[Australia] Asset Allocation, Portfolio, Rebalancing & Strategy Advice

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expropertyaddict
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Location: Australia

[Australia] Asset Allocation, Portfolio, Rebalancing & Strategy Advice

Post by expropertyaddict »

[Australia] Asset Allocation, Portfolio, Rebalancing & Strategy Advice

Country of Residence: Australia

International Lifestyle: Will retire in Australia

Currency: Australian Dollar (AUD)

Emergency funds: Six months of expenses

Debt: No personal. Only investment (See below)

Age: Late Thirties

Desired Asset allocation: 90% stocks / 10% bonds or 100% stocks

Family Trust / Personal Names: Low 7 figure portfolio with $15k per month regular contributions

Superannuation / Retirement Accounts: Low 6 figure portfolio with $55k per annum regular contribution


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Currently hold a variety of speculative stocks, ETFs etc across a number of brokers and platforms. Looking to consolidate - so have set up a new Family Trust with a Commsec (large bank owned) broking account and a similar account for my SMSF (self managed pension/retirement account). I wish to liquidate all paper assets/transfer them to CommSec where appropriate for simplicity and safety.

Currently employed, current income meets all day-to-day lifestyle and living requirements. No plans to retire, I enjoy my job and I have freedom to work when and where I want. Very high job security (partial owner). No income drawdown required from the portfolio for 25+ years.

No plans to change the primary place of residence/home - no debt.

$15m AUD residential property portfolio with $10m debt (~20 properties). Cashflow positive by $200k to $300k per annum (pre-tax). Will sell some of the poor performing assets over the next 5 years - to redeploy capital to portfolio. Cash surplus will remain the same (or probably increase).

_______________________________________________________________

New annual Contributions

$180k per annum ($15k per month) into personal accounts
$55k per annum into retirement accounts.


_______________________________________________________________

Firstly, thank you in advance for any suggestions and help. Have been property focused for many years, but feel I don’t want the headache of building my property portfolio further.

Would like to seek guidance on the following:

Questions:
1. Should my portfolio be 90/10 or 100% stocks? Is it purely a risk tolerance decision? I consider myself to have a high tolerance for risk - I could (and have) stomached 50% declines and have kept hope that values will return in the long term. Or is there a scenario where my total lifetime returns would be higher by having a bond component? Sorry if this question is so basic - but I’m struggling to find my view.

2. I have read a number of posts on this forum (first time poster, long time lurker :mrgreen: ) and there appears to be two portfolios recommended for Aussies:

For smaller balances:

75% Vanguard Diversified High Growth INDEX ETF (ASX:VDHG)
25% Vanguard MSCI INDEX International Shares (Hedged) ETF (ASX:VGAD)

For larger balances:

70% Vanguard MSCI Index International Shares ETF (ASX: VGS)
20% Vanguard Australian Shares Index ETF (ASX: VAS)
10% Vanguard FTSE Asia Ex-Japan Shares Index ETF (ASX:VAE)

My overall macroeconomic view is that we will have 5 to 7 years of asset price increases as a result of the massive financial stimulus, followed by a large contraction in the markets due to a credit related issue (Another GFC). We will then restart the economic cycle with a few years of slow recovery - followed by the next boom (similar to post-GFC recovery). I also like the Asia growth thematic - I believe there will be a gradual rebalance between the West and East. Just another economic cycle…

Based on the above - is the second portfolio the most suitable? Based on the answer to 1), what bond allocation would be preferred? Is there a better, more appropriate target portfolio? Are these Vanguard ETFs the best? Or should I diversify with iShares, Betashares etc?

3. Commsec brokerage fees are as follows:

$10.00 (Up to and including $1,000)
$19.95 (Over $1,000 up to $10,000 (inclusive))
$29.95 (Over $10,000 up to $25,000 (inclusive))
0.12% (Over $25,000)

Based on $15k new money invested each month - do I use this to ‘rebalance’ my portfolio? I.e. buy a single ETF each month to bring the target allocation in line? Or do I wait till I have $25k available for investment - to take advantage of the cheaper brokerage?

My gut feel is that brokerage is irrelevant at this level, and I should just implement the best rebalancing strategy for the portfolio. If so, what frequency and what strategy is best?

4. [Off-Topic] I feel I am in the right place financially, educationally and emotionally to implement a Boglehead strategy - and stick with it for the rest of my days. I have worked hard for 20 years to build up my financial position, I am proud of what I have accomplished - and am ready to focus on the next non-financial chapter of my life. I see this investment strategy as the foundation to that next chapter. My journey so far has lead me to read the following excellent books:

The Psychology of Money by Morgan Housel
Die with Zero by Bill Perkins

My future reading list includes:

The Bogleheads' Guide to the Three-Fund Portfolio by John C. Bogle
The Four Pillars of Investing by William J. Bernstein
The Little Book of Common Sense Investing by John C. Bogle
A Random Walk Down Wall Street by Burton G. Malkiel

With the collective wisdom of this forum - are there any tips, tricks, critique, guidance, or suggestions anyone can add to my journey? Everything and anything is greatly appreciated.

Thanks,
expropertyaddict
Last edited by expropertyaddict on Sat Apr 17, 2021 12:56 am, edited 1 time in total.
000
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Re: [Australia] Asset Allocation, Portfolio, Rebalancing & Strategy Advice

Post by 000 »

What does VDHG hold? Does it tilt to "growth" (high P/E) stocks?

You might consider a simple portfolio of domestic and international equities at some reasonable ratio without other tilts.
My overall macroeconomic view is that we will have 5 to 7 years of global economic prosperity as a result of the massive financial stimulus, followed by a large contraction in the markets due to a credit related issue (Another GFC). We will then restart the economic cycle with a few years of slow recovery - followed by the next boom (similar to post-GFC recovery).
I'm not sure I agree with your macro view. You may need to temper your expectations. We have had massive financial stimulus for the last 12 years (actually longer perhaps) but economic prosperity has arguably already been declining over much of that time. Asset values have done very well though. Japan has also been doing massive stimulus for 30+ years with little effect (and perhaps the opposite effect) of causing growth. What I am saying is that we might (or might not!) be nearing the end of a long secular bull market in paper assets caused by declining interest rates, monetary expansion, and stimulus.
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expropertyaddict
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Re: [Australia] Asset Allocation, Portfolio, Rebalancing & Strategy Advice

Post by expropertyaddict »

Thanks 000.

VDHG is currently:

Percentage/ Funds
35.90% - Vanguard Australian Shares Index Fund (Wholesale)
26.30% - Vanguard International Shares Index Fund (Wholesale)
16.10% - Vanguard International Shares Index Fund (Hedged) - AUD Class (Wholesale)
7.00% - Vanguard Global Aggregate Bond Index Fund (Hedged)
6.70% - Vanguard International Small Companies Index Fund (Wholesale)
5.00% - Vanguard Emerging Markets Shares Index Fund (Wholesale)
3.00% - Vanguard Australian Fixed Interest Index Fund (Wholesale)

You are correct - I did not mean 'economic prosperity'... I meant 'asset price increase'. I'll update the original post.

So you would suggest a 2 fund strategy being 80% VGS and 20% VAS?
SR7
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Location: Down Under

Re: [Australia] Asset Allocation, Portfolio, Rebalancing & Strategy Advice

Post by SR7 »

VDHG is examined in some detail here
https://www.passiveinvestingaustralia.c ... l-your-own

In a recent thread somebody was going 50% VDHG and 50% VGS to increase their global exposure, which may be an option if you keep some of your local Australian properties.
I studied Physics not Finance, so best to ignore anything I say about money.
000
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Re: [Australia] Asset Allocation, Portfolio, Rebalancing & Strategy Advice

Post by 000 »

As far as VDHG vs VGS/VAS I'm not sure (not familiar with Australian funds) but there are a few factors I'd consider: coverage (for example, are emerging markets and small caps included at market weight), how much of the international stocks are hedged, and expense ratio. I guess the big question for your stock allocation considering your large exposure to the Australian property market is how much exposure do you want (1) to international stocks and (2) to international currencies (you can have one but not the other with hedging of course). 80% in unhedged foreign stocks might be a bit volatile for some people. If VDHG is the easiest way to get exposure to all this stuff I don't think I'd be bothered by 10% in bonds.

As for your mechanical brokerage questions I personally would probably invest each month. I might even be willing to do two buys each month of the two ETFs. You can do the math yourself for the amounts you're talking about but at least during a bull market it seems that missing a month of appreciation may very likely be worse than the higher commission.

A lot of your current portfolio is in illiquid leveraged real estate. Based on your post and username it sounds like you're trying to reduce your exposure and leverage here but nevertheless be aware that you might be setting yourself up for a bad time if we see a bear market in housing prices or the general economy. Decline in asset values, vacant rentals, job loss, and/or banks calling loans (if applicable) could all coincide during bad times. The fact that you have so much debt leads to the question of if it makes sense to invest in bonds while holding debt or if it's better to pay off the debt, discussed here.

As far as other books to read, frankly I think at a certain point there isn't much more to cover on passive investing. Of the books you mention, I think the only one I would suggest is The Little Book of Common Sense Investing by John C. Bogle.
andrew99999
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Re: [Australia] Asset Allocation, Portfolio, Rebalancing & Strategy Advice

Post by andrew99999 »

Welcome to the forum. Well done on your financial position.

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With so much Australian property, I would stick to entirely global stocks and no Australia stocks or AUD-hedged stocks. This is to maximise both stock diversification and currency diversification.

Generally
• 10% Emerging markets
• The rest VGS (developed LC/MC), or optionally 85/15 VGS/VISM (VISM = developed SC)

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90/10 or 100% stocks isn't all that different, and don't forget that this includes your cash reserves, so I assume if you had 100% stocks within your stock portfolio, overall, you might already be 90/10.

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To determine your appropriate growth to defensive allocation, you would consider your willingness, ability, and need to take risk.

25 years to drawdown means ability to take risk is not a restriction.

Your need to take risk depends on how much you need your assets to grow to achieve the retirement goal. My guess is that you probably don't need to take even more risk than what is in your leveraged property, but I don't know what your retirement goal is.

That leaves the most important — your willingness to take risk — which is your ability to remain invested during extreme market turbulence. If your portfolio fell by 30%, would you panic-sell? What about 40%? What about 50%? What did you do last year when everyone was talking about the coming of the next great depression? If you can remain invested for the recovery, then you have a high willingness to take risk. The biggest danger to your portfolio (provided you are property diversified) is panic-selling and missing out on the recovery.

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It's nice to have a macroeconomic view, but the share market does not equal the economy. The stock market was improving while the economy was getting worse and worse last year. This is because the stock market is forward-looking, and everything you know is already priced in. Whatever your experience with property, leave it at the door and accept that you don't have any more information when it comes to stocks. It will do what it will do, long before you even know why or have a chance to react. Your goal is to invest only as much as you can tolerate leaving it invested during high volatility and only changing your allocation based on your own change in circumstances (i.e. a change in your ability, willingness, and need to take risk).

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I personally like the warm fuzzy feeling of Commsec being linked to the biggest company in Australia, but with CHESS sponsorship, there is much more safety, and there are cheaper CHESS sponsored brokers. Selfwealth is most commonly mentioned and is $9.50 for trades of any size (if I recall correctly). But yes, at your wealth, I wouldn't be too concerned about brokerage cost between those 2.

--

If you have not done so, see a professional about structuring — it may be enormously beneficial to set up something like a company & trust structure to retain profits (through the company) and distribute to the lower tax earner (through the trust) to minimise tax.

Also, if you haven't got your life insurance done, check that out. It just so happens that insurance needs some expertise that isn't particularly well available on forums.

Same with estate planning.
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expropertyaddict
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Re: [Australia] Asset Allocation, Portfolio, Rebalancing & Strategy Advice

Post by expropertyaddict »

Excellent Resource - Thanks SR7.

Thanks 000 - all noted.

Andrew99999 - thanks for the comprehensive reply.

I've got comprehensive personal insurance coverage as well a trust/bucket company. Currently in the process of updating my estate plan.

I believe I have a a high willingness to take risk - although I do value simplicity.

Does it make sense then just to go 100% VGS for simplicity? or will putting in 10% VAE or VGE for EM exposure will make a noticeable difference?
andrew99999
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Re: [Australia] Asset Allocation, Portfolio, Rebalancing & Strategy Advice

Post by andrew99999 »

expropertyaddict wrote: Sat Apr 17, 2021 6:50 am Does it make sense then just to go 100% VGS for simplicity? or will putting in 10% VAE or VGE for EM exposure will make a noticeable difference?
100% VGS is a great option and IMO diversified enough for your equities.
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expropertyaddict
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Re: [Australia] Asset Allocation, Portfolio, Rebalancing & Strategy Advice

Post by expropertyaddict »

Thanks andrew99999.
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