early years of a portfolio its important to self reflect on reasons for divergence from the benchmark - in either direction, was it good luck? or good management? and vice versa. In very general terms I am comfortable in the short term if my overall performance is at least related to the index i am benchmarking.

What i mean by this is that in my fairly small number of companies owned, one company that runs up in price very quickly and strongly, can have sufficient impact to move my performance to the +ve side of the benchmark, (and vice versa obviously) - what I watch is that my relative performance continues, so if the market drops my scale of outperfomance or if it rises my outperformance floats up with the rising tide! 

Anyway what I am saying in all that waffling is that I agree with your comments about benchmarking!


----------



## craft

skc said:


> I think calculating performance against funds that has been designated to be deployed (the entire facility in my case) is a fair enough metric.
> 
> Calculating performance against all potential / possible funds deploy-able, however, is probably a bit too much. How far do you go? May be you could have applied for another facility (I know I still have plenty of untapped equity in properties), or buy a less expensive PPOR, or take an unsecured loan from your friend, or sell your old furniture etc etc. It is only limited by your imagination.
> 
> The amount allocated to the market should be a separate consideration under one's overarching wealth strategy... but has nothing to do with investment performance. And it comes down to different life circumstances and ambitions as much as anything else. Some want a nice beach holiday, some want a new house, some want inter-generational wealth. There's no right answer there...




Don’t mind my ramblings skc.

Until this discussion, Return on total equity allocated to investment was a very black and white metric for me, but I caught a glimpse of a little grey and perused it as a thought, maybe return on only invested funds or return on equity + safe debt capacity has merit. How far do you go indeed? Don’t know but it’s not as black and white as I had previously seen it.  

My portfolio manager actually has two return calculations (presented right next to each other) Return on total portfolio (includes cash balance) which I would have observed daily for years and return on securities (ignores cash balance and calculate only on funds invested in securities) which I barely even registered that it existed. Talk about biases blocking things out.


----------



## craft

galumay said:


> Anyway what I am saying in all that waffling is that I agree with your comments about benchmarking!




And I with yours. 

Thanks for the index info.


----------



## skc

craft said:


> Don’t mind my ramblings skc




Thanks for the exchange. Many will pay to hear more of your ramblings.


----------



## VSntchr

craft said:


> still hopeful that some more people will chime in with their picture one day.



Okay, so here is my contribution to the thread.
After all the talk about how everyone is measuring their returns I feel a little embarrassed to provide my method. 

I am simply calculating end of current month value divided by end of last month value to get a % return for the month. The end of month figure is normalised by subtracting deposits and adding back withdrawals. Return is being measured on total securities value + cash balance. I tend to run a portfolio that is 80%+ invested at all times, so the cash drag is never too large. The monthly % return is then applied to an indexed line (I chose $100k) and compared against XJOAI and XSOAI. There is error using this method, as the method above shows a FY16 YTD return of 38.002%, while taking the current value divided by the beginning value (normalised for dep/withdraw) gives a return of 38.98%. 
The performance must also be taken into context that the deposits to the fund have been ~50% of the starting value, primarily due to adding in a new member - so position sizing has had to evolve as the fund has grown. The SMSF was actually established a bit earlier than FY15, but due to some data issues I just started it from start FY15.

One note: I have found tremendous value since being in charge of multiple portfolios. I have used the SMSF as a way to express a slightly different view than the way I have been managing my retail portfolio. The result is that the SMSF has vastly outperformed my own portfolio 

Enough chat, heres the chart:


----------



## craft

VSntchr said:


> Okay, so here is my contribution to the thread.
> After all the talk about how everyone is measuring their returns I feel a little embarrassed to provide my method.
> 
> I am simply calculating end of current month value divided by end of last month value to get a % return for the month. The end of month figure is normalised by subtracting deposits and adding back withdrawals. Return is being measured on total securities value + cash balance. I tend to run a portfolio that is 80%+ invested at all times, so the cash drag is never too large. The monthly % return is then applied to an indexed line (I chose $100k) and compared against XJOAI and XSOAI. There is error using this method, as the method above shows a FY16 YTD return of 38.002%, while taking the current value divided by the beginning value (normalised for dep/withdraw) gives a return of 38.98%.
> The performance must also be taken into context that the deposits to the fund have been ~50% of the starting value, primarily due to adding in a new member - so position sizing has had to evolve as the fund has grown. The SMSF was actually established a bit earlier than FY15, but due to some data issues I just started it from start FY15.
> 
> One note: I have found tremendous value since being in charge of multiple portfolios. *I have used the SMSF as a way to express a slightly different view than the way I have been managing my retail portfolio*. The result is that the SMSF has vastly outperformed my own portfolio
> 
> Enough chat, heres the chart:
> View attachment 66710




Another awesome result - thanks for sharing.

Any interest in expanding on the bolded bit?


----------



## VSntchr

craft said:


> Any interest in expanding on the bolded bit?



I still consider myself a rank amateur when it comes to investing and business analysis. I have definitely improved since beginning around 10 years ago at a tender age of 16 where I had NFI at all, although I still seem to learn very simple lessons quite often . 
My retail portfolio therefore, has had to endure very poor management from the early stages with a slow improvement in investment selection and position management etc. I think that a poor ability to cull investments which don't deserve a place in my portfolio has held the retail portfolio back. Being able to start a fresh with the  SMSF gave me a chance to focus clearly on portfolio construction without any bias towards what I already hold. 

As for the style - the retail portfolio has been managed with a focus on small-mid caps. Essentially the goal was to find good businesses with a strong growth runway that I could ride for a number of years. Only one or two 'home-runs' was needed every couple of years to really set the returns on fire...and these have been achieved with random consistency and a few big chunks of luck. As the years have gone on, I have realised that this style doesn't fit perfectly with me. I think that alot of the early wins in the portfolio were due to blind luck, and while that gave me a good springboard - it wasn't sustainable. I began to transition the portfolio towards higher quality companies, although some of the laggards remained for far too long in the portfolio.  

When starting the SMSF portfolio I found myself reading some stuff, namely threads like this one and the PVFCF thread, which accelerated my path of trying to create a portfolio that I could be really confident in holding. A portfolio that is more than just a list of potential lottery tickets and momentum plays. Something that comprises a list of businesses that I am happy to be a part owner of, that will hopefully provide a continually increasing stream of cash flows over the years. Hence, the focused has shifted from trying to find '10-baggers' to trying to find 'dividend baggers'. 

The 'shifting view' has really been that the SMSF is used for longer term wealth generation, a getting rich slow type thing.


----------



## Huskar

skc said:


> Let me first clarify the chart I posted. It's a "unit price" performance.... not absolute return or current open profits or anything like that. I only worked out the month-end unit price based on cash in/out and portfolio value... so it's not perfect (and likely slightly over estimate performance), although it should be representative enough.
> 
> For example.. say my portfolio is $100k on 1 Jan, and the portfolio has equivalent of 10k units @ $10 each. I bought $25k of shares during Jan and my end of Feb portfolio valuation was $130k. I approximated that the $25k addition was done at a unit price of $10, creating 2500 new units. So now my portfolio has 12.5k units valued at $130k/12.5k = $10.4.
> 
> Similarly, if I sold $10k of shares during Feb, and my end of Mar portfolio valuation was $125k. I approximated that the $10k subtraction was done at a unit price of $10.4, resulting in 961.5 fewer units. So my portfolio at end of Mar has 11,538.5 units each valued @ $125k / 11538.5 = $10.833.
> 
> So in this illustration, my "charted return" shows +8.33%. But the total open and realised profits are actually $10k. So you can calculate a different return number depending on what number you choose to put in the denominator (average equity, starting equity, time-weighted equity etc etc).
> 
> Apologies for the long winded explanation... but it's actually the first time I use this unit price performance method  so if I made any gross error then please kindly point it out.
> 
> Other response in blue below.
> 
> 
> 
> Thanks for the questions. You made me think hard about what I am actually doing.




My  on calculating return because I have been studying recently and I have it to hand (the below is paraphrasing of the CFA Institute text): a unit price calculation should give you a total rate of return (which is really what you are left with at the end of the day - ie increase in wealth due to investment income and capital gains). But then do you calculate the investment-related growth rate in the account's value by focusing on a single unit of money invested in the account or by focusing on an average amount of dollars invested? Because calculating the return on the average amount of money in the account is sensitive to the size and timing of cash flows into/out of the account, it seems sensible to focus on the single unit of money measure which reflects how you would have fared over the period if you had placed funds in the account at the beginning of the period. This is the time-weighted rate of return approach (TWR).

The approaches will produces similar results under normal conditions but differences can be significant where external cash flows occur that are large relative to the account's value and the account has significant volatility during the period.

The downside is that TWR requires account valuations on every date that your external cash flow takes place and then the returns need to be linked (to account for compounding), while MWR can just be calculated at the end of the period. 

To show how the differences work: if your account is worth $100k at the start of the month, on day 10 it is valued at $220k after receiving a $120k contribution and at the end of the month the account is worth $300k:

For MWR, solve for R:
$300k = $100k(1+R)^30 + $120k(1+R)^30-10
By trial and error, R = ~0.01265. That is a monthly return of (1+0.01265)^30 - 1 = 46%

For TWR:
subperiod 1: [($220k-$120k) - $100k]/$100k = 0%
subperiod 2: ($300k-$220k)/$220k = 36.4%
Then return for total period = (1+0)x(1+0.364) - 1 = 0.364 or 36.4%

Apologies for the rant!


----------



## skc

VSntchr said:


> When starting the SMSF portfolio I found myself reading some stuff, namely threads like this one and the PVFCF thread, which accelerated my path of trying to create a portfolio that I could be really confident in holding. A portfolio that is more than just a list of potential lottery tickets and momentum plays. Something that comprises a list of businesses that I am happy to be a part owner of, that will hopefully provide a continually increasing stream of cash flows over the years. Hence, the focused has shifted from trying to find '10-baggers' to trying to find 'dividend baggers'.
> 
> The 'shifting view' has really been that the SMSF is used for longer term wealth generation, a getting rich slow type thing.




Nice results. Great stuff.

Questions if I may... 
1. You are also a trader. Any thoughts to share on how you handle the much slower feedback cycle involved with SMSF investing? 

2. Have you considered whether you should deploy more capital in trading rather than split it between trading and SMSF? While trading income isn't nearly as tax effective, it is potentially more scalable at an earlier stage? I know if I wasn't trading other people's money then I probably wouldn't be putting much money in SMSF (or hold investments in my family trust).


----------



## luutzu

pixel on AFS have an app that calculate portfolio returns.

I remember it look very well thought out. Worth talking to pixel and check it out.


----------



## So_Cynical

I can't afford a SMSF but i do have an IB account.  its kind of a super fund because the plan was to just build it until i needed the money at some point in the distant future, i have only deposited twice into the account at the very start, a very small amount of cash and 3 shares, no deposits since and no withdrawals ever.

Wrote some covered calls and received a few dividends, mostly trading profits and open profit.
~


----------



## VSntchr

skc said:


> Questions if I may...
> 1. You are also a trader. Any thoughts to share on how you handle the much slower feedback cycle involved with SMSF investing?
> 
> 2. Have you considered whether you should deploy more capital in trading rather than split it between trading and SMSF? While trading income isn't nearly as tax effective, it is potentially more scalable at an earlier stage? I know if I wasn't trading other people's money then I probably wouldn't be putting much money in SMSF (or hold investments in my family trust).



1. I was an investor before I was a trader. So for me, the learning curve has been the other way around. Pairs was such an excellent strategy for this reason - because I feel it gives you a much easier way to get out of a trade. There is no legitimate way to convince yourself to stay in a trade that needs to be exited. If the rolling mean is back to 1.00 or whatever your target is - your out. Obviously as a more developed trader, there are other stops involved, but this works for illustrative purposes. 

Once I started doing more directional trading and developing a few strategies, I noticed that my biggest weakness was turning trades into investments, or even just holding trades for too long, whether that is 20 minutes too long for an intraday move, or a few days too long in a momentum play. I didn't let this go on for too long (and couldn't $$), but it certainly was a challenge. It's still something that I have to battle with my own internal dialogue on certain trades (when you really feel right, but price action says :fu: ) but I find that with each positive decision made, that little burst of rewarding neuro-chemical in my brain makes it a bit easier the next time I have to make the hard decisions. 

So, that doesn't really answer your question - as 'buying right and sitting tight' in an investment just naturally feels comfortable for me. I can hold through moderate periods of drawdown or flatness without losing sleep at night, assuming I have confidence in my business analysis. I guess what I'm getting at, is that I haven't depended on the feedback in order to continue my investment process. As I'm sure you understand, trading is a different story ---and a PM to you a while ago whilst in drawdown would confirm that 

Perhaps it was a few lucky positions early on that gave me confidence that this investment thing actually works and that if I remained patient that I could have an ascending equity curve. I have never had to deal with an equity curve going into drawdown for an extended 24 month period for example, so maybe it's just that I am naive and blinded by some 'lucky results'. 

Some other things that I have found to make it easier, is to have the investment stuff completely separate in as many ways as possible from trading: different broker, different spreadsheet layouts etc - helps to keep it separate in my mind. I think you already spoke a bit about this in another thread, how you like that your investment broker takes a few extra clicks to slow you down etc. Updating the equity curve monthly is another good one, "Fooled by Randomness" is a great book which has a bit on how checking your returns less frequently as an investor can be beneficial for the psyche. 

I'll come back to the second question tomorrow - I think I have cluttered up this post more than enough with ramblings!


----------



## Value Hunter

DeepState said:


> For the 2014/15 FY *alone*, the probability of a 47.1% year total pre-tax return outcome is crudely estimated at 0.5%.
> 
> On the basis of a fully invested, unlevered, buy-hold portfolio (days held average for realised positions is well above this period) with an effective diversification of 8 stocks (to allow for concentration into a smaller number of names within the portfolio) drawn from the ASX 200 which survived the year.
> 
> 
> 
> 
> Rinse and repeat, roughly, eleven more times.  ASX 200 Accum 11 years to FY2014  compound approx 10% per annum, realised approx. 35% pa.  Very very rough likelihood *per year* 2-5%. No more than 15%. Allows full rebalancing each year. Fully invested...
> 
> 
> 
> Indeed. Welcome back.





I think one fundamentally flawed assumption you have made here is that Craft confines himself to the ASX 200. I don't remember him mentioning that anywhere. When you have a pool of 2000 or so companies to choose from its of course easier to get a very high return than when looking at just the top 200. Proof of this is if you look at the top ten performing stocks in any given year on the ASX (in terms of total shareholder return) most if not all of them will be outside of the top 200 stocks.


----------



## craft

skc said:


> 2. Have you considered whether you should deploy more capital in trading rather than split it between trading and SMSF? While trading income isn't nearly as tax effective, it is potentially more scalable at an earlier stage? I know if I wasn't trading other people's money then I probably wouldn't be putting much money in SMSF (or hold investments in my family trust).




Interesting question and whilst I'm not VC perhaps you'll indulge my ponderings. 

Super has some very attractive tax benefits for retirement saving. 

The earlier (kudos to VC being 26) you get money in the LESS overall you will need to put in to achieve a desired outcome. This is exaggerated by good long term investment returns.

The downside is that what you do put in is captive until preservation age so the earlier you put money in the longer you are exposed to regularity risk. A level of grandfathering alleviates this to a certain extent and some of the regulatory risk is actually not taking advantage of the benefits whilst they exist.

Despite the tax advantages – common sense says you should allocate towards your best risk weighted after tax return.  

So in the case where your best risk weighted after tax returns come from trading is there any place for allocating towards super? 

If you allocate the money to trading you increase the working capital of your trading business and given you can scale up without sacrificing return you will increase your current income.

Is ‘earned’ current income from a trading business wealth?  I don’t know, I’ve seen quite a few people who have earned high incomes at time and end up with not that much to show for it.

Passive income from a stockpile of capital seems to be much more enduring.

A trading business is never going to generate goodwill on its sale ( A potential benefit of investing in other types of businesses)  – however you will be able to recover your working capital when you quit trading, so that will be a stockpile of capital for the future outside of super - how big will it be? Depends how much working capital your trading business was able to accommodate.

I _‘think’ _I think that even a successful trader earning great returns should consider allocating at least a part of his/her current income (as should any other sort of income earner)  towards a stock of capital [other than just the working capital of the trading business] to generate passive income for the future and the superannuation system is a pretty tax effective place to do that. 

But what mix? Isn't the old nugget 10% of your net income will do the trick.


----------



## craft

So_Cynical said:


> I can't afford a SMSF but i do have an IB account.  its kind of a super fund because the plan was to just build it until i needed the money at some point in the distant future, i have only deposited twice into the account at the very start, a very small amount of cash and 3 shares, no deposits since and no withdrawals ever.
> 
> Wrote some covered calls and received a few dividends, mostly trading profits and open profit.
> ~




Thanks for the contribution My Cynical.

That's one high win rate on closed trades your packin there.

Conventionally they say cut the weeds water the flowers - but sometimes unconventional is less crowded.


----------



## craft

Huskar said:


> My  on calculating return because I have been studying recently and I have it to hand (the below is paraphrasing of the CFA Institute text): a unit price calculation should give you a total rate of return (which is really what you are left with at the end of the day - ie increase in wealth due to investment income and capital gains). But then do you calculate the investment-related growth rate in the account's value by focusing on a single unit of money invested in the account or by focusing on an average amount of dollars invested? Because calculating the return on the average amount of money in the account is sensitive to the size and timing of cash flows into/out of the account, it seems sensible to focus on the single unit of money measure which reflects how you would have fared over the period if you had placed funds in the account at the beginning of the period. This is the time-weighted rate of return approach (TWR).
> 
> The approaches will produces similar results under normal conditions but differences can be significant where external cash flows occur that are large relative to the account's value and the account has significant volatility during the period.
> 
> The downside is that TWR requires account valuations on every date that your external cash flow takes place and then the returns need to be linked (to account for compounding), while MWR can just be calculated at the end of the period.
> 
> To show how the differences work: if your account is worth $100k at the start of the month, on day 10 it is valued at $220k after receiving a $120k contribution and at the end of the month the account is worth $300k:
> 
> For MWR, solve for R:
> $300k = $100k(1+R)^30 + $120k(1+R)^30-10
> By trial and error, R = ~0.01265. That is a monthly return of (1+0.01265)^30 - 1 = 46%
> 
> For TWR:
> subperiod 1: [($220k-$120k) - $100k]/$100k = 0%
> subperiod 2: ($300k-$220k)/$220k = 36.4%
> Then return for total period = (1+0)x(1+0.364) - 1 = 0.364 or 36.4%
> 
> Apologies for the rant!




Thanks for sharing this Hesking1


----------



## craft

skc said:


> Questions if I may...
> 
> 2. Have you considered whether you should deploy more capital in trading rather than split it between trading and SMSF? While trading income isn't nearly as tax effective, it is potentially more scalable at an earlier stage? I know if I wasn't trading other people's money then I probably wouldn't be putting much money in SMSF (or hold investments in my family trust).




Just for the sake of inverting the question.

Why don't you trade your capital along side other peoples money? If its a scale issue why not substitute your capital for some of the other peoples capital and save the expense(profit share) you incur for using their capital?


----------



## VSntchr

skc said:


> 2. Have you considered whether you should deploy more capital in trading rather than split it between trading and SMSF? While trading income isn't nearly as tax effective, it is potentially more scalable at an earlier stage? I know if I wasn't trading other people's money then I probably wouldn't be putting much money in SMSF (or hold investments in my family trust).



This is a question that I have pondered over quite a bit. 
Initially, the decision of where to put surplus capital was a no-brainer. I went through a period where I was making no new investments and directing all exited investment capital, dividends, trading earnings etc back into the 'working capital' as Craft puts it. When you are paying brokerage at 10bps with a fixed minimum charge of $8 each way...it's a pretty strong incentive to scale up your trading. After reaching a much better commission structure, these early scale benefits are mostly achieved..and as such the decision moves from being a 'no-brainer' to one that is a little more complex.

Over the long run, I hope to have a bigger investment portfolio and I understand that the earlier that it is contributed to, the longer that compounding can work its magic. But I also know that at an early stage, when earnings are below say $180k that tax is less of a drag on trading and the most efficient use is going to be directing the capital there -- allowing bigger total dollar amounts to be directed towards investment capital at a future stage (rather than smaller amounts sooner). 

The balancing factors for me are that scaling up can take time - too much capital all at once can be wasteful if its not being utilised by sizing up the positions and obviously that scaling up quickly also brings psychological challenges that must be dealt with. 

So what am I doing? Basically I am sizing up as fast as I feel is safe. This involves directing all my new surplus capital towards trading, while maintaining my investment portfolio without further reducing it. The investments have been trimmed to get where I am and I am now at a stage where I feel I need to grow into my 'working capital' level for a while (i.e. my account isn't being pushed very hard at all). If I get to a stage where the 'working capital' needs a boost, then I might just have to do a capital raising and cull a few investments :

*As an aside, despite not trading prop, there is OPM involved in my trading structure which boosts the working capital and makes the decision to retain 'some' investment capital alot easier. 

**The SMSF is a family SMSF with my parents owning the majority. I only represent ~5%.


----------



## VSntchr

craft said:


> Passive income from a stockpile of capital seems to be much more enduring.
> 
> A trading business is never going to generate goodwill on its sale ( A potential benefit of investing in other types of businesses)  – however you will be able to recover your working capital when you quit trading, so that will be a stockpile of capital for the future outside of super - how big will it be? Depends how much working capital your trading business was able to accommodate.
> 
> I _‘think’ _I think that even a successful trader earning great returns should consider allocating at least a part of his/her current income (as should any other sort of income earner)  towards a stock of capital [other than just the working capital of the trading business] to generate passive income for the future and the superannuation system is a pretty tax effective place to do that.
> But what mix? Isn't the old nugget 10% of your net income will do the trick.



Great points Craft. For me, in the developing stages of my 'trading business' it has all been about ensuring that what I can do is sustainable, repeatable and scalable. I think that should this continue to be proven over the next 24 months that things like SMSF contributions, PPOR investment etc will become heightened considerations.
Your points around working capital, goodwill and capital allocation very eloquently describe how I try to approach these kinds of things, you've certainly stoked the motivation in me!


----------



## skc

craft said:


> But what mix? Isn't the old nugget 10% of your net income will do the trick.




Before I started trading OPM that's what I put into my lazy super each year.



craft said:


> A trading business is never going to generate goodwill on its sale ( A potential benefit of investing in other types of businesses)  – however you will be able to recover your working capital when you quit trading




Never thought of it that way... I guess that's why many traders branch into education, selling books, or even running a prop shop as these businesses are capable of generating goodwill.



craft said:


> Just for the sake of inverting the question.
> 
> Why don't you trade your capital along side other peoples money? If its a scale issue why not substitute your capital for some of the other peoples capital and save the expense(profit share) you incur for using their capital?




I have always assumed that this is not do-able. The shop doesn't actually provide me with $XX in an account as trading capital. It simply gives me a login to a trading account, and a limit on what and how big I can trade. Say my limit is $100k for each ASX200 stock but no more than 5 stocks at a time.... it doesn't mean that the trading capital is $500k. It depends on what arrangement the shop has with it's prime broker (not something I am privy to). As a reference, a retail CFD account can trade these sizes with ~$20-$30k capital. 

My guess is the shop will calculate and put up the required margin every night with the prime broker (on an across-the-shop basis)... and that number will fluctuate greatly day-to-day. So it seems difficult to calculate how a fixed capital contribution from a trader would work in terms of profit share. 

But may be I should actually ask the question 



VSntchr said:


> Over the long run, I hope to have a bigger investment portfolio and I understand that the earlier that it is contributed to, the longer that compounding can work its magic. But I also know that at an early stage, when earnings are below say $180k that tax is less of a drag on trading and the most efficient use is going to be directing the capital there -- allowing bigger total dollar amounts to be directed towards investment capital at a future stage (rather than smaller amounts sooner).




If I were you (at your age) I'd think about this differently.

The thing is... when you grow your trading size you also grow your vision - vision on what can be achieved in trading. There is no real upper bound in trading income. While you may sacrifice the next 5-10 years of tax effective compounding, it is off a relatively low base (and at most $25k per year with the new regulation). But to grow your trading, you are not only increasing your present income, you are investing in your trading career that can have a very high potential payback. 

In 8 years time, would you rather have the trading skills and ambition to make $1m a year, or have a $350k super balance that was tax effective? I am not saying that the two must be mutually exclusive, but I know which one I'd skew my capital towards. 

And once you start trading OPM, you are free to deploy your trading capital into super so you get both the active and passive streams going. That's where I'd be aiming.


----------



## craft

VSntchr said:


> Over the long run, I hope to have a bigger investment portfolio and I understand that the earlier that it is contributed to, the longer that compounding can work its magic. But I also know that at an early stage, when earnings are below say $180k that tax is less of a drag on trading and the most efficient use is going to be directing the capital there -- allowing bigger total dollar amounts to be directed towards investment capital at a future stage (rather than smaller amounts sooner).




I read vc's paragraph as a well considered view picking up both the pro's and con's.



skc said:


> If I were you (at your age) I'd think about this differently.
> 
> The thing is... when you grow your trading size you also grow your vision - vision on what can be achieved in trading. There is no real upper bound in trading income. While you may sacrifice the next 5-10 years of tax effective compounding, it is off a relatively low base (and at most $25k per year with the new regulation). But to grow your trading, you are not only increasing your present income, you are investing in your trading career that can have a very high potential payback.
> 
> In 8 years time, would you rather have the trading skills and ambition to make $1m a year, or have a $350k super balance that was tax effective? I am not saying that the two must be mutually exclusive, but I know which one I'd skew my capital towards.
> 
> And once you start trading OPM, you are free to deploy your trading capital into super so you get both the active and passive streams going. That's where I'd be aiming.





This is a good post but maybe a little trading centric. I suspect no matter what VC does he's going to be good enough to have to learn to broaden his vision and dream big enough to realise his full potentiial 

Trading is only one niche in the financial world. Leveraging investment skills through the rest of the financial and funds management industry would offer as much if not more  opportunity and reward.

Your last sentence is a good argument for employment, any sort of employment, not just working for a prop shop.

My centric view.

Follow your passion first and foremost.

Invest in learning and immersing yourself into that passion.

Build some capital. Other people's money always has cost, obligations and strings attached.

The ultimate:
Indulging your passion funded by your own capital is blissful freedom and we are lucky enough to live in a country where it's possible to make it happen.


----------



## craft

craft said:


> I read vc's paragraph as a well considered view picking up both the pro's and con's.




Sorry VSntchr, I'm not sure why I referred to you as Vc in that post. Too late to edit. But you know who I mean even if it comes out all confused.


----------



## Newt

VSntchr said:


> Okay, so here is my contribution to the thread.
> After all the talk about how everyone is measuring their returns I feel a little embarrassed to provide my method.
> 
> I am simply calculating end of current month value divided by end of last month value to get a % return for the month. The end of month figure is normalised by subtracting deposits and adding back withdrawals. Return is being measured on total securities value + cash balance. I tend to run a portfolio that is 80%+ invested at all times, so the cash drag is never too large. The monthly % return is then applied to an indexed line (I chose $100k) and compared against XJOAI and XSOAI. There is error using this method, as the method above shows a FY16 YTD return of 38.002%, while taking the current value divided by the beginning value (normalised for dep/withdraw) gives a return of 38.98%.
> The performance must also be taken into context that the deposits to the fund have been ~50% of the starting value, primarily due to adding in a new member - so position sizing has had to evolve as the fund has grown. The SMSF was actually established a bit earlier than FY15, but due to some data issues I just started it from start FY15.
> 
> One note: I have found tremendous value since being in charge of multiple portfolios. I have used the SMSF as a way to express a slightly different view than the way I have been managing my retail portfolio. The result is that the SMSF has vastly outperformed my own portfolio
> 
> Enough chat, heres the chart:
> View attachment 66710




Yes, congrats VS and thanks for sharing.  These sorts of discussions have fantastic value for those early in their trading education for figuring out what sorts of returns are possible versus market (in equities) from those that have invested their "10000 hours".  

I like that you've included XSO AI  in your benchmarking.  For those frequently holding or trading outside the ASX top 200, there is obviously quite a different relationship in XSO versus say XAO over the last 10 years.


----------



## Huskar

VSntchr said:


> Some other things that I have found to make it easier, is to have the investment stuff completely separate in as many ways as possible from trading: different broker, different spreadsheet layouts etc - helps to keep it separate in my mind. I think you already spoke a bit about this in another thread, how you like that your investment broker takes a few extra clicks to slow you down etc. Updating the equity curve monthly is another good one, "Fooled by Randomness" is a great book which has a bit on how checking your returns less frequently as an investor can be beneficial for the psyche.




Couldn't agree more on Taleb - some very thought provoking stuff in my opinion.

I also find interesting that you are taking the in-built human bias for mental accounting (treating money in different buckets differently despite the ultimate truth that money is fungible and should be treated the same across accounts) and turning it to your advantage, much in the same way as it can be helpful for to separate income into 'buckets' in order to better save and allocate (for some practical and helpful personal financial advice I really enjoy reading Barefoot Investor: https://barefootinvestor.com/money-management/).

I am not too sure how the different payoffs workout but it may be a good diversifier within your portfolio as the value block would typically outperform in bull markets and underperform in bear markets while trading (esp pair trading) is likely to be more market neutral thus acting as a drag in really good times but an anchor in bad times.


----------



## Trendnomics

Thought I'd tie some of my SMSF results to this thread.

Current annual costs is approximately 0.4% - purely trend-following (100% invested):


----------



## McLovin

Trendnomics said:


> Thought I'd tie some of my SMSF results to this thread.
> 
> Current annual costs is approximately 0.4% - purely trend-following (100% invested):
> 
> View attachment 68136




You can't post a chart like that and not offer an explanation! What's the secret sauce?


----------



## Trendnomics

McLovin said:


> You can't post a chart like that and not offer an explanation! What's the secret sauce?




No secret sauce, just dedicated disciplined systematic trading.

See: https://www.aussiestockforums.com/forums/showthread.php?t=30641


----------



## McLovin

Trendnomics said:


> No secret sauce, just dedicated disciplined systematic trading.
> 
> See: https://www.aussiestockforums.com/forums/showthread.php?t=30641




It's a little confusing. It's supposedly a trend following system but it did nothing for 3 years then suddenly exploded. I would have expected a smoother equity curve. Did anything change in the methodlogy in August?

Or put another way, at the start of August you were underperforming the index over three years, a month later you've blitzed it.


----------



## craft

McLovin said:


> You can't post a chart like that and not offer an explanation! What's the secret sauce?




Its not an equity curve as most of the world would understand it.

I probed this in his thread when the chart didn't match his table. Once he got his excel errors sorted out I think I understand what he is presenting.


Look at the X axis - its a date axis but its not evenly spaced. The sequencing is actually numbers of trades but he's labelled it with dates.

So closed trades are listed then open trades and this is then charted. For each trade closed date he has recorded his bench mark. when it comes to plotting open positions (todays benchmark value) - you will see the bench mark flatten but the equity line incrementally climb for each open trade marked to market. On closed trades he's below his bench mark (you can see from where the equity line is when the bench mark flattens)  but the open trades have a fair bit of open profit. It would be interesting to know if he has in the money stops on these or if they will eventually close below index return like the past three year history.

Any rate that's the best I could ever sort out what he was presenting.


----------



## Trendnomics

McLovin said:


> It's a little confusing. It's supposedly a trend following system but it did nothing for 3 years then suddenly exploded. I would have expected a smoother equity curve. Did anything change in the methodlogy in August?
> 
> Or put another way, at the start of August you were underperforming the index over three years, a month later you've blitzed it.




Things to note about the equity curve:


The index return data-points coincide with closed trade dates (before 18/08/2016);
The flat part (at right side) of the index, is the region of current open trades (18/08/2016 on wards).
This might explain the massive deviation at the end - but this doesn't negate the fact that the portfolio has significantly outperformed.

No change in methodology, the first 2 years were really bad for trend-following - the last 8 months or so have been great -trend-following returns can be extremely lumpy.


----------



## Trendnomics

craft said:


> Its not an equity curve as most of the world would understand it.
> 
> I probed this in his thread when the chart didn't match his table. Once he got his excel errors sorted out I think I understand what he is presenting.
> 
> 
> Look at the X axis - its a date axis but its not evenly spaced. The sequencing is actually numbers of trades but he's labelled it with dates.
> 
> So closed trades are listed then open trades and this is then charted. For each trade closed date he has recorded his bench mark. when it comes to plotting open positions (todays benchmark value) - you will see the bench mark flatten but the equity line incrementally climb for each open trade marked to market. On closed trades he's below his bench mark (you can see from where the equity line is when the bench mark flattens)  but the open trades have a fair bit of open profit. It would be interesting to know if he has in the money stops on these or if they will eventually close below index return like the past three year history.
> 
> Any rate that's the best I could ever sort out what he was presenting.




Thanks for helping out. 

I'm not sure what other method you can use to present an equity curve with closed and current open trades + a comparative curve of an index.

I'll update my equity curves as I close out the big open profits - will be closing a +160%'er in the next 2 weeks.


----------



## craft

Trendnomics said:


> I'll update my equity curves as I close out the big open profits - will be closing a +160%'er in the next 2 weeks.




Well done - but how do you know in the next two weeks? do you know when the trend will finish? or are you using something other than trailing stops to exit trends or is there a two week delay from an already activated trigger?


----------



## Trendnomics

craft said:


> Well done - but how do you know in the next two weeks? do you know when the trend will finish? or are you using something other than trailing stops to exit trends or is there a two week delay from an already activated trigger?




I have a method for measuring when exit signals are likely to be triggered - this is handy for portfolio planning (in particular capital allocation and re-balancing).


----------



## skc

Trendnomics said:


> Thanks for helping out.
> 
> I'm not sure what other method you can use to present an equity curve with closed and current open trades + a comparative curve of an index.
> 
> I'll update my equity curves as I close out the big open profits - will be closing a +160%'er in the next 2 weeks.




May be just do a periodic (monthly or weekly) marked-to-market of account balance vs benchmark?

Everyone has closed and open positions at any one time...


----------



## Trendnomics

skc said:


> May be just do a periodic (monthly or weekly) marked-to-market of account balance vs benchmark?
> 
> Everyone has closed and open positions at any one time...




I might contradict myself here, but I prefer a closed only equity curve. 

My current method can easily be converted to closed only (chop off the open trades side) - but my curves aren't impressive at the moment without open trades. :

To each his own, i guess...


----------



## McLovin

craft said:


> Its not an equity curve as most of the world would understand it.
> 
> I probed this in his thread when the chart didn't match his table. Once he got his excel errors sorted out I think I understand what he is presenting.
> 
> 
> Look at the X axis - its a date axis but its not evenly spaced. The sequencing is actually numbers of trades but he's labelled it with dates.
> 
> So closed trades are listed then open trades and this is then charted. For each trade closed date he has recorded his bench mark. when it comes to plotting open positions (todays benchmark value) - you will see the bench mark flatten but the equity line incrementally climb for each open trade marked to market. On closed trades he's below his bench mark (you can see from where the equity line is when the bench mark flattens)  but the open trades have a fair bit of open profit. It would be interesting to know if he has in the money stops on these or if they will eventually close below index return like the past three year history.
> 
> Any rate that's the best I could ever sort out what he was presenting.




Thanks for clearing that up. So where it goes parabolic, it's not actually measuring total portfolio return just open return?


----------



## Trendnomics

McLovin said:


> Thanks for clearing that up. So where it goes parabolic, it's not actually measuring total portfolio return just open return?




It's total return (closed + open profits). As at today's close my SMSF portfolio is sitting at +84% return (closed + open profits).


----------



## McLovin

Trendnomics said:


> It's total return (closed + open profits). As at today's close my SMSF portfolio is sitting at +84% return (closed + open profits).




Got it. Thanks. I understand now.

I'd suggest doing what skc suggested might give a more real representation of when returns were achieved.


----------



## Trendnomics

McLovin said:


> Got it. Thanks. I understand now.
> 
> I'd suggest doing what skc suggested might give a more real representation of when returns were achieved.




My back-testing software (and most), plot closed trade equity curves only - hence my gravitation towards.


----------



## craft

Trendnomics said:


> It's total return (closed + open profits). As at today's close my SMSF portfolio is sitting at +84% return (closed + open profits).




To make that 84% relevant to most it would make sense to express it with a time function. the usual convention is per year.  In your case you have been running the fund for 3 years and 3 months so the annual return that would give you 84% over that period is approx. 20-21%  (aka Compound Annual Growth Rate - CAGR )


----------



## craft

Trendnomics said:


> I'll update my equity curves as I close out the big open profits - will be closing a +160%'er in the next 2 weeks.




From your tables in your thread I'm guessing you are talking about SAR. Trend determination is in the eye of the beholder but I suspect many trend followers may have already called it quits on this trend. 

You hold 16 positions in your SMSF, correct? 1/16th x 160% should lock in approx. 10% overall portfolio gain. Still leaves a lot of that open profit exposed does it not? what is the overall heat in the portfolio?

If you multiply out the last position reported in your thread with their win/loss% and multiply by 1/16 you get around 40% open profit and the closed profit by the graph you posted here looks to be about 15% so the numbers look a little strange to me again - perhaps its the referring your % gain back to your starting capital 3+ years ago that's making it seem weird.

Anyrate big picture - doesn't matter, if your happy with how you overview your performance that's what counts. (and gives me something to do - working out how others see the world)  If you want to go a bit more mainstream (daily mark to market & CAGR)- Google's your friend, I'm sure you could find cheap portfolio management software that could do the job for you in seconds.


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## Trendnomics

An update after recent volatility:


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## kid hustlr

Just wanted to bump this thread. There was another thread where the TA/FA debate started recently which reminded me of this gem. 

Anyone interested in the FA (or general wealth creation path) should be reading this.


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## rb250660

Is anyone having issues with AustralianSuper Member Direct platform? I'm getting this error and can't trade. Trust it to break today, I only trade once a month.

_We are obtaining your investment option balances; this page will refresh shortly_

It never refreshes and I can't trade. Very annoying.


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## leyy

How is everyone tracking for FY18 SMSF returns?

Does anyone have any suggestions on best way to calculate CAGR SMSF returns? Should this be after all SMSF expenses? Insurances, audit/accountant fees and taxes?


How do we accurately calculate CAGR when when I still have employer contributions for the three members of the SMSF?

Cheers
leyy


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## sptrawler

leyy said:


> How is everyone tracking for FY18 SMSF returns?
> 
> Does anyone have any suggestions on best way to calculate CAGR SMSF returns? Should this be after all SMSF expenses? Insurances, audit/accountant fees and taxes?
> 
> 
> How do we accurately calculate CAGR when when I still have employer contributions for the three members of the SMSF?
> 
> Cheers
> leyy




Forgive my ignorance, what is CAGR, I'm lost when it moves from a TLA.


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## PZ99

Compound Annual Growth Rate.


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## Junior

leyy said:


> How is everyone tracking for FY18 SMSF returns?
> 
> Does anyone have any suggestions on best way to calculate CAGR SMSF returns? Should this be after all SMSF expenses? Insurances, audit/accountant fees and taxes?
> 
> 
> How do we accurately calculate CAGR when when I still have employer contributions for the three members of the SMSF?
> 
> Cheers
> leyy




I suggest calculating performance on both a before and after cost basis.  I would include the following in your fees/costs:
* Accounting and audit
* ATO Levy & ASIC Fee
* Any other administration fees
* MER/ICRs if using ETFs or managed funds

Including the above costs allows you to assess performance compared with investing through an industry or retail fund, which I think is important as there are pros and cons of using an SMSF.  A major 'con' being running costs.

I would exclude insurance premiums, as this is a separate product which can be funded through super or personally, and is not related to investment performance.


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## leyy

Junior said:


> I suggest calculating performance on both a before and after cost basis.  I would include the following in your fees/costs:
> * Accounting and audit
> * ATO Levy & ASIC Fee
> * Any other administration fees
> * MER/ICRs if using ETFs or managed funds
> 
> Including the above costs allows you to assess performance compared with investing through an industry or retail fund, which I think is important as there are pros and cons of using an SMSF.  A major 'con' being running costs.
> 
> I would exclude insurance premiums, as this is a separate product which can be funded through super or personally, and is not related to investment performance.



Thanks Junior.

And what about taxes? And what about if you are still in accumulation phase and you still have employer contributions.


Cheers


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## Junior

leyy said:


> Thanks Junior.
> 
> And what about taxes? And what about if you are still in accumulation phase and you still have employer contributions.
> 
> 
> Cheers




Yes I'd include taxes as well.  That way you can determine your after fee, after tax return.


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## McLovin

leyy said:


> How is everyone tracking for FY18 SMSF returns?




Not my SMSF, but across my portfolio I've done over 30% this year. Should be about 33%. Need to crunch the final numbers over the weekend. Solid year!


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## willy1111

McLovin said:


> Not my SMSF, but across my portfolio I've done over 30% this year. Should be about 33%. Need to crunch the final numbers over the weekend. Solid year!




Great work!  Care to share some of your individual top performers for the year and their respective gains?  Also some of the dogs (if there were any)


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## McLovin

willy1111 said:


> Great work!  Care to share some of your individual top performers for the year and their respective gains?  Also some of the dogs (if there were any)




Top performers LOV, ADH, KGN, SRX and on an annualised basis WFD. Worst was COG and PPT, TGA.

Anyway, that's another year done.


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## leyy

McLovin said:


> Not my SMSF, but across my portfolio I've done over 30% this year. Should be about 33%. Need to crunch the final numbers over the weekend. Solid year!




Terrific result.

I am looking at circa 15% will need to look into the figures in detail.

Top performers for me were APX, KGN, EHL STO worst performers GSW..


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## kid hustlr

Anyone else have their toes and fingers crossed for a craft sighting?

Happy with my year - somewhere between 12-16% (pre tax) but most importantly put a structure in place for the long term


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## Trendnomics

Pre-tax return = +56%.

Top 5 performers/trades: A2M (+262%); APX (+188%); LOV (+119%); BAL (+108%); ALU (+54%)

Worst 5 performers/trades: EPW (-19%); APT (-16%); CCP (-14%); ISU (-13%); BKW (-10%)


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## willy1111

Trendnomics said:


> Pre-tax return = +56%.
> 
> Top 5 performers/trades: A2M (+262%); APX (+188%); LOV (+119%); BAL (+108%); ALU (+54%)
> 
> Worst 5 performers/trades: EPW (-19%); APT (-16%); CCP (-14%); ISU (-13%); BKW (-10%)



Good to have you back Trendnomics, a great year for you!

Would be good to see an update on your thread - would have approx 5 years of following your system now.


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## Garpal Gumnut

Don't matter 2017-2018.

Ccccccccccash will rule 2018-2019

Prepare Property and Stock Lifeboats.

gg


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## Trendnomics

Garpal Gumnut said:


> Don't matter 2017-2018.
> 
> Ccccccccccash will rule 2018-2019
> 
> Prepare Property and Stock Lifeboats.
> 
> gg




Another great contribution by one of our local perma-bears.


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