Walking the Road to Riches

luutzu said:

Buffett is 84 years old.

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Did you read the part that the bequest is for his wife before shooting out that insight? She is 68 and, according to the CDC actuarial life tables (2009), can expect to live another 18+ years on average as a basic US woman. Given she probably has better dental care than the average, I'd say she can expect to live longer than average. This is a long term investment.

Buffett will give away or bequest to charity 99% of his wealth. That still leaves about $640m to divide amongst his kids and wife. Presumably she won't blow it all on a visit to Tesco and actually pass a good amount along. Given that size of wealth, he should invest more aggressively than the general populace. Most people with 2x leverage and savings intensity of 1/3rd of AWOTE or thereabout, speaking of the need to build emergency buffer funds, are not in a similar ability to absorb risk. If a bequest was handed out with, say, $10 million and spending was proportionate, there is a hard floor below which people would say there was hardship (of a kind). This means that they would invest less in equities than Buffett's instructions to the Trustee. This is asset-liability management under conditions of risk.

I am not sure, but think to ask. He is renting. Maybe he wants a house even though this is not mentioned. The desire for a house is actually a liability on his balance sheet. This increases effective leverage if so. But this is a type of liability that moves around in value. Buying equities to finance a (desire for) a house is a massive mismatch when all is totaled up and would argue for an even more conservative setting if he wants to buy one in the next 10 years or so.

Key point: On a long term basis, exposure to bonds should probably be greater than the 10% supplied by Buffett, and initially applied to offset existing debt as previously mentioned by McLovin.

The investor may wish to take the Balls of Steel approach and max out risk with a 100% equity position under leverage, but if at the limit of frugality, success would be akin to a negative odds bet come good. People do it. Some win. Some move back with their parents at 35. Your move.

DeepState said:

Did you read the part that the bequest is for his wife before shooting out that insight? She is 68 and, according to the CDC actuarial life tables (2009), can expect to live another 18+ years on average as a basic US woman. Given she probably has better dental care than the average, I'd say she can expect to live longer than average. This is a long term investment.

Buffett will give away or bequest to charity 99% of his wealth. That still leaves about $640m to divide amongst his kids and wife. Presumably she won't blow it all on a visit to Tesco and actually pass a good amount along. Given that size of wealth, he should invest more aggressively than the general populace. Most people with 2x leverage and savings intensity of 1/3rd of AWOTE or thereabout, speaking of the need to build emergency buffer funds, are not in a similar ability to absorb risk. If a bequest was handed out with, say, $10 million and spending was proportionate, there is a hard floor below which people would say there was hardship (of a kind). This means that they would invest less in equities than Buffett's instructions to the Trustee. This is asset-liability management under conditions of risk.

I am not sure, but think to ask. He is renting. Maybe he wants a house even though this is not mentioned. The desire for a house is actually a liability on his balance sheet. This increases effective leverage if so. But this is a type of liability that moves around in value. Buying equities to finance a (desire for) a house is a massive mismatch when all is totaled up and would argue for an even more conservative setting if he wants to buy one in the next 10 years or so.

Key point: On a long term basis, exposure to bonds should probably be greater than the 10% supplied by Buffett, and initially applied to offset existing debt as previously mentioned by McLovin.

The investor may wish to take the Balls of Steel approach and max out risk with a 100% equity position under leverage, but if at the limit of frugality, success would be akin to a negative odds bet come good. People do it. Some win. Some move back with their parents at 35. Your move.

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I don't think investing in index funds, with exposure to the US and the World and Australia is a Balls of Steel approach. It's a sensible, conservative approach... and I have said that Bonds may be a good idea, just maybe not under current situation... and not a good idea for someone at 32 and investing for the long term, and to not buying bonds through an index fund.

Where in Buffett's 10% "short term government bonds" does he say expose to bonds through an index fund?

If Ryan is exposed to bonds through an index fund, can he be sure that the fund manager/s will only buy government bonds and not bonds from risky businesses? Can he be sure that the bonds are short term? And under current low interest rate environment, would the bond be worth more or less in a likely near term future?

To suggest that a person should spread their capital over everything across every corner of the world is insane...not with the capital Ryan has most definitely.


Unless a person have billions of dollars and no opportunities around, I honestly don't know why they would want to invest in bonds in the first place. Unless they don't know what they're doing for themselves and their clients so just spread the "risk" and charge a fee...

To go out and buy a bit of bond, a bit of property, a bit of stock in this and that continent... that's only advisable for very rich people who haven't a clue and whose manager have many friends in the industry over the world.

I don't know alpha kappa theta etc... but if I were to put my money into a company, it doesn't warm my heart thinking that if the company go broke, I'd be among the first in line to get what ever is left.

luutzu said:

1. I don't think investing in index funds, with exposure to the US and the World and Australia is a Balls of Steel approach. It's a sensible, conservative approach... and I have said that Bonds may be a good idea, just maybe not under current situation... and not a good idea for someone at 32 and investing for the long term, and to not buying bonds through an index fund.

2. Where in Buffett's 10% "short term government bonds" does he say expose to bonds through an index fund?

If Ryan is exposed to bonds through an index fund, can he be sure that the fund manager/s will only buy government bonds and not bonds from risky businesses? Can he be sure that the bonds are short term? And under current low interest rate environment, would the bond be worth more or less in a likely near term future?

3. To suggest that a person should spread their capital over everything across every corner of the world is insane...not with the capital Ryan has most definitely.

Unless a person have billions of dollars and no opportunities around, I honestly don't know why they would want to invest in bonds in the first place. Unless they don't know what they're doing for themselves and their clients so just spread the "risk" and charge a fee...

4. To go out and buy a bit of bond, a bit of property, a bit of stock in this and that continent... that's only advisable for very rich people who haven't a clue and whose manager have many friends in the industry over the world.

5. I don't know alpha kappa theta etc... but if I were to put my money into a company, it doesn't warm my heart thinking that if the company go broke, I'd be among the first in line to get what ever is left.

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Here is what a 'conservative' investment mix looks like for Australia's largest superannuation fund:



Please add the numbers 22 and 21 together. That would be the asset allocation to equities for something the industry regards as 'conservative'.

Let's have a look at something Australia Super regards as 'High Growth'. Something which is suitable for investment horizons of 20+ years and not recommended at all for people who may need to draw down on their capital in the interim:



Please add the numbers 34 and 35, and, I'll be generous...throw in a 7. According to my insane calculations, that adds up to 76%. Somewhat below 100% and somewhat below 90%.

You can do what you wish with your money. The above is the practice. Ryan has drawn from Bogle and Vanguard to ascertain his asset allocation. It is in line with what is recommended as a long term asset mix. This is in line with Buffett's bequest for his wife in that the exposure to equities is lower than that appropriate for the super-rich. You may know better than the industry, Bogle and Buffett.


2. An index fund is an index tracker. It will track the index. Governments manage their borrowing requirements. Ryan can see the exposures regularly for changes in index composition. These change at a glacial pace.

We are thinking long term. That's what you have been saying. Who cares what short term bonds will do in the near term future? It doesn't impact a long term strategy. Since you are curious: Delta(Value) = Duration x Delta(i) + Carry(t, i(t), i(t+d)). Go for your life.


3. Guess what, he's doing it. At low cost. Did you just imply that Ryan is definitely insane? Let me look....yes you did.


4. You need to find out about investing for real. That's a ridiculous statement ad extremis.


5. Does it warm your heart that when a company goes broke you'll be last in line?

DeepState said:

Here is what a 'conservative' investment mix looks like for Australia's largest superannuation fund:

View attachment 58757

Please add the numbers 22 and 21 together. That would be the asset allocation to equities for something the industry regards as 'conservative'.

Let's have a look at something Australia Super regards as 'High Growth'. Something which is suitable for investment horizons of 20+ years and not recommended at all for people who may need to draw down on their capital in the interim:

View attachment 58758

Please add the numbers 34 and 35, and, I'll be generous...throw in a 7. According to my insane calculations, that adds up to 76%. Somewhat below 100% and somewhat below 90%.

.

You can do what you wish with your money. The above is the practice. Ryan has drawn from Bogle and Vanguard to ascertain his asset allocation. It is in line with what is recommended as a long term asset mix. This is in line with Buffett's bequest for his wife in that the exposure to equities is lower than that appropriate for the super-rich. You may know better than the industry, Bogle and Buffett.


2. An index fund is an index tracker. It will track the index. Governments manage their borrowing requirements. Ryan can see the exposures regularly for changes in index composition. These change at a glacial pace.

We are thinking long term. That's what you have been saying. Who cares what short term bonds will do in the near term future? It doesn't impact a long term strategy. Since you are curious: Delta(Value) = Duration x Delta(i) + Carry(t, i(t), i(t+d)). Go for your life.


3. Guess what, he's doing it. At low cost. Did you just imply that Ryan is definitely insane? Let me look....yes you did.


4. You need to find out about investing for real. That's a ridiculous statement ad extremis.


5. Does it warm your heart that when a company goes broke you'll be last in line?

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Since Ryan has better things to do than watch stocks, since he is, I'm assuming, new to the subject, what he is doing is reasonable. And I have said that as much before.

For a "professional" manager to spread the risk by buying here there everywhere charge a fee, then add insult to injuries, measure their performance against the very measure they tries to emulate... Wow, no wonder the market crash every few years.

I don't know what the disclaimer about not knowing ur financial situation to customise financial advise is used for when all the pro does is spread it everywhere. Just a marketing jingo and a legal shield all in one then.

I don't think a fund manager ever ask themselves what value they bring to investors spreading, oh, diversifying, stuff and charges billions for work any high school kids could do in a few seconds - if they know the lingo and wear expensive suits.

It's good to know "real" professionals just sit there rejigging funds to and fro one asset class to another.

DeepState said:

Here is what a 'conservative' investment mix looks like for Australia's largest superannuation fund:

...

You can do what you wish with your money. The above is the practice. Ryan has drawn from Bogle and Vanguard to ascertain his asset allocation. It is in line with what is recommended as a long term asset mix. This is in line with Buffett's bequest for his wife in that the exposure to equities is lower than that appropriate for the super-rich. You may know better than the industry, Bogle and Buffett.

3. Guess what, he's doing it. At low cost. Did you just imply that Ryan is definitely insane? Let me look....yes you did.

...

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I can not do a better job explaining what DeepState has explained it the last few responses. Come time to invest in Jan I may even hold bonds index as high as 33%, increasing each year by 1%. Watch this space. This may be an insane plan to some and that's fair enough but for me I believe it'll pass my "sleep at night" test.

If you really want to understand this approach may I recommend "If You Can" by Bill Bernstein. In it he outlines the long term approach I am going to implement to a varying degree. There is a reading list of books that may take you some time to get through but the time invested is well worth it if you're interested in knowing this approach.

Ryan C said:

I can not do a better job explaining what DeepState has explained it the last few responses. Come time to invest in Jan I may even hold bonds index as high as 33%, increasing each year by 1%. Watch this space. This may be an insane plan to some and that's fair enough but for me I believe it'll pass my "sleep at night" test.

If you really want to understand this approach may I recommend "If You Can" by Bill Bernstein. In it he outlines the long term approach I am going to implement to a varying degree. There is a reading list of books that may take you some time to get through but the time invested is well worth it if you're interested in knowing this approach.

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Diversification ought to be a concept, a general principle, not a formula.

Let say one of ur funds is doing really really well while the bond or property is in decline, by following a precise formula you'll buy more of a bad investment and dump the ones that could make ur entire investment journey.

There ought to be more common sense and less mathematics, even simple ones, in investing.

I think a cautious approach like u r taking is perfectly rational, just keep an open mind and see if the approach need some minor modifications as u go along.

skc said:

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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1. Definitely offset. It'll increase my cash flow.
2. I haven't shopped around although maybe I should.
3 & 4. I made the decision to go SMSF because my administrators are cheap. See XpressSuper. I decided to go SMSF because an example for the cost of $50k in an industry fund I had was already $620+ per annum. Having SMSF also allows me to invest in property should I wish to do so. Other things I could explore are self installment warrants. Right now though I'll just invest in Vanguard LifeStrategy High Growth which is 90/10 stocks/bonds allocation. Long term and not touching those accumulated $$ is a very good thing for me.
5. Paying it back is the priority. No investing or building of emergency funds for me will happen until this is paid in full.

luutzu said:

1. I don't think a fund manager ever ask themselves what value they bring to investors spreading, oh, diversifying, stuff and charges billions for work any high school kids could do in a few seconds - if they know the lingo and wear expensive suits.

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What do you know of what is in the minds of the funds management industry? On just the sample of one say, me, we worked really hard to manage risk. Diversification is a key part of it, depending on purpose. It is by no means the only way to manage risk. Look around this ASF site and you will find many/most of the experienced set will emphasise the importance of risk management so you can actually survive the journey and reach your financial goals.

Show me the kid. I have some coding I need done. I pay very well. Given they are so cheap and plentiful, I'll have a dozen please. Is it FOB or CIF?

luutzu said:

Diversification ought to be a concept, a general principle, not a formula.

Let say one of ur funds is doing really really well while the bond or property is in decline, by following a precise formula you'll buy more of a bad investment and dump the ones that could make ur entire investment journey.

There ought to be more common sense and less mathematics, even simple ones, in investing.

I think a cautious approach like u r taking is perfectly rational, just keep an open mind and see if the approach need some minor modifications as u go along.

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I feel I am keeping an open mind. Other things I haven't mentioned I take into considerations are my temperament, my current and changing situation, my bad habits and impulsiveness and more. I value your input luutzu however I think we have different approaches. That's not a bad thing.

If one of my funds is doing really really well while the bond is in decline, I'd follow my asset allocation, meaning I'd buy more of the declining bond/stock index. I wouldn't do this by selling the stock/bond index that was going up but by using my investing money to top up the declining allocation come Jan or July. It's being a contrarian long term investor.

luutzu said:

It's good to know "real" professionals just sit there rejigging funds to and fro one asset class to another.

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Please supply evidence to support your proposition. In reality, many of us stood up.

DeepState said:

What do you know of what is in the minds of the funds management industry? On just the sample of one say, me, we worked really hard to manage risk. Diversification is a key part of it, depending on purpose. It is by no means the only way to manage risk. Look around this ASF site and you will find many/most of the experienced set will emphasise the importance of risk management so you can actually survive the journey and reach your financial goals.

Show me the kid. I have some coding I need done. I pay very well. Given they are so cheap and plentiful, I'll have a dozen please. Is it FOB or CIF?

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What other ways do you manage risks? Further diversification within asset class I bet. Oh wait, looking at those juvenile "research" from Morningstar PRO and economic forecasts and forecasts by others pro looking at the same or no data at all.

I'm not sure if by risk management, the pros are referring to risks to their own job, risks to not look foolish and be wrong against the crowd, risks to be wrong with the crowd... Risks to "perform" just as well or as badly with the tide. It definitely isn't any kind of risk mitigation the dumb money like me can see.

The way risks are managed there, it's like a game with fancy charts to show the clients to either pay more fees with a rising tide or "yea we lost ur money, but so were everyone else suck it up, invest for the long term, remember. And where are r u going to take the money to anyway? My cousins down the street?".

I was always taught by my father that to reduce the risk of being wrong and lose, I ought to learn more and know more about what I'm doing. I was never told to reduce it by doing more and more different things in the same careless way. But then he's never a smart money like the masters of the universe.

If only a handful of you guys know what ure doing, have some common sense like Peter lynch, the world would literally be trillions richer and the wars since the collapse in 2008 might not happen t all.

You do know that an industry that brings no value to society will not last right?

DeepState said:

Please supply evidence to support your proposition. In reality, many of us stood up.

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You already supply the evidences above - those two funds. Wow, you guys really take liberty with the word "strategy".

That or ur telling me that those guys and their analysts there study all the corporate data, all the global economic blah blah and based on theirs and their consultants and consultants consultants and his good luck charm, it just happen that a portfolio ought to have that breakdown in assets like that for optimum risk-reward hahaha... I couldn't even finish the sentence.



What's the strategy bob?
Ummm... To grow, we must take on more risk, and more risks came from stocks, so more stocks for growth!
How much more stocks bob?
Ummm.... 5, no, 10 per cent more.
Brilliant! Let's sit down before our brilliance hurt us.

luutzu said:

... Brilliant! Let's sit down before our brilliance hurt us.

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Please tone it down, ...

The OP and I are having trouble coping with this excess of brilliance!

@Luutzu: I'm having a hard time understanding what your point is. Are you saying that diversifying within asset classes through using an index fund and diversifying across multiple asset classes by using multiple index funds for the various asset classes is not a useful approach?

You say that you think there should be less mathematics and more common sense in investing, but asset allocation isn't exactly complex financial mathematics - you are simply using non-correlated or lower correlated asset classes in combination to smooth out your returns over time, and make sure that you have some powder dry to take advantages of weakness in market valuations.

@Ryan C: One thing to consider is that your mortgage is essentially already fixed interest exposure. The cost to you (and therefore the impact on your wealth) over the course of your loan will go up and down with interest rates. The capital value of your bonds will also go up and down with interest rates. The difference is you are the borrower not the lender.

Say you have 25 years to run on your mortgage - it's essentially a floating rate bond with 25 years until maturity. As interest rates go up, the impact on your wealth is negative. As interest rates go down, the impact on your wealth is positive. You are effectively significantly overweight fixed interest in an environment where it doesn't pay to be overweight fixed interest. Interest rates really only have one direction they can go, and that's up. Government bonds are issued as fixed interest with a fixed coupon. If rates go up, capital value will fall on your fixed interest holdings and your mortgage liability will increase at the same time, doubling the impact on your financial position. At the same time, your bond coupon payments will be relatively lower as they've stayed the same, while your mortgage repayments will be higher.

Long story short, it may be worth reconsidering using a bond fund with a real return objectives of 3-5% that has exposure to interest rates while you have an interest rate liability that costs you 5-7% with the same risk exposure. When we return to a higher interest rate environment where interest rates and bonds have two directions to move in rather than one, it would be time to revisit using fixed interest in a portfolio again. Until then, the fixed interest asset allocation outside super is going to be offering you a greater compounding return in your offset account. Might as well sell the bonds and put the cash there.

Vixs said:

@Ryan C: One thing to consider is that your mortgage is essentially already fixed interest exposure. The cost to you (and therefore the impact on your wealth) over the course of your loan will go up and down with interest rates. The capital value of your bonds will also go up and down with interest rates. The difference is you are the borrower not the lender.

Say you have 25 years to run on your mortgage - it's essentially a floating rate bond with 25 years until maturity. As interest rates go up, the impact on your wealth is negative. As interest rates go down, the impact on your wealth is positive. You are effectively significantly overweight fixed interest in an environment where it doesn't pay to be overweight fixed interest. Interest rates really only have one direction they can go, and that's up. Government bonds are issued as fixed interest with a fixed coupon. If rates go up, capital value will fall on your fixed interest holdings and your mortgage liability will increase at the same time, doubling the impact on your financial position. At the same time, your bond coupon payments will be relatively lower as they've stayed the same, while your mortgage repayments will be higher.

Long story short, it may be worth reconsidering using a bond fund with a real return objectives of 3-5% that has exposure to interest rates while you have an interest rate liability that costs you 5-7% with the same risk exposure. When we return to a higher interest rate environment where interest rates and bonds have two directions to move in rather than one, it would be time to revisit using fixed interest in a portfolio again. Until then, the fixed interest asset allocation outside super is going to be offering you a greater compounding return in your offset account. Might as well sell the bonds and put the cash there.

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I understand what you are saying. The reason I want to start this 2-3 fund portfolio is to diversify and create more assets away from just a single rental property. The only asset I 'own' right now is that property, not counting super, and it's not liquid or delivering capital growth right now.
Apologies if I wasn't clear in past posts but the portfolio I will hold will only consist of 2-3 low cost index funds through ETFs with 80% all world equities index funds and 20% bonds index funds allocation. No individual stocks or bonds (not including my 'gambling' fund investments)

Ryan C said:

I understand what you are saying. The reason I want to start this 2-3 fund portfolio is to diversify and create more assets away from just a single rental property. The only asset I 'own' right now is that property, not counting super, and it's not liquid or delivering capital growth right now.
Apologies if I wasn't clear in past posts but the portfolio I will hold will only consist of 2-3 low cost index funds through ETFs with 80% all world equities index funds and 20% bonds index funds allocation. No individual stocks or bonds (not including my 'gambling' fund investments)

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I follow what you mean, but from an overall return perspective and an 'asset allocation' perspective, the bonds may not achieve what you want them to at this stage. Sure it will smooth out the volatility of the portfolio returns because they are more capital stable than the international and Australian shares, but the actual return will be worse than what you could be getting by offsetting interest.

If you get a 4% p.a. return from, say, $5,000, that's $200 in taxable income. Taxed at 32.5% + 2% Medicare levy, you get $131 in net income. 2.62% net income return, with no expectation of capital growth as it is not a growth asset, and the risk of capital loss as we're more likely to experience an increase in interest rates than a decrease.

Duration of the portfolio for VGB is 4.62 yrs, VAF is 4.22 yrs. That means if interest rates go up 1% you can expect VGB to lose 4.62% in capital value. For VAF, they could be expected to lose 4.22% in capital value. The Vanguard Australian Fixed Interest index ETF yield-to-maturity is 3.33%. The yield-to-maturity on VGB, the Vanguard Govt Bond index ETF is 3.24%. That means that 4% p.a. income return looks pretty, in fact very, rosy from a bond index ETF perspective.

If you are paying 34.5 cents in the dollar tax (sub 80k tax bracket, so a conservative estimate based on your stated income as there will be deductions there as well), then your effective investment loan interest rate is let's say 5.5% p.a. before tax, or 3.6% p.a. after tax (5.5% p.a. x 0.655).

Keeping your cash in an offset account against your IP will effectively give you a tax-free return of 3.6% p.a. by not incurring the interest on your investment loan.

You've got the right idea in diversifying your portfolio, but the reasons for including fixed interest in a portfolio are to provide some consistent income, non-correlated returns to equities and a less volatile portfolio return. Basically, in this low interest rate environment where bond yields are appalling and there is significant downside risk in the short-term as a result of capital loss when interest rates rise, there's no point someone like you holding them. You don't want taxable income as you don't need more income to get by. You don't need lower volatility as you are still very much an accumulator and it doesn't really matter if your portfolio drops 25% next year, because long-run you anticipate it will perform significantly better than that and it's just going to represent a great buying opportunity - in which case you have significant cash in your mortgage offset account ready to be put to work, because you were holding that money as your 'fixed interest' exposure.

Does that make sense?

Vixs said:

I follow what you mean, but from an overall return perspective and an 'asset allocation' perspective, the bonds may not achieve what you want them to at this stage. Sure it will smooth out the volatility of the portfolio returns because they are more capital stable than the international and Australian shares, but the actual return will be worse than what you could be getting by offsetting interest.

If you get a 4% p.a. return from, say, $5,000, that's $200 in taxable income. Taxed at 32.5% + 2% Medicare levy, you get $131 in net income. 2.62% net income return, with no expectation of capital growth as it is not a growth asset, and the risk of capital loss as we're more likely to experience an increase in interest rates than a decrease.

Duration of the portfolio for VGB is 4.62 yrs, VAF is 4.22 yrs. That means if interest rates go up 1% you can expect VGB to lose 4.62% in capital value. For VAF, they could be expected to lose 4.22% in capital value. The Vanguard Australian Fixed Interest index ETF yield-to-maturity is 3.33%. The yield-to-maturity on VGB, the Vanguard Govt Bond index ETF is 3.24%. That means that 4% p.a. income return looks pretty, in fact very, rosy from a bond index ETF perspective.

If you are paying 34.5 cents in the dollar tax (sub 80k tax bracket, so a conservative estimate based on your stated income as there will be deductions there as well), then your effective investment loan interest rate is let's say 5.5% p.a. before tax, or 3.6% p.a. after tax (5.5% p.a. x 0.655).

Keeping your cash in an offset account against your IP will effectively give you a tax-free return of 3.6% p.a. by not incurring the interest on your investment loan.

You've got the right idea in diversifying your portfolio, but the reasons for including fixed interest in a portfolio are to provide some consistent income, non-correlated returns to equities and a less volatile portfolio return. Basically, in this low interest rate environment where bond yields are appalling and there is significant downside risk in the short-term as a result of capital loss when interest rates rise, there's no point someone like you holding them. You don't want taxable income as you don't need more income to get by. You don't need lower volatility as you are still very much an accumulator and it doesn't really matter if your portfolio drops 25% next year, because long-run you anticipate it will perform significantly better than that and it's just going to represent a great buying opportunity - in which case you have significant cash in your mortgage offset account ready to be put to work, because you were holding that money as your 'fixed interest' exposure.

Does that make sense?

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Thanks for that excellent and detailed explanation. Just to clarify, given my situation, as long as I have a mortgage on my IP, it makes more sense to hold my bonds/fixed interest allocation in my offset account to avoid me paying more tax and because of the higher interest 'saved' for my money?

luutzu said:

What's the strategy bob?
Ummm... To grow, we must take on more risk, and more risks came from stocks, so more stocks for growth!
How much more stocks bob?
Ummm.... 5, no, 10 per cent more.
Brilliant! Let's sit down before our brilliance hurt us.

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Yep that's pretty much it, that's all it can be at the end of the day.

Vixs said:

@Luutzu: I'm having a hard time understanding what your point is. Are you saying that diversifying within asset classes through using an index fund and diversifying across multiple asset classes by using multiple index funds for the various asset classes is not a useful approach?

You say that you think there should be less mathematics and more common sense in investing, but asset allocation isn't exactly complex financial mathematics - you are simply using non-correlated or lower correlated asset classes in combination to smooth out your returns over time, and make sure that you have some powder dry to take advantages of weakness in market valuations.

@Ryan C: One thing to consider is that your mortgage is essentially already fixed interest exposure. The cost to you (and therefore the impact on your wealth) over the course of your loan will go up and down with interest rates. The capital value of your bonds will also go up and down with interest rates. The difference is you are the borrower not the lender.

Say you have 25 years to run on your mortgage - it's essentially a floating rate bond with 25 years until maturity. As interest rates go up, the impact on your wealth is negative. As interest rates go down, the impact on your wealth is positive. You are effectively significantly overweight fixed interest in an environment where it doesn't pay to be overweight fixed interest. Interest rates really only have one direction they can go, and that's up. Government bonds are issued as fixed interest with a fixed coupon. If rates go up, capital value will fall on your fixed interest holdings and your mortgage liability will increase at the same time, doubling the impact on your financial position. At the same time, your bond coupon payments will be relatively lower as they've stayed the same, while your mortgage repayments will be higher.

Long story short, it may be worth reconsidering using a bond fund with a real return objectives of 3-5% that has exposure to interest rates while you have an interest rate liability that costs you 5-7% with the same risk exposure. When we return to a higher interest rate environment where interest rates and bonds have two directions to move in rather than one, it would be time to revisit using fixed interest in a portfolio again. Until then, the fixed interest asset allocation outside super is going to be offering you a greater compounding return in your offset account. Might as well sell the bonds and put the cash there.

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I'm saying that the pros, who if I remember right, charges Australian investors some $20 billion last year for management fees of their super, seem to do nothing for it except "diversify" the funds here there and everywhere. If that's risk management, I'm not sure whose risk they are managing - theirs or the investors money.

So say bond, or property, is at the moment a pretty bad investment, in general there are better opportunities out there in stocks, let say. These pros, in all their wisdoms, and all the fees great wisdoms costs are charged to the average bloke who's working hard and hoping for a decent retirement with his savings still intact, decides it's safest to buy a bit of everything regardless... It's the long term thing, we can't predict the market...

That's like feeding your kids their breakfast, second breakfast, brunch, lunch, snacks, deserts... All at once because over the day, they'll need it anyway.

No one is asking for wizards with market timing abilities, we're asking that for that 20 billion and those great mental and financial resources, at least not spend all of it covering your behind and act slightly to our interests and maybe use a little common sense.

The funny thing is, in diversifying and not timing the market as they claim, guess how they value a stock? Based on future forecasts of its earnings, cash flow estimates etc.

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I'm not having a go at RY, I'm seriously not qualified and who could fault a guy that retire early to spend more time with his kids, who spend some spare time trying to teach us and share with us his knowledge and understanding, and who goes to church every Sunday....

Issue is bigger than RY...

I mean, asking us to put some 12 per cent of our salary towards retirement? If that we're passed, that's asking for a 33.333333 per cent extra revenue.

When people muck around with a nations savings like this, they at least ought to be honest about it. Instead they lobbied for more money, increase retirement age... Because the working man, like them, can certainly work another 10 years.

The funny thing is that most people that join the industry are actually among our best and brightest, not necessarily our warmest or most industrious, but they're smart and could do great things. But when hired, their hands are tied and they're fed rubbish and legal doodle speech and action.

How many smart graduates you reckon would stand up to the boss and ask why does beta measure risk again? Why do we have to buy the top 10 blue chips even though the 100th to 120th is a much better investment? Why bonds now?

If the graduate know enough career risk management to stay quiet and learn his Greek alphabets, he'd get paid pretty well and soon start to believe and practise it too.

The result will be a 15pc super, full upfront payment to GPs and older retirement age.

When Buffett closed his partnership and bought Berkshire, the capital base was around 17million... I don't think any of his original investors are forced to work longer and give him more savings to manage to make ends meet since then, same with peter lynch, Phillip fisher...

Is it too much to ask that our best and brightest, and their bosses and the 20 billion annual fees, with all the information at their fingertips can't do anything close to what a few smart, but by no mean genius smart, men with common sense, some basic maths and a mindset to cover their clients money first before covering their own hide and sing among themselves "all for one and one for all (fund mangers)"?