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Walking the Road to Riches

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Ryan C

Ryan C

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17 February 2014
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Hey everyone,

Last few months I've been educating myself on the investing approach I will take. I wanted to use this forum to track my journey to accumulate wealth slowly just before I begin.

Please feel free to follow and critique my plan to help me learn and hopefully you can learn something from me too.

Current Situation
Age: 32 years old
Emergency fund: $0
Assets: $280-300k investment property, $80k in SMSF, $16k cash
Debt: $8k borrowed from family, $260k IO mortgage
Income: $85k– 100k+ pa
Savings per month: $2k+ pm

Approach
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle

Asset allocation: 80% stocks (40% US / 40% International) / 20% bonds

Goals:
  • Repay outstanding debt
  • Build emergency fund to $6k then split savings thereafter 50% to emergency fund until $24k and 50% to funds for investing
  • Invest / rebalance to asset allocation every Jan and July.

Here it goes! Thanks for reading.
 
Just thought I'd share what I'll be investing in

Outside Super:
VTS - Vanguard US Total Market ETF -40% - Management cost: 0.05%
WXOZ - SPDR ® S&P ® World ex Australia Fund ETF - 40% - Management cost: 0.42%
VAF - Vanguard Australian Fixed Interest Index ETF - 20% - Management cost: 0.20%

Inside Super:
Vanguard LifeStrategy High Growth Fund - 90% shares / 10% bonds

I chose WXOZ over VEU - Vanguard All-World ex-US Shares Index ETF with its slightly higher management cost because of potentially claiming back non-US withholding taxes (Ill check this out with my accountant when I get my tax done so it could change). Ill have my Australian share exposure in Super.
 
Ryan C said:
Approach
"Buy-and-hold, long-term, all-market-index strategies, implemented at rock-bottom cost, are the surest of all routes to the accumulation of wealth" - John C. Bogle
Click to expand...

Excellent planning. However I must point out one thing:

jr4m4n.jpg

I am going to suggest that current prices are not rock-bottom to satisfy that quote. The last time was in 2009 and 2003 before that. And the one before that was before that was before you were born. You will probably want to drop down the time frame and look at buying temporary dips if you don't want to wait for the next big bottom.

Doesn't mean you can't make money buying right now, just that you will not be following your stated approach.
 
minwa said:
Doesn't mean you can't make money buying right now, just that you will not be following your stated approach.
Click to expand...

Really appreciate you taking the time to comment minwa.

However when I stated rock-bottom cost, I meant it for management cost of the chosen index funds. Higher management costs will eat into my real returns. Since my portfolio will be comprised of whole market funds I can expect the same results with comparable whole market funds but I wont be paying extra for those same results.

I will not try to time the market with this approach and will buy every Jan and July to bring my asset allocation into line with the 40/40/20 split I want to achieve. I'm doing this for three reasons:
1) I don't believe I can consistently time the market over the long term,
2) I want to avoid selling out of panic and;
3) I can control my asset allocation.

Should the market crash, I'd expect to buy more of what index wasn't matching my allocation and ride it out. Sounds good in theory. Fingers crossed I have the stomach to put it into practice should a crash occur.
 
So after some thought I decided to drop Vanguard VTS and just go with SPDR WXOZ because I would be over-weighting my US market exposure.

I have however bought 11 units of VTS and 22 units of VEU with my 10 year old daughter to start teaching her about investing and using this long term approach. It's a small amount but she has plenty of time. I matched what she was able to save over the past twelve months and invested with her. Trading cost wasn't an issue with these transactions because I used a Commsec promotion with free trades. Kid has more money than me right now :eek:
 
Hi Ryan C. I'll be keenly watching this thread with interest. The strategy you have outlined clearly shows that you are seeking to follow a highly disciplined methodology with somewhat limited flexibility in your path for seeking wealth. I hope it works out well for you and I am keen to see just how rigidly the rules you have set are followed. From personal experience, I have always found it difficult to follow such plans, but will watch with interest. Thanks for sharing your plans and progress with us.
 
Ryan C said:
Really appreciate you taking the time to comment minwa.

However when I stated rock-bottom cost, I meant it for management cost of the chosen index funds. Higher management costs will eat into my real returns. Since my portfolio will be comprised of whole market funds I can expect the same results with comparable whole market funds but I wont be paying extra for those same results.

I will not try to time the market with this approach and will buy every Jan and July to bring my asset allocation into line with the 40/40/20 split I want to achieve. I'm doing this for three reasons:
1) I don't believe I can consistently time the market over the long term,
2) I want to avoid selling out of panic and;
3) I can control my asset allocation.

Should the market crash, I'd expect to buy more of what index wasn't matching my allocation and ride it out. Sounds good in theory. Fingers crossed I have the stomach to put it into practice should a crash occur.
Click to expand...


I see ! Thanks for explaining that. I just googled John Bogle and it turns out he's the founder/CEO if Vanguard. It's a bit like if Richard Macdonald stating "Having a Macdonalds Big Mac meal everyday is the surest of all routes to a healthy lifestyle". It may or may not be true, but it certainly is advertising-based for his funds.

Look into covered calls strategy - it may come in useful when market goes sideways or down and it's pretty low maintenance.

After your emergency funds is $24k - is the other 50% going to go into repaying your debt above minimum payments or into investments ?

Good luck and great job on getting your daughter on board - she will be thanking you many years into the future.
 
minwa said:
...but it certainly is advertising-based for his funds.
Click to expand...
Absolutely agree! I take everything I read with a grain of salt however so much of his philosophy resonated with me.

...Look into covered calls strategy...After your emergency funds is $24k - is the other 50% going to go into repaying your debt above minimum payments or into investments ?
Click to expand...

coolcup said:
I hope it works out well for you and I am keen to see just how rigidly the rules you have set are followed.
Click to expand...

After the $24k, I'll create a small fun (~$5k) 'gambling' fund that I could use to buy individual company stocks and look into other strategies like options. This will help curve my itch to speculate and deviate from plans as my investments starts to build and feeling too restricted. I can be my own worse enemy at times.

After that I'll slowly build up my emergency fund to $48k over time for 12 months of living expenses and I'll be working to reduce my LVR on my investment property to 50%.

Good luck and great job on getting your daughter on board - she will be thanking you many years into the future.
Click to expand...
Her wealth is part of my retirement plan. She better put me in a schmick retirement home with pretty nurses haha
 
I'd hold off buying bonds for now.

Best time to buy into bonds is when interest rates are high - at least 6 or 7% for my money...
From what i remember, when the economy and the stock market are hot is when rates are higher - the central banks tend to increase borrowing costs to cool down or slow down markets expansion... that's when you'd want to lend money [thru bonds] because it usually follows that high interests won't put off some people and the market/s tend to crash, then gov't will lower the rates to stimulate activities again.

So at currently low rates, leave in cash or buy into index as well... then when high buy so that when the stock and other markets crashes, you could sell your bonds at higher price too if you want.

When will it rise? I have no clue.
 
Ryan C said:
Current Situation
Age: 32 years old
Emergency fund: $0
Assets: $280-300k investment property, $80k in SMSF, $16k cash
Debt: $8k borrowed from family, $260k IO mortgage
Income: $85k– 100k+ pa
Savings per month: $2k+ pm
Click to expand...

Firstly, congrats on your detail approach and plan. Having something written down is always the first step.

Is that income quote pre or post tax? If you are earning 100k before tax, then saving 25% of that, you must be running a very tight budget. By my calcs >40% of your wages would go to tax and savings. Then there is rent on top of that...

The main point i wanted to raise however is the issue of return. I understand you are wanting to diversify, but some would argue that if you already have a mortgage, unless you can guarantee yourself a return above your current interest rate, you are better paying that down. The fact that it is IO also means that you are simply waiting for capital growth, which may or may not occur, and leaves you with a lot of debt still in place.
 
Ryan C said:
Just thought I'd share what I'll be investing in

Outside Super:
VTS - Vanguard US Total Market ETF -40% - Management cost: 0.05%
WXOZ - SPDR ® S&P ® World ex Australia Fund ETF - 40% - Management cost: 0.42%
VAF - Vanguard Australian Fixed Interest Index ETF - 20% - Management cost: 0.20%

Inside Super:
Vanguard LifeStrategy High Growth Fund - 90% shares / 10% bonds

I chose WXOZ over VEU - Vanguard All-World ex-US Shares Index ETF with its slightly higher management cost because of potentially claiming back non-US withholding taxes (Ill check this out with my accountant when I get my tax done so it could change). Ill have my Australian share exposure in Super.
Click to expand...

Hi Ryan

The first thing that stands out to me is that you're investing in fixed interest while you have a mortgage. This seems a bit counterproductive, unless you expect big capital gains in fixed interest (you'd be in the minority on that if you are! :))

I also agree with prawn that you must be living very frugally if you're managing to save $24k/year on that income.
 
luutzu said:
So at currently low rates, leave in cash or buy into index as well... then when high buy so that when the stock and other markets crashes, you could sell your bonds at higher price too if you want.
Click to expand...
I'll only hold bonds through an index. This is my security that in the event of a crash in equities, chances are, bonds won't. I'd also sell some bonds to bring my stocks allocation back up to what I've set, picking up stock funds on the cheap. Holding some bonds will have little effect on my expected gains while reducing my risks significantly. Ideally my bond allocation should match my age (32%) but right now I don't mind planning to hold a slightly riskier portfolio.

prawn_86 said:
...The fact that it is IO also means that you are simply waiting for capital growth, which may or may not occur, and leaves you with a lot of debt still in place.
Click to expand...
Sadly, this property was my first attempt into investing in property and I made plenty of mistakes. I've learnt a lot since but right now I don't feel comfortable having everything I have just in this property so I'm working to change that.
You're right. There's little to no capital growth, rent pays the IO at current rates, making it neutral or even slightly positive after depreciation etc. It doesn't stress me and that's why I don't mind holding it. If I sell now I'll definitely realise a loss. Holding on long enough, which I will, there's a good probability to see some growth. I could always stop renting and make it my PPOR again too.

prawn_86 said:
Is that income quote pre or post tax?
Click to expand...

burglar said:
Nothing wrong with "frugal", as long as you allow for an occasional dessert.
Click to expand...
Before tax. I do live very frugally. I save as much as 45% of my weekly income, not including rent and rental income. However I don't go without should I want to splurge a little. I can also add as much as $2k to my monthly income which I don't count so I'm not reliant on it. If I don't spend it all, guess where it goes? :)
I'm very disciplined.

Really appreciating the response guys because it really gets me thinking why and how I'm going about investing.
Cheers
 
You're 32? What are you doing diversifying into bonds?
At ur age and with what seems a long term investment timeframe, I'd put all mine in the stock index.

Too much diversification can be a bad thing, same with too much portfolio balancing and age dependent financial planning.

Don't know how ur index operates but if it's 10pc bonds, chances are if the stock market rise and say bonds vale remain or fall, they'll go out and buy more bonds to balance the portfolio, which doesn't make sense but that's what they'd do to not get sue.

In case you think that a bond is safer, it might not be. Depends on the term of the bonds, the borrowers, the economic environment. Bonds from companies trying to take over the world now might not be; long term bonds at the moment is probably a bad investment... Depends.

Look up Peter Lynch. His 'one up on wall street' is very good. And as a successful fund manager, he doesn't like bonds at all.
 
Just a couple of suggestions (you may be doing that already).

1. Make sure you have an offset account to park your $24k emergency fund.
2. Make sure you shop around for the right loan, if you haven't looked at the loan market for 12 month.
3. You only have $80k, are you sure SMSF is the right thing to do? Especially considering that you are new to the market and aren't doing anything too active investing wise.
4. Assuming you keep your SMSF vehicle, have you looked at doing more investing in that vehicle and maximise the tax advantage (and the fixed cost base)? Chances are some of the $$ you make and invest today won't be touched until you retired, so putting it in SMSF might be a good thing.
5. Consider repaying your family (if the loan has non-deductible interest) before you have your full $24k emergency fund. Especially if you think you can borrow it again in case of an emergency. A supportive family can "pool" their resources for an emergency backup. If it's interest free, then it depends on your relationship with the lender...
 

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