Walking the Road to Riches

[DeepState]

I'm guessing that Ryan does not need to consume from capital and Julia is closer to doing so or already doing so. The more you do, the higher the risk is to you and the less tolerant you are to holding on. At the limit, you can totally exhaust your portfolio if consuming during weak markets - even if they subsequently rebound.

I utilize a type of protection on my net equity exposure which pulls me somewhat out of sharply falling markets and then, usually, buys in at a lower level when things have calmed down. In deep falls (>20%) it will essentially cut me out of the markets. I will miss the worst experience, but will not pick the bottom for the most part. It does some profit taking when markets are strong. This is a much more comfortable and survivable approach for me. The costs of doing this on overall returns is very small over the long haul. "Loose change" I am happy to pay for this kind of pay-off profile.

 

[Julia]

I'm guessing that Ryan does not need to consume from capital and Julia is closer to doing so or already doing so.

Much as I value your contributions, RY, I'm a bit confused about what you actually mean here, i.e. are you suggesting that I am close to consuming from capital or not? I'd really rather not have my situation guessed at on a public forum just because I answered the question about holding on through all markets (or whatever the question was).

As I've said in the past, with the GFC I sold everything soon after it started, went to cash. Gave back some profit but protected most of it. If I'm generating a living from my capital then protecting that capital is a priority. I walked away from the work force late 40's and have added to the capital every year since then, never used any of it.

 

[DeepState]

Much as I value your contributions, RY, I'm a bit confused about what you actually mean here, i.e. are you suggesting that I am close to consuming from capital or not? I'd really rather not have my situation guessed at on a public forum just because I answered the question about holding on through all markets (or whatever the question was).

As I've said in the past, with the GFC I sold everything soon after it started, went to cash. Gave back some profit but protected most of it. If I'm generating a living from my capital then protecting that capital is a priority. I walked away from the work force late 40's and have added to the capital every year since then, never used any of it.

Julia, sorry for involving a guess at your situation in my response. I should have used a blank-name illustration instead. Let me re-state.

If a person happened to be consuming yield from their capital, a sharp market correction - which is usually accompanied with a fall in dividends - may require them to eat into capital. By eating into capital, there is less capital available to invest in any subsequent reversion in the markets. In the event that the weak markets and dividends persists for a while, it is quite possible that a material amount of capital is consumed.

Hence, looking at equity market returns and saying we buy and hold with strength will be less appropriate when you are consuming a reasonably material amount of yield from the capital or already consuming capital. The more extreme that situation, the less able this person is to incurring capital losses in general. It would reasonably lead them to sell out entirely in weaker markets.

In contrast, if you are not consuming yield from your investments but are adding to investment periodically, holding through the weak markets and even adding to them on the expectation of reversion is perfectly reasonable.

The response to the question of whether a person might hold or not ought, therefore, consider their particular cashflow requriements. The same person, with otherwise identical risk profile, would reasonably make different decisions depending on their circumstances.

 

[Ryan C]

Update:

"Do what you can, with what you have, where you are" -Theodore Roosevelt

This is the plan I immediately put into action when my SMSF funds and tax refunds were cleared in the last few days.

(Inside super)
50% US market - VTS
31% International market - VEU (~5% is AU market)
9% A-REIT - VAP
10% Fixed Interest - VAF

Here is what it will look like in the medium term:

(Inside Super)
50% US Market
17% International
9% - A-REIT
10% Fixed Interest (split between super and my mortgage offset account)

(Outside Super)
14% - Australian

I split it this way for tax effectiveness.
I want to keep my home bias to a minimum and may only go as high as 15% Aussie of my portfolio.
My 'gambling' funds aren't counted as part of this portfolio.

I repaid my family loan with my tax refund and started building my emergency fund with any remaining.

I relaxed my frugality a bit and decided to treat myself and family by taking advantage of recent Jetstar sales and booked short holidays to Japan and Vietnam for 2015. I consider these value investments for the price I got them for. :

 

[Ryan C]

 

[DeepState]

Update:

"Do what you can, with what you have, where you are" -Theodore Roosevelt

This is the plan I immediately put into action when my SMSF funds and tax refunds were cleared in the last few days.

(Inside super)
50% US market - VTS
31% International market - VEU (~5% is AU market)
9% A-REIT - VAP
10% Fixed Interest - VAF

Here is what it will look like in the medium term:

(Inside Super)
50% US Market
17% International
9% - A-REIT
10% Fixed Interest (split between super and my mortgage offset account)

(Outside Super)
14% - Australian

I split it this way for tax effectiveness.
I want to keep my home bias to a minimum and may only go as high as 15% Aussie of my portfolio.
My 'gambling' funds aren't counted as part of this portfolio.

I repaid my family loan with my tax refund and started building my emergency fund with any remaining.

I relaxed my frugality a bit and decided to treat myself and family by taking advantage of recent Jetstar sales and booked short holidays to Japan and Vietnam for 2015. I consider these value investments for the price I got them for. :

Hi Ryan

Post #4 states you have planned to have Aust equities in Super. The above states otherwise. Which of the statements is an accurate depiction of your situation?

Cheers

 

[Ryan C]

Hi Ryan

Post #4 states you have planned to have Aust equities in Super. The above states otherwise. Which of the statements is an accurate depiction of your situation?

Cheers

Changed my mind on that after considering franking credits. VAS is what I will buy in a couple of months.

 

[DeepState]

Changed my mind on that after considering franking credits. VAS is what I will buy in a couple of months.

Maybe it's my math that needs checking, but I think VAS is best held within super.

Reasoning as follows:

Assume for VAS and international shares assets are hold to death. You have stated that you are after an income stream. Although super assets can't be touched for a while, income from these can be offset against income from personal exertion. That is, even if you can't get money out of your super, you can spend as if you did.

Australian shares yields around 4% pa with 80% franking. An after tax yield in super is the grossed up yield (5.4%) less tax at 15% equaling 4.6%. You will get a tax refund. Outside of super, even at 30% tax rate (that's before you get rich, to be conservative) the after tax yield is 3.8%.

Overseas shares yields around 2% and might get you a smidge of withholding tax credits not worth mentioning in this context. After tax yield is 1.7% for a super arrangement. The after tax yield outside of super is 1.4%

So, the benefit for going into super vs not for Australian shares is 4.6% less 3.8% = 0.8%.

For overseas shares, the difference is 1.7% vs 1.4% = 0.3%.

The gain for moving Australian shares into super is greater than obtained for moving overseas shares into super. If you had to choose which was moved into super, it would be Australian shares.

If you considered capital gains as well, it would point more firmly in this direction too if the total pre-tax returns on Australian and overseas shares are assumed to be identical (which is the outcome of one theory emerging from cost of capital equality across the world).

 

[Ryan C]

...Although super assets can't be touched for a while, income from these can be offset against income from personal exertion. That is, even if you can't get money out of your super, you can spend as if you did.

How does that work? I thought money in super stays in super until I retire.

 

[DeepState]

How does that work? I thought money in super stays in super until I retire.

I was not clear enough. Given you are investing for income but choose to house some of it in super for the tax benefit even though you can't touch it. I just figured that you can reduce your saving from personal exertion income by the amount of income generated from investments within the super arrangement. That way, you can spend the income as you had imagined.

 

[Ryan C]

Update: I achieved my goal early to save $3000 by end of 2014 to invest in my first lot of VAS. I settled a purchase for 43 units @ 63.47 today. While Commsec is offering no brokerage fee I'll be buying $700 a month into VAS until it runs out before I revert back to bi annual purchases and adjusting my allocations. I continue to build my emergency fund within my offset account.

Index investing is simple but boring. I hardly check how my ETFs are performing and do not concern myself with the daily movements.

 

[>Apocalypto<]

Update: I achieved my goal early to save $3000 by end of 2014 to invest in my first lot of VAS. I settled a purchase for 43 units @ 63.47 today. While Commsec is offering no brokerage fee I'll be buying $700 a month into VAS until it runs out before I revert back to bi annual purchases and adjusting my allocations. I continue to build my emergency fund within my offset account.

Index investing is simple but boring. I hardly check how my ETFs are performing and do not concern myself with the daily movements.

love your signature.

 

[DeepState]

Update: I achieved my goal early to save $3000 by end of 2014 to invest in my first lot of VAS. I settled a purchase for 43 units @ 63.47 today. While Commsec is offering no brokerage fee I'll be buying $700 a month into VAS until it runs out before I revert back to bi annual purchases and adjusting my allocations. I continue to build my emergency fund within my offset account.

Index investing is simple but boring. I hardly check how my ETFs are performing and do not concern myself with the daily movements.

Keep walking the path RC. You are doing really well.

 

[slothman]

Update: I achieved my goal early to save $3000 by end of 2014 to invest in my first lot of VAS. I settled a purchase for 43 units @ 63.47 today.

Congrats! I just purchased my first lot of VAS today @ 65.75 and considering buying some WXOZ once I feel comfortable enough to pull the trigger. Still paying down PPOR debt so not in a mad rush.

Have you come across this blog?
http://superannuationfreak.blogspot.com.au/

 

[Ryan C]

Update:

Today, I added another 19 units of VAS at $67.50 each. I intend to make full use of the free brokerage whilst it last. Side note: Correction on my last purchase of 43 units of VAS. It was purchased at $68.74 a unit.

As I mentioned in my last post this style of investing is boring but on the upside it's hassle free.

I've also mentioned that I'll have a 'gambling' fund which I will use on individual shares but this has changed somewhat. Now I literally have a gambling fund that I use at the casino instead to play poker. This has curved any interest in me taking a gamble at picking individual companies to make money.

I've built a comfortable and consistently growing bankroll and play on profit. I've dipped into my bankroll to tuck away a few hundred into my investing account for ETFs (and small gifts for family) every so often whilst leaving me enough to play with. I understand this may not be the best way to build wealth but it's helping me with extra income. And if I lose it all tomorrow, well, I feel good some of it went into my share portfolio.

It's funny that every thing I've learned about investing translates right into to how I handle my gambling money. I do not risk what I can't afford to lose. I'm just as frugal with it. And every extra bit I can spare goes right into my portfolio.

 

[Ryan C]

Congrats! I just purchased my first lot of VAS today @ 65.75 and considering buying some WXOZ once I feel comfortable enough to pull the trigger. Still paying down PPOR debt so not in a mad rush.

Have you come across this blog?
http://superannuationfreak.blogspot.com.au/

Good job! Keep at it. I was actually thinking of buying WXOZ but went with more VAS today only because I hold international shares in super and my daughters account.

 

[Ryan C]

Update: With the recent dip in Aussie Shares I added another 31 unit of VAS at 66.70. Happy to see it bounce back up to 67.32 yesterday. Not really a big deal in the long term scheme of things.

Hoping my buy order on WXOZ happens before my free brokage with Commsec is over this month otherwise it'll have to wait.

 

[Ryan C]

Update: Finally bought 100 units of WXOZ. Wasn't too happy with how I went about this buy. I bought it in the higher end of what I wanted to pay. In the past few weeks as I was watching it I tried to save a few bucks by setting a price below bid and I just watched as it climbed in the following weeks.

Also, topped up the ETFs in my super to be 50% VTS, 31% VEU, 9% VAP and 10% VAF. All these purchases have increased since I bought my first lot when I started my SMSF so happy to see my holdings are in the green with about $7000 profit.

 

[hiddencow]

You might want to check out VGS, new vanguard ETF.
Similar to WXOZ but fees are lower.

 

[Ryan C]

You might want to check out VGS, new vanguard ETF.
Similar to WXOZ but fees are lower.

Awesome! Thanks for that! Possibly will add it in future.

Update:
Accidentally bought 93 units of WXOZ - I had an outstanding buy order which I missed and didn't cancel. It executed today and what a big shock it was when I received a confirmation email

Also added 100 units of DJRE in last few days. I like having a small real estate allocation.

Outside of my super, I now hold 50% VAS, 35% WXOZ and 15% DJRE. I haven't followed an allocation to these holdings and just bought what I could. I'll set one before my next buys and adjust accordingly.