SMSF Returns

[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]

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]

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]

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]

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]

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]

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]

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]

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]

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.

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.

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

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]

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.

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]

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]

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]

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]

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]

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]

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]

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.