Australian investor seeking advice on a 20 year plan

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Topic Author
Translumination2002
Posts: 24
Joined: Sat Sep 18, 2021 8:07 pm
Location: Australia

Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

I was told by somebody smart that I should seek the help of bogleheads before I enter into a big decision.

My situation:

Age 47

Family: married 2 kids under 6. Wife works part time.

Savings rate: 300K pa. Our employment is fortunately pandemic & downturn resistant.

Human capital:
20 years of employment left. Total earnings i.e my "bond coupon" is 20 years multiplied by 300K p.a= 6 million dollars.
But I really only want to work another 10 years.

Insurance: income protection to cover any interest costs if I cannot work in my own profession.
Life insurance enough to pay of any debt if I die.



Assets:
Home: 6M no debt

Superannuation: 3.1M. All in high growth industrial Super funds at the moment. I've set up self managed super to save on cost and I'll soon transfer it over.

Cash: 900K



Goal: to want to have 200K pa post tax to live on for 35 years. I want to retire or work part time in 10 years time. To achieve this I will need a total 8M post tax to draw from.



Investment plan:

1. My wife's parents do not qualify for pension so I have asked them to set up 2 superannuation accounts within my self managed super (which allows 4 individual accounts under the same umbrella). This will allow 110K x 2= 220K non concessional contributions to be invested each year in my wife's parents name . They are 69 years old so I can use this until they are 75 years old. They can take it out as a lump sum tax free at the opportune time in the future. We will make a enduring power of attorney should there be issues of cognitive decline. This plan has been discussed my wife's parents & siblings who are happy with this arrangement.

2. Me & my wife can make 27.5K x3= 55K concessional contributions each year into our own super.

3. Redraw equity from the home loan & invest in broadly diversified index funds.
The bank will lend me 80%= 4.8M at 2.49% fixed 4 years.

I intend to use a discretionary trust structure to distribute the dividends & save tax. My wife's parents have incomes of 20K each so I can make distributions to them to reduce taxes. My wife is on the 37.5% marginal tax rate & I'm on the 47%.

After making all the super contributions there will remain about 80K cash which can be added to the discretional trust each year.



My investment philosophy:
I've read that market indices cannot be used to time the market in the short term but can give information on the longer term outlook. The future expected returns for US stocks will be low for the next decade. The expected return for value & international markets will be higher as they are trading at average historical levels. I'm tilting away from the US due to this. But the bull run in US markets may run for another 5 years for all I know therefore I still need US stocks.

Given the lower expected returns my strategy is to leverage using my house to improve my returns. The risk is that interest rates may go up in which case it may erase any extra gains. A large correction with a long depressed market for a decade would also amplify my losses. I'm aware of this and I'm prepared to keep on investing & not sell( what else can I do?). If this situation occurs I would probably start paying down the debt to reduce the interest repayments instead of buying more shares. This will force me to work longer than I want to but that's why it's called risk right??

I am also not buying any bonds as that would defeat the purpose of leveraging. It doesn't make sense to borrow to buy an asset that pays less than the interest rate. In the event of a correction as long as I can afford the interest I will not be forced to sell.

My understanding of portfolio allocation is to make one that you can hold for life and not constantly change. I heard that you choose your (diversified) strategy & the market throws the dice. At some stage your strategy will hit pay day but only if you stick to it & not change to yesterday's winners. You'll never get the best returns of you're well diversified but you won't go through enormous swings that may be disastrous if it's at the end of your life cycle & you don't have time to recover. My time frame is only 10 years , stretching to 20 years if needed.



I haven't decided on the exact portfolio. It will be one of the following:

A: simple 3 fund market cap index portfolio. Simple Bogle style.

VTS 40%: total U.S all cap
VEU 40%: total world including emerging markets
VAS 20%: Australian

B: all Australian domociled market cap index portfolio to avoid US estate & withholding tax issues.

VAS 20%
VGS 60%
VGE 10% emerging markets index
VISM 10% small cap index

C: Factor tilted portfolio. Talking a bet on value coming back. The difference in valuations between growth & value are at historical highs.

VTS 25%:
VEU 25%:
VAS 25%:
AVUV 10%: Avantis US small cap value
AVDV 10%: Avantis international developed ex US small cap value
AVES/AVEM 5%: Avantis emerging markets

D.
All in one solutions set & forget. No rebalancing so no chance l will lower returns by fiddling. But these are heavily weighted to Australia & US.

DHHF: betashares all high growth diversified etf
OR
VDHG: Vanguard high growth diversified etf

The execution of the index portfolio ( except if I go with the all in one solution VDHG or DHHF) will be to mirror the same investments across all the 4 super accounts & the discretionary trust. This will enable me to have the maximum flexibility to rebalance within each structure & to simplify the accounting. Given that trading costs with Selfwealth or Interactive Brokers is minimal this is cost effective


What to do once target reached:
The target is 8 million. Once I reach that goal I'll have to start deleveraging & derisking by buying bonds. Maybe 20:80 stock to bond ratio. Within super once you get to 60 years old you can take it out as a lump sum tax free. I can buy bonds from that lump. Outside of super a proportion can be kepted within stocks though you can argue it's better to do it within super for the tax advantages.
I really haven't figured the most tax effective way to do this & I'm open to suggestions.


What do you guys think of this plan? Are there any glaring holes before I commit myself?
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andrew99999
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Re: Australian investor seeking advice on a 20 year plan

Post by andrew99999 »

Extremely well thought out plan. Well done.

Any of those 4 investment options would be excellent. I personally prefer not to hold VTS/VEU due to potential legislative risk.

The only other comment is that you must have some serious cahonas to leverage up 4.8m. If you can do it without losing your nerve and panicking in a severe bear market, it seems ok. If you are in a profession that you definitely will remain employable in (e.g. medicine), that probably helps on this point.

Oh, also, are you likely to remain in the 6M house in retirement? Don't forget that you may be able to retire sooner if you downsize. A 3m house will mean $3m more that will meet most of your retirement funding needs of 200k/yr for 30 years without even needing to levarage.
Topic Author
Translumination2002
Posts: 24
Joined: Sat Sep 18, 2021 8:07 pm
Location: Australia

Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

Thanks Andrew. I've learnt the bulk of my investing relevant to Australia between you, Hockey Monkey and PassiveinvestingAustralia.com.

That house contains 20 years of my working life. Now the house valuations in Sydney are simply ridiculous and if I sell then I still have to buy something else also at ridiculous valuations. The kids are going to school and we can't move to somewhere cheaper until they grow up.

Given the low return environment based on the also ridiculous US market valuations I think I need to leverage. I might also be a lemming heading for the cliff with everybody else doing the same thing with such low interest rates. Hopefully with the diversified portfolio and continuously buying more stocks as soon as I generate income it will reduce the pain in a downturn.

I just want to ask 2 things:

A. Should I rebalance? I have no bonds so I can only rebalance between asset classes. I can do this by buying the worse performing stocks with my income but it will not keep up and I will have to eventually sell something to buy something else. However this will incur capital gains tax and I will be clipping the wings of my best performers. I guess rebalancing will reduce the risk of the best performing sub class from sinking the ship in a crash? But everything goes down in a crash except for bonds.
If I just let them run eventually everything will revert to the mean and each asset class will have its time to perform. This avoids taxes too and stops me from tweaking. I can't decide.

B. Does tax harvesting work in Australia? I never hear anybody mention much about this.

Thanks
Last edited by Translumination2002 on Mon Sep 20, 2021 7:01 am, edited 1 time in total.
pseudoiterative
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Re: Australian investor seeking advice on a 20 year plan

Post by pseudoiterative »

Translumination2002 wrote: Sun Sep 19, 2021 3:46 am Given the lower expected returns my strategy is to leverage using my house to improve my returns. The risk is that interest rates may go up in which case it may erase any extra gains. A large correction with a long depressed market for a decade would also amplify my losses. I'm aware of this and I'm prepared to keep on investing & not sell( what else can I do?). If this situation occurs I would probably start paying down the debt to reduce the interest repayments instead of buying more shares.
By "a large correction with a long depressed market for a decade", do you mean that stock market prices drop and stay down, or the market price for your house drops and stays down, ... or both?
Topic Author
Translumination2002
Posts: 24
Joined: Sat Sep 18, 2021 8:07 pm
Location: Australia

Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

Sorry just talking about the stockmarket tanking & then taking forever to recover. That would mean my loan will be the same but my portfolio less & I'm paying interest. The lower share price will however be good for me to buy more with my income. Or else I use my income to pay down the loan if the interest rate is too high.

I don't care what the house is worth. I've already taken the banks money.
Last edited by Translumination2002 on Mon Sep 20, 2021 6:55 am, edited 1 time in total.
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andrew99999
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Re: Australian investor seeking advice on a 20 year plan

Post by andrew99999 »

Translumination2002 wrote: Sun Sep 19, 2021 4:29 pm A. Should I rebalance? I have no bonds so I can only rebalance between asset classes. I can do this by buying the worse performing stocks with my income but it will not keep up and I will have to eventually sell something to buy something else. However this will incur capital gains tax and I will be clipping the wings of my best performers. I guess rebalancing will reduce the risk of the best performing sub class from sinking the ship in a crash? But everything goes down in a crash except for bonds.
If I just let them run eventually everything will revert to the mean and each asset class will have its time to perform. This avoids taxes too and stops me from tweaking. I can't decide.
Rebalancing is more for your growth to defensive allocation. Within equities, it is less important.

My main concern would be if Australian equities did well, I would want to rebalance to minimise concentration risk, and in that case, due to the high dividends in Australian equities, you would have income from that (plus your personal contributions) for rebalancing within your equities.

Translumination2002 wrote: Sun Sep 19, 2021 4:29 pm B. Does tax harvesting work in Australia? I never hear anybody mention much about this.
Unfortunately no. In the US you can sell up to 3k worth of loss and claim on your income. In Australia, you can not.

The closest thing you can do in Australia is sell at a loss and buy something different enough so that you can claim that it was not done primarily for tax-advantages. For instance, you probably could switch IOZ for AFI/ARG, but not for STW which both track the same index (IOZ/STW both track ASX200). Not sure if you can switch form VAS (ASX300) to IOZ/STW (ASX200).
Hockey Monkey
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Re: Australian investor seeking advice on a 20 year plan

Post by Hockey Monkey »

Why the need to leverage?

Savings rate $300k
Current assets $4m (excluding family home)
Target asset $8m

=RATE(10,-300000,-4000000,8000000)
=1.74% annual return before inflation will get you there

In fact with monthly compounding, all you need is 0.14% before inflation.
=RATE(10*12,-300000/12,-4000000,8000000)
= 0.14%
Topic Author
Translumination2002
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Location: Australia

Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

Hi Hockey
I'm afraid I can't follow your calculations. So you're saying I only need a very modest return to get to my goals? Below is how I did my sums. Maybe I'll reach the same conclusions as you, that my savings rate is in fact nearly enough to do most of the heavy lifting outside of super.

I based my calculations on needing 200K post tax pa for 2 people. That means if neither of us are working then we would need 130K each before tax to reach 100K after tax.

If I wanted to have 30 years of life after I retire then I would need 30x 2x 130K= 8M pre tax.

Within super I have 3.1M which will soon be 3.4M when I make my last non concessional contribution into my wife's account. I'll be adding 55K total concessional contributions each year.

Using a compound calculator & if I get a modest after inflation compounded return of 4% then in 13 years when I'm 60 years old I'll have 6.5M.

I however want to reduce my work hours or retire by 55 years of age if possible. If I simply invest my 600K cash ( 900K minus 300K that went into my wife's super non concessional contribution) & saved 300K pa and get a compounded after inflation return of 4% then in 7 years when I'm 55 years old I'll have 3.159M. 460K of this is capital gains. After I pay CGT I might be left with 3M or so. Drawing 200K pa this will last 15 years. Enough time until I can access my super.

If I reduce my goals by drawing an investment income of 150K per year and working alot less then the pressure to have my finances in perfect shape is alot less. But I want to aim abit higher.

So yes I don't need to leverage but interest rates are so low & the valuations on my house so high that I'm hoping to achieve my goals even earlier if I leverage. Not having to work should I choose to is my ultimate goal. It buys me more time... time to be with my kids, to travel, to do my hobbies and to enjoy my good health while it lasts.
Hockey Monkey
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Re: Australian investor seeking advice on a 20 year plan

Post by Hockey Monkey »

I'm saying you have already won the game with $4m in assets plus the ability to save $300k p.a.

Think of it this way. If you can save $25k per month for the next 10 years, even at a zero percent return, that gets you to $7m, so you only need to make up $1m plus inflation from investment returns.

You may have the ability and willingness to take risk, but you should also consider whether you need to. With that much leverage, it could all blow up requiring you to work much longer than if you took less risk.
Topic Author
Translumination2002
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Location: Australia

Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

It's reassuring my calculations are within the ballpark & the plan has no major blindspots save maybe taking on too much risk to get there.

Perhaps I'll be less aggressive & start paying down my loan if interest rates start rising. I've got 4 years at 2.49% so it'll depend on how much the portfolio returns can cover the interest costs.

Otherwise I can be even more conservative & simply pay down the loan from the start.

Thank you Andrew & Hockey.
Hockey Monkey
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Re: Australian investor seeking advice on a 20 year plan

Post by Hockey Monkey »

Have you already taken out the loan? Generally fixed loans don’t have a offset account, so you would be paying interest on money just sitting there in cash if not invested.

You may want to consider a variable loan with offset
Jaymover
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Re: Australian investor seeking advice on a 20 year plan

Post by Jaymover »

Translumination2002 wrote: Mon Sep 20, 2021 8:59 pm It's reassuring my calculations are within the ballpark & the plan has no major blindspots save maybe taking on too much risk to get there.

Perhaps I'll be less aggressive & start paying down my loan if interest rates start rising. I've got 4 years at 2.49% so it'll depend on how much the portfolio returns can cover the interest costs.

Otherwise I can be even more conservative & simply pay down the loan from the start.

Thank you Andrew & Hockey.
It seems like you need to go back to basics and work out what you really really want to achieve in life. You and your wife already have alot of money. You could probably retire now unless having $200k a year income with no mortgage is essential. 25x rule means that you only need about $5 million to sustain that income, like, forever on a balanced portfolio. Aim for what you need.

What is your risk tolerance? Calculators suggest 90 percent stocks at your age if you are not risk averse. However borrowing money to buy shares is risky but I guess if it doesn't work out you will still have heaps and move on. It was almost 15 years before a 2000 US stock portfolio fully recovered. Why not just ensure that your super and most of your cash is as aggressively invested as possible with 6 months of cash for emergencies?

Spend a few grand and get a financial advisor to to a bit of modelling.

Its a worry reading about people (particuarly Australians) tipping house equity into the stock market because the banks couldn't care less what the borrowings are spent on. Sounds like a 2007 rerun.
Topic Author
Translumination2002
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Location: Australia

Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

I'm going to split the loan into 10 parts so that if I need to break I can do it in smaller parts. The variable loans charge 2.9% which is higher than 2.49% for my interest only. Must be because I'm not buying real estate.

My working life has 20 years to run so at the very worse I'll be working alot longer. I should be able to survive a crash & recover within that time frame. At the best I'll be able to retire or go part time much earlier. The debt is not much worse then what some people are spending on their mortgages yet the sharemarket is somehow perceived as more dangerous (probably because if you're forced to sell in a downturn you'll never recover).

I've done my calculations and I think my income can sustain the risk. But like I said I'll revisit or reduce my debt levels after 4 years when the interest only period expires.
Hockey Monkey
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Re: Australian investor seeking advice on a 20 year plan

Post by Hockey Monkey »

Translumination2002 wrote: Tue Sep 21, 2021 7:20 am I'm going to split the loan into 10 parts so that if I need to break I can do it in smaller parts. The variable loans charge 2.9% which is higher than 2.49% for my interest only. Must be because I'm not buying real estate.
2.49% of 4.8m is still 120k which is a big hit to your savings rate if you are not fully invested. Why not borrow as you invest?

An owner occupier variable rate on should really be high 1.xx% or low 2.xx%
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Translumination2002
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Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

My plan was always to be as aggressive as possible hence the interest only loan. I didn't want to pay the principal and lock up my savings and so using an interest only loan I will be investing the whole loan in one hit since I'll be paying interest straight away. The 2.49 percent interest should be covered by the dividend returns. If the portfolio dividend grows enough to be able to support a higher interest rate the better it'll be for me. If not then at the end of 4 years I may end up converting to PI to get a better rate.

It took me a long time to understand why time in the market and not timing was important. I had money that could've been invested 4 years ago after the house was paid off but I was waiting for a market crash to buy. That crash came last March. But did I buy at the low? No I didn't. It was so fast and I was so absorbed with the existential threat that I didn't invest a cent. If I had been less fearful and invested for 4 years instead of waiting for a crash I would likely able to retire now. Therefore I see no point in getting a PI loan and dollar cost averaging my way in. If I keep money out of the market to wait for a better time to buy then I've incurred opportunity costs because that money could be giving me dividends if I had invested it.
Jaymover
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Re: Australian investor seeking advice on a 20 year plan

Post by Jaymover »

Translumination2002 wrote: Tue Sep 21, 2021 9:23 am

It took me a long time to understand why time in the market and not timing was important. I had money that could've been invested 4 years ago after the house was paid off but I was waiting for a market crash to buy. That crash came last March. But did I buy at the low? No I didn't. It was so fast and I was so absorbed with the existential threat that I didn't invest a cent. If I had been less fearful and invested for 4 years instead of waiting for a crash I would likely able to retire now. Therefore I see no point in getting a PI loan and dollar cost averaging my way in. If I keep money out of the market to wait for a better time to buy then I've incurred opportunity costs because that money could be giving me dividends if I had invested it.
That bit of insight suggests that you may not be as risk tolerant as you think, eg "so absorbed in the existential threat I didn't invest a cent". If you do borrow to buy shares then you will have to be disciplined and not look at your total position more than once a year. They reckon there is a 50 percent chance that US and China will go to war in the next 10 years. Will you have the stomach to ride that out? I'm 80 percent stocks and not sure if I would be able to stomach it but know that I have to take on that level of risk to meet my modest goal.

All I'm saying is go in with eyes open. A 50 percent devaluation is still 50 percent even if your dividends are paying the interest bill.
Jaymover
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Re: Australian investor seeking advice on a 20 year plan

Post by Jaymover »

Translumination2002 wrote: Mon Sep 20, 2021 6:51 am .

If I wanted to have 30 years of life after I retire then I would need 30x 2x 130K= 8M pre tax.


This is a very conservative calc as you are not taking into account the return on the retirement portfolio. You don't take an insane amount of risk and then throttle to zero risk. Better to taper down over time to reach the same goal.

I think you would keep your nest egg 50 percent stocks for the rest of your life which means you need less. Good to read up on the 25x rule and try putting some figures onto one of the free portfolio visualisers

Sounds like you are not a workaholic. Guaranteed early retirement would be a worthy goal.
Jaymover
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Re: Australian investor seeking advice on a 20 year plan

Post by Jaymover »

pseudoiterative wrote: Sun Sep 19, 2021 4:42 pm
Translumination2002 wrote: Sun Sep 19, 2021 3:46 am Given the lower expected returns my strategy is to leverage using my house to improve my returns. The risk is that interest rates may go up in which case it may erase any extra gains. A large correction with a long depressed market for a decade would also amplify my losses. I'm aware of this and I'm prepared to keep on investing & not sell( what else can I do?). If this situation occurs I would probably start paying down the debt to reduce the interest repayments instead of buying more shares.
By "a large correction with a long depressed market for a decade", do you mean that stock market prices drop and stay down, or the market price for your house drops and stays down, ... or both?
Without banging on about it, the you tube presentation below on leveraged ETFs is enlightening. He is talking about 3x leveraged ETFs. The verdict is for long term share investors leveraging is good but it comes with big psychological risks. It probably means that Australian 20 somethings should be leveraging their superanuation with their 40 year time horizon. However with a 10 to 20 year horizon it is more risky

https://www.youtube.com/watch?v=G_rLXQHn0c0
Topic Author
Translumination2002
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Location: Australia

Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

Yes I've been thinking long & hard about taking on this level of risk. An alternative is for me to get a P&I loan and dollar cost averaging my way into the market over several years. But there odds are in my favour if I just lumped summed it.

On the topic of young people leveraging. If you have a 5 year old kid & deposit 50K into a 100% index share portfolio within a super account. By the time they get to 60 years of age they'll have enough money to retire. No need to leverage. Compounding over a long time, tax advantages of super & the low cost of index funds take care of the rest. Plus they can't take money out use it for stupid things. I'm thinking of doing this for my 2 kids.
Jaymover
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Re: Australian investor seeking advice on a 20 year plan

Post by Jaymover »

Translumination2002 wrote: Thu Sep 23, 2021 12:16 am Yes I've been thinking long & hard about taking on this level of risk. An alternative is for me to get a P&I loan and dollar cost averaging my way into the market over several years. But there odds are in my favour if I just lumped summed it.

On the topic of young people leveraging. If you have a 5 year old kid & deposit 50K into a 100% index share portfolio within a super account. By the time they get to 60 years of age they'll have enough money to retire. No need to leverage. Compounding over a long time, tax advantages of super & the low cost of index funds take care of the rest. Plus they can't take money out use it for stupid things. I'm thinking of doing this for my 2 kids.
Ive been prowling this forum for a while and it has provided a really good financial education, with many smart people out there willing to help. It is a bit harder for us non US investors to get advice unless you can pose the question in a general way that might apply to an investor anywhere in the world. Try asking the question; do people borrow against their houses to buy stocks?

One thing I noticed that most Bogleheads are risk averse, but hey, they are at least invested. Generally their opinion is to get living costs under control, pay down the mortgage, save, aggressively invest until you get 50 plus and then start building up a ballast of bonds and cash gradually until retirement.

Maybe it is just a US thing but most investors on this forum frown on borrowing to invest, especially against the house. The extremists are 100 percent stocks with no debt. There is not much gossip on leveraged ETFs for instance.

In Australia, going to a bank and borrowing to buy investments such as a unit on the Gold Coast has been a national pastime for the last 40 years. The tax system here helps with this. It has worked well for many, but not all, and created an industry.

Actually, I'm surprised the bank would lend you money to buy stocks. For all they know you could be buying anything; bitcoin, Gamestop. I guess they know that they will just walk off with the house and then some if someone is stupid with the money. House prices never go down, right? This worries me a little and maybe it is a sign of bad things to come and the reason why the stock market is at year 2000 valuations.

Anyway, borrowing 80% LVR to buy 100% stocks isn't very common but with your assets, high saving rates and recession proof job you could pull it off and be rich. The worst thing that could happen is your stocks lose $2.5 million in value and then you will have to keep working for months or decades to recover to what you started out with. With your high savings rate you would be buying into the recovery so probably recovery would be quicker.

HOWEVER there might be other ways to achieve the exact same result with less risk assuming a 3% pa real return on stock in the next 20 years. I noted that you were thinking about putting it into almost 100 percent bonds in retirement. For one thing doing that would trigger a huge CG tax event which might be avoided with a different strategy. No-one one sits on 100% bonds in retirement. Usually people taper down to at least 50/50 into their old age. The more you have the more stocks you can own of course but many people are mostly bonds in their old age because they don't have much left and don't need the stress of having it all in stocks.

For instance, you could use all your current cash and savings to buy and accumulate stocks (no bonds) over the next 10 years. When it comes to retirement keep both your super and your stocks aggressively invested at say 80 percent stocks. Distributions alone might end up making up most of the $200K post tax.

All this is linear systems analysis and requires some modelling to compare your leverage option with another option. Amazingly there is this totally free portfolio visualiser that you can play with.

https://portfoliocharts.com/portfolios/

You can build your own portfolio like you propose, put in your savings rate and then look at models where you stop earning and are relying on your savings alone. There are two acronyms to understand. One is SWR and one is PWR. Basically using stock market history data, for any portfolio you can work out what you can draw out safely over 40 years, or what can draw out and never ever draw down your principle even in a worst case scenario.

It is an eye opener the dud decades in the past, especially in the 70s. Check out some of the example portfolios. I still think a stock heavy portfolio is the way to go in the next 20 years but some of the gold heavy and bond heavy portfolios did amazingly well over many decades in the past with less risk that stock heavy portolios.

I guess the point is only take on as much risk as you need to achieve your goals. And if you want to retire in 10 years, plan for that and don't jeopardize that huge opportunity that you are very likely to achieve anyway.
Topic Author
Translumination2002
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Location: Australia

Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

People have been predicting a housing collapse for the last 2 decades. If I'm going to be paralysed by waiting for the next crash I'll never invest. I can only follow the evidence and have a plan. If there is a crash then at least I'll still have an income to keep on buying at the low or just pay off the loan if the interest rates are too unbearable.

So yes they can walk off with my house or they can sell off my share portfolio. Both are always worth something. Nobody would have batted an eyelid if I went out and bought an investment property for 4.8M and that's just one home in one market in one country. How much risk does that carry compared to what I'm taking? You're right Australian's love their real estate and the government and the voters won't want it any other way.

The bank made me jump through hoops and then some and are requiring a SOA from a financial planner as well. We've modelled a worse case scenario with a crash and then a prolonged recovery and in this case it can cause me to reach my target at age 56 instead of 55 years. Most of the gains were from my savings not from the loan in this worse case scenario. The upside was being able to retire many years earlier if things go better. I've done my maths and fortunately a high income can make up for a lot of things.

I wasn't planning to go 100% bonds when I reached my target. I was going to go to something like a 30:70 bond to stock portfolio gradually across my whole portfolio including super.
Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: Australian investor seeking advice on a 20 year plan

Post by Valuethinker »

Translumination2002 wrote: Thu Sep 23, 2021 7:00 am People have been predicting a housing collapse for the last 2 decades. If I'm going to be paralysed by waiting for the next crash I'll never invest. I can only follow the evidence and have a plan. If there is a crash then at least I'll still have an income to keep on buying at the low or just pay off the loan if the interest rates are too unbearable.

So yes they can walk off with my house or they can sell off my share portfolio. Both are always worth something. Nobody would have batted an eyelid if I went out and bought an investment property for 4.8M and that's just one home in one market in one country. How much risk does that carry compared to what I'm taking? You're right Australian's love their real estate and the government and the voters won't want it any other way.

The bank made me jump through hoops and then some and are requiring a SOA from a financial planner as well. We've modelled a worse case scenario with a crash and then a prolonged recovery and in this case it can cause me to reach my target at age 56 instead of 55 years. Most of the gains were from my savings not from the loan in this worse case scenario. The upside was being able to retire many years earlier if things go better. I've done my maths and fortunately a high income can make up for a lot of things.

I wasn't planning to go 100% bonds when I reached my target. I was going to go to something like a 30:70 bond to stock portfolio gradually across my whole portfolio including super.
You are heavily exposed to the Australian dollar and the Australian economy. If we entered a worldwide depression, that would hit Australia hard. If for some reason it became impossible for Chinese investors to buy homes in Australia/ had to liquidate their existing holdings**, that might hit the Australian housing market and economy hard.

You have an income in AUD, and property equity in AUD. But your consumption is not only in AUD - Australia imports most of its manufactured goods, and Australians like to travel abroad, generally.

If you read Neil Monnery's "Safe as Houses. 8 centuries of housing prices" there's a nice little chapter on the Australian housing market since Confederation (that's the Canadian term for it ie unification of the provinces/ states). All new to me. Previous boom in Australian history: late 19th C. Great while it happened, but real housing prices in Australia did not rise to that level again until, from memory, the 1950s. They didn't start to do really well again until, from memory, the late 1980s.

Whilst any number of factors say we are not going to repeat the Great Depression in terms of commodity prices, it's nonetheless the case that an adverse move in terms of trade (price of exports/ price of imports) for Australia won't be good for the Australian economy. 25 (27?) years of continuous economic growth is an OECD record, I believe - but was it smart actions, or just good luck?

Also the world is in a situation which probably means more refugees from equatorial countries away from the equator. Whether that's good for Australia you can make your own call. Depends on immigration policy (political hot topic not to be discussed -- by these Forum rules) and also what climatic changes Australia undergoes -- as I understand it, it is the dryest continent.

So my bias is towards more global diversification, not less. Cognizant that of course it could go the other way, and Australia could be the supercurrency of the 21st century. I think it is one of 2 countries that we have a 100 year stock market record for in the 20th century, that outperformed the USA? So who knows.

(if you haven't picked up on, my cognitive bias is based on Canada-- which means I could be reasoning by false analogy. Huge hydrocarbon exporter- -world's largest proven oil reserves (but in sand, so mined not pumped). 80% of stock market is natural resource companies and financial services. What I view as the housing boom (bubble) of all time, initiated by (but not wholly caused by) money from East Asia. Theoretically lots of room but actually sparsely populated for a good reason - harshness of climate and geology. A combination of Bank of Canada monetary policy, Federal tinkering with home lending, foreign investment, immigration laws - all factors in housing prices moving to the most stretched levels they've ever been. I've been waiting for the Canadian housing bubble to pop for at least 10 years (it was concentrated on Vancouver and Toronto, but it has now spread to most major cities). I perceive Canada's fiscal problems to be much more serious than Australia's OTOH-- neither the Fed nor the Provinces can borrow their way out of the next recession).

I would favour lots of global equity diversification. I wouldn't favour adding even more exposure to Australian housing markets than what you already have. Not when The Economist index of same (among others) shows Sydney and Melbourne to be among the most expensive markets in the world (on a price to rent or price to incomes basis; Vancouver is the highest, after Hong Kong I believe)****.

You should also consider your position if:

- global equity markets fall by 50%, as they did nearly in 2008/9, and do not swiftly recover
- the Australian economy takes a big hit - what happens to your income, then? Are you in a "recession proof" job like a doctor? Or do you have a business which is dependent upon the health of the Australian economy?

As to currency:

- you can hedge currency risk on equity portfolios. Normally in Bogleheads we say it's not worth doing (because the actual cash flows of the underlying companies are to some extent hedged, so a fall in AUD may mean a rise in stocks like natural resource exporters, and vice versa). However Andrew9999 has pointed out that the actual swings in AUD v USD can be far away from what purchasing power parity would predict, and can last for years

But it will add to fund expenses. It's something to consider as you get within 10 years of retirement, perhaps, and need to reduce your direct foreign currency exposure.

- I don't think there are big worries about Australian govt creditworthiness. I cannot remember what happened in the Commonwealth in the 1930s, but I think some states had to reschedule debts, but the Federal govt did not?*** To the extent you hold Federal govt bonds, which naturally hedge your currency exposure (they pay in AUD), then that's pretty safe. The alternative is a global govt bond fund hedged back into AUD, but I don't think one can properly rate risk of Japanese default (20% of index) v Australian

A related risk, which I think is a serious one, is inflation risk. That's going to be a problem even in your retirement. US studies have suggested portfolio efficiency (minimizing risk-return tradeoff) is best achieved with up to half of all bond exposure in TIPS (inflation linked bonds). But I believe similar Australian instruments are not available retail? Or were only recently so?

In any case, if you were 60% bonds/ 40% stocks at retirement, I'd be all for being up to 30% in inflation linked bonds, if that were at all feasible.

** we should acknowledge here that, besides China and HK, there are many Chinese ethnic investors in Singapore, Malaysia and Indonesia, among other countries, who are probably significant investors in Australia.

*** again, Canada. One or two provinces that will get downgraded to junk pretty soon OR have to take levels of pain in terms of tax rises and expenditure cuts which will not be politically feasible. And Ontario and Quebec both hang out there as the 2 largest populations that have also not figured out how to pay their way, fiscally.


**** there were more construction cranes at work in Toronto, at least at one point, than in any other North American city (including NYC). All hard at work building residential condos. The transformation of the city into "Miami North" has to be seen to be believed. And these are not cheap units. It's not at all clear to me who is buying them.
Topic Author
Translumination2002
Posts: 24
Joined: Sat Sep 18, 2021 8:07 pm
Location: Australia

Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

It's very hard to use macro trends & indices to make investment decisions. That's what I hear when I listen to Bogle,Swedroe, Merrimen, Ferri talk on this matter. You make a strategy & nature throws the dice. Hopefully at some point your strategy will pay well that makes up for the times when it didn't. But you have to stick to your strategy to get this. If you chase yesterday's winners you'll simply lower your returns. Everybody's got a story about why they were successful but the market is simply random & so that's why Bogle said to buy the whole market & be happy with an average market return ( which is still better than 90% of what the majority of investors get when they play the timing game).

You can guarantee no returns if you're not invested at all. That was me in the past.

If you hold a diversified portfolio & consistently contribute to it, keep your cost low & not time it then you'll at least get the chance of getting the average market return. I read an which compared someone who did this strategy vs a God investor who got in & out of the market at all the perfect times during crashes. The result was God investor won of course but not be an enormous margin.
pseudoiterative
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Location: australia

Re: Australian investor seeking advice on a 20 year plan

Post by pseudoiterative »

Jaymover wrote: Thu Sep 23, 2021 5:37 am In Australia, going to a bank and borrowing to buy investments such as a unit on the Gold Coast has been a national pastime for the last 40 years. The tax system here helps with this. It has worked well for many, but not all, and created an industry.

Actually, I'm surprised the bank would lend you money to buy stocks. For all they know you could be buying anything; bitcoin, Gamestop. I guess they know that they will just walk off with the house and then some if someone is stupid with the money. House prices never go down, right?
Even if market prices for housing were to drop, banks limit their exposure to losses by lending out <= 80% of the current market price of the property and by requiring borrowers who want to borrow in excess of 80% market price to pay for lenders mortgage insurance, to reduce the risk to the bank. So from that perspective it doesn't matter to the bank what the borrower uses the cash for, provided the borrower doesn't somehow destroy the value of the house used as collateral for the loan.

If market prices for Sydney real estate were to decrease by 40% or more, perhaps in combination with some kind of event (recession? interest rate hike?) that caused a decent proportion of borrowers to default on their mortgages, I would expect banks with large exposure to Sydney housing prices to not have a profitable year.
Jaymover
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Re: Australian investor seeking advice on a 20 year plan

Post by Jaymover »

Translumination2002 wrote: Thu Sep 23, 2021 7:00 am I've done my maths and fortunately a high income can make up for a lot of things.

I think that is the nub of it. You can afford the risk. You can ride it out whatever happens.

Borrowing to invest in shares or property are probably equivalent risk. We Australians are the worlds biggest gamblers. I do worry a little that people can borrow most of their value of their home to plough into stock markets. I guess if more people keep doing this then the markets are just going to keep going up and up and up and everyone wins with stock market valuations never ever seen before. A new frontier that favours the early movers like you (even though valuations are already ridiculous).

You have done the maths. Enjoy the investing experience. Of course the more risk you can stomach the better over 15 plus year timeframe. I think the recovery point for diversified investments has always been less that 14 years using 100 years of data, irrespective of risk, an interval which is of course reduced with a high savings rate. Keep in mind sequencing risk as you approach your goal.

It is good to have some input to this forum from a highly aggressive investor. This makes me wonder why there are no leveraged superannuation options for young workers. If you cant touch the money for 40 plus years why not be 3x leveraged 100 percent stocks starting in your 20s?
pseudoiterative
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Location: australia

Re: Australian investor seeking advice on a 20 year plan

Post by pseudoiterative »

Bit of a tangent to the intent of OP's thread:
Valuethinker wrote: Thu Sep 23, 2021 12:23 pm Whilst any number of factors say we are not going to repeat the Great Depression in terms of commodity prices, it's nonetheless the case that an adverse move in terms of trade (price of exports/ price of imports) for Australia won't be good for the Australian economy. 25 (27?) years of continuous economic growth is an OECD record, I believe - but was it smart actions, or just good luck?
I am reminded of this characterisation of Australia:
Australia is a lucky country run mainly by second rate people who share its luck. It lives on other people's ideas, and, although its ordinary people are adaptable, most of its leaders (in all fields) so lack curiosity about the events that surround them that they are often taken by surprise.
-- https://en.wikipedia.org/wiki/The_Lucky_Country

It is interesting to compare Australian listed public companies vs US listed public companies, weighted by sector:

Code: Select all

                        USA     AUS
communication           10.0%	 5.4%
consumer discretionary  13.3%    8.6%
consumer staples         6.7%    4.9%
energy                   4.1%    3.2%
financials              12.7%   28.0%   !!!
health care             12.4%   10.9%
industrials              8.5%	 7.6%
tech                    23.5%	 5.2% ??!
materials                3.8%	17.6% !!!
real estate              2.6%    7.1% !!!
utilities                2.4%    1.6%
You can pretty clearly see this market cap data reflecting Australia's two national past-times of (i) digging stuff out of the ground and selling it to other countries that have succeeded in developing their economies further up the value chain, and (ii) lending each other money to buy real estate. Note that of the 28% financial services, half of that is from Australia's largest 4 banks, with 50%-60% of the banks net profit and loans attributed to home loans to the domestic Australian market.

Pretty good argument against Australians over-exposing their stock investments to Australian-listed public companies.
Topic Author
Translumination2002
Posts: 24
Joined: Sat Sep 18, 2021 8:07 pm
Location: Australia

Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

The market is inherently unpredictable and returns can be divided into expected and unexpected. I try to look at what is knowable for the next decade and base my decisions upon that.

We all agree that US stocks are highly valued. WE can agree that stocks that are highly value means that the company can deserve it. Apple et al have billions in cash sitting around and they are dominant and profitable. But paying such high prices will only assure that your future returns will be lower than what they've been in the last decade. Also big companies cannot grow as much as smaller ones so you can't expect them to continue to perform like they did in the past. International ex US are at historical average in their valuations. Their expected return would be better than US going ahead next decade just by virtue of the price you pay for them. Historically things revert to the mean and International vs US have swapped over many decades.

Value had taken a beating in the last decade. The spread between value and growth in particular means are at historical highs. Likewise they will revert to the mean at some point like they have in the past.

Does this mean I can simply buy all International and all value stocks? No because things may go for longer than you can stay solvent. When Allen Greenspan said the US market was overpriced 3 years before the Dotcom crash he was only 3 years late but they were the best 3 years of that bull run. So you can predict the trend over 10 year periods but you can't use it to jump in and out.

Therefore I'm still going to keep a broadly diversified total market portfolio with a home country bias and with a tilt towards small cap value and emerging market. I'll tilt away from US towards more International. Then I will stick to this portfolio. I'll get some more gains if US and growth continue their upward path. It'll be painful to have International and small cap value be a drag but when they get their turn I'll capture some of it as well. This principle is what Bogle meant by staying the course. If you chase yesterday's winners than you are selling your underperformers, locking in your underperformance to pay high prices for something that at some point will revert back to the mean. Of course once it reverts then you haven't got enough of yesterday's under performers which have become today's over performers because you had sold them cheap.

Of course if it crashes than everything goes down together so too bad if you don't have bonds. Don't take on so much risk that you'll lose your job or can't afford the interest repayments which will make you sell out cheap. You can argue I should keep some bonds in case that happens. But then the opportunity cost of keeping them may be more than what you save by keeping them in case of a downturn. And why leverage at all if I'm going to keep bonds which earn so little plus I'm paying interest on my loans?

That's how I'm thinking. All the other economic forecasts like China going to war etc etc are just not useful or knowable.
Maybe this post can be kepted going in the next decade to see how things pans out.
Topic Author
Translumination2002
Posts: 24
Joined: Sat Sep 18, 2021 8:07 pm
Location: Australia

Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

I got worried with everyone telling me the risks so I decided to do my own calculations manually. I couldn't find any proper calculators on the internet & I don't know how to use excel. Probably should learn excel.

The calculations were rather sobering.

Here's my assumptions for a black swan event:

50% drop during crash. My portfolio is 4.8M loan plus 580K cash so portfolio is 5.38M. After the crash its becomes 5.38x 0.5= 2.69M

It takes 10 years to return to pre crash levels. This would imply a 7% return p.a for 10 years to achieve this.

From this 7pa return 4% growth 3% dividends which will pay tax then get re-invested

Interest rates 5% on 4.8M loan

My savings rate 300K pa.

I calculated the dividends on 5.38M since I assume companies will keep dividends the same rather than calculating it on 2.69M after the crash.




Scenario 1.
As soon as I invest 5.38M the market tanks. I don't sell but instead start adding more money to buy the same stocks while they're cheap. It takes 5 years for the portfolio to get back to 4.8M.

So for 5 years I didn't make a cent. If I didn't go into debt I would be in scenario 5. My opportunity cost was 1.77M

My superannuation would be devastated too. 3.4M to 1.7M & take 10 years @7% returns to get back to present value.


Scenario 2.
I get 3 good years of 7% return. This builds my portfolio to 6.047M

Then it tanks by 50% to 3M. I don't sell. I pay of the interest & buy more shares. It takes 4 years for the portfolio to reach 4.8M.

Superannuation devastated as in scenario 1.

So for total of 7 years I have no returns. It's actually worse than scenario 1. It didn't grow fast enough to make up for the drop during the crash & then I wasted more time just to pay down the debt. The opportunity cost is high & no early retirement.


Scenario 3.
I get a good run for 4 years with no black swan event. I make 2.6M after paying off the debt & taxes. I retire early & I can live of this income for 12 years if I spend 200K pa until my Super kicks in.


Scenario 4.
I don't go into debt & I just save every year for 4 years. No black swan occurs. I make 2.255M after paying taxes. That's only 300K less than leveraging. I can retire early too. Drawing 200K pa it'll last me 11 years & then I can use my Super.

Scenario 5.
I don't go into debt & get a black swan event right at the start. At the end of 4 years I'll have 1.77M after taxes. That's half a million less then scenario 4.
This amount will give me 8 years drawing 200K pa. Unfortunately my Super would've taken a big hit too. 3.4M would halve to 1.7M. After 8 years at 7% it still wouldn't have recovered.



Conclusion: even with a 20 year investing horizon a black swan event is devastating with & without debt. No retirement if it occurs & I'm quite vulnerable within the next 10 years with such low returns not allowing the 100% share portfolio up reach a size that would cope with a black swan event.

Without a black swan I can retire with or without using debt within the next 4 years.

Now I understand why bonds are so important. I'm wondering with a less aggressive portfolio within superannuation would alleviate these issues. Another round of calculations later.
Jaymover
Posts: 214
Joined: Wed May 12, 2021 8:19 pm

Re: Australian investor seeking advice on a 20 year plan

Post by Jaymover »

I was someone that tipped my life savings into the market in December 2019 only to see it tank March 2020. As it is better to go all in rather than dollar cost average 65 percent of the time (studies show) I bravely decided to tip it all in.

If I think back to early 2020 there were definitely a few sleepless nights and crankiness with the kids. However the main feeling of upset was due to the disapointment that if I had only waited a few more months I could have rejoiced in the drop and bought ETFs much cheaper.

Due to that market trauma I decided to ignore the market entirely and laugh it off. I therefore neglected to roughly pick a bottom and rebalance into a depressed market. If I had, my returns would have improved by about 5 percent. Of course I was speculating that it might be a few years, not a few months, before the market recovered.

I think with your recession proof job and a high savings rate you can take on far more risk than the average person. My savings rate for instance is only 1 percent per annum of my net wealth leading me to an 80/20 decision (at 52) which some would say is pretty risky. As the market roars I start thinking I should be 100 percent, but the last few days for instance has reminded me that it can all go south quickly.

Borrowing 80 percent of your house value to buy stocks is a huge risk but will likely pay off within at the most 12 years but would take nerves of steel and you might have to live through a few years of negative returns which would feel awefull. And unexpeceted stuff can happen at the same time, divorce, illness in the family, etc, just sayin'

One problem I see is that the interest on the loan would suck up your dividends so you are totally reliant on capital gain.

It might be better to plan a more humble early retirement goal, considering the resources you have and just keep dollar cost averaging your savings into 100 percent stocks . For instance you could sell a 6million dollar house and downsizing to a house half as expensive wouldn't be too bad on retirement. Surely you could get something nice for that kind of money with the kids still being able to fit in whenever they drift back home. Or live more cheaply and keep the nice house, go on one overseas holiday a year instead of 4 (like some retirees I know, before COVID)

You can also increase your draw down rate on retirement with the intention of leaving nothing for the kids except your house. Lots of Australians find it hard to do this.

Oh and the 3% real return thing, pretty pessimistic, but good to plan around.
Valuethinker
Posts: 48947
Joined: Fri May 11, 2007 11:07 am

Re: Australian investor seeking advice on a 20 year plan

Post by Valuethinker »

Translumination2002 wrote: Sat Oct 02, 2021 2:52 pm I got worried with everyone telling me the risks so I decided to do my own calculations manually. I couldn't find any proper calculators on the internet & I don't know how to use excel. Probably should learn excel.

The calculations were rather sobering.

Here's my assumptions for a black swan event:

50% drop during crash. My portfolio is 4.8M loan plus 580K cash so portfolio is 5.38M. After the crash its becomes 5.38x 0.5= 2.69M

It takes 10 years to return to pre crash levels. This would imply a 7% return p.a for 10 years to achieve this.

From this 7pa return 4% growth 3% dividends which will pay tax then get re-invested

Interest rates 5% on 4.8M loan

My savings rate 300K pa.

I calculated the dividends on 5.38M since I assume companies will keep dividends the same rather than calculating it on 2.69M after the crash.




Scenario 1.
As soon as I invest 5.38M the market tanks. I don't sell but instead start adding more money to buy the same stocks while they're cheap. It takes 5 years for the portfolio to get back to 4.8M.

So for 5 years I didn't make a cent. If I didn't go into debt I would be in scenario 5. My opportunity cost was 1.77M

My superannuation would be devastated too. 3.4M to 1.7M & take 10 years @7% returns to get back to present value.


Scenario 2.
I get 3 good years of 7% return. This builds my portfolio to 6.047M

Then it tanks by 50% to 3M. I don't sell. I pay of the interest & buy more shares. It takes 4 years for the portfolio to reach 4.8M.

Superannuation devastated as in scenario 1.

So for total of 7 years I have no returns. It's actually worse than scenario 1. It didn't grow fast enough to make up for the drop during the crash & then I wasted more time just to pay down the debt. The opportunity cost is high & no early retirement.


Scenario 3.
I get a good run for 4 years with no black swan event. I make 2.6M after paying off the debt & taxes. I retire early & I can live of this income for 12 years if I spend 200K pa until my Super kicks in.


Scenario 4.
I don't go into debt & I just save every year for 4 years. No black swan occurs. I make 2.255M after paying taxes. That's only 300K less than leveraging. I can retire early too. Drawing 200K pa it'll last me 11 years & then I can use my Super.

Scenario 5.
I don't go into debt & get a black swan event right at the start. At the end of 4 years I'll have 1.77M after taxes. That's half a million less then scenario 4.
This amount will give me 8 years drawing 200K pa. Unfortunately my Super would've taken a big hit too. 3.4M would halve to 1.7M. After 8 years at 7% it still wouldn't have recovered.



Conclusion: even with a 20 year investing horizon a black swan event is devastating with & without debt. No retirement if it occurs & I'm quite vulnerable within the next 10 years with such low returns not allowing the 100% share portfolio up reach a size that would cope with a black swan event.

Without a black swan I can retire with or without using debt within the next 4 years.

Now I understand why bonds are so important. I'm wondering with a less aggressive portfolio within superannuation would alleviate these issues. Another round of calculations later.
Things like Firecalc allow Monte Carlo simulations of chances of success. American investors have these, I am not sure if Australian ones do.

You really need at least a 95% chance of success to age 95. And one problem is that these models use past annual returns to simulate future returns, but of course we might have returns which are worse or better than historic. The one thing we do know about financial markets is that they are unpredictable - look at the political risk that is hitting the Chinese market right now. Or the Facebook outage.

The only way to retire very early (before age 55 or 60, say) is to have a very low spending rate (or a huge amount of capital). Then if one gets hit with a 1929-1939 or a 1966-1981 period, one is still solvent at the end.

There's 2 ways things could go wrong (at least). One is a big fall in markets--- drop in nominal returns. That was the pattern of the 1870s & the 1930s. And note there were lots of false rallies before the market finally, truly, bottomed (in about 1938, but then there was the war with all sorts of restrictions on paying dividends, investing etc).

Or you have a situation very familiar to the Anglosphere in the 1970s - high inflation, stock market goes nowhere. In the UK worse case, you had an over 80% fall in real terms around 1973-74 (Britain went to the IMF for rescue funding). That's devastating to retirees in a different way, because their income no longer pays the bills.

10-15 years into retirement, if the bad news hasn't happened, one can probably relax a bit. If one retired in 2000, took the pain of the dot com crash and the GFC, then the next decade has had high returns. But one needed to have a conservative spending plan for 2000-10.

Given current interest rates, I would suggest the low risk capital consumption in years 1-10 has to be around 2% aka "Safe Withdrawal Rate".

An equity portfolio, developed markets, can drop 50%. And it does not necessarily recover quickly like the Covid market did. Japan has never recovered, for example, from the 1989-90 peak & 1990s crash.
Topic Author
Translumination2002
Posts: 24
Joined: Sat Sep 18, 2021 8:07 pm
Location: Australia

Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

It's only by sitting down & doing the numbers myself that I really appreciated what risk means & the value of bonds.

I've found that by taking out 4.8M in debt I can achieve my target in 4 years. My target is 8M total assets excluding my house.

With 2.4M it will take me 5 years.

If I simply saved & invested without debt I will hit my target in 7 years.

This demonstrates how crap the returns are going forward ( I assume 7% nominal) & how much heavy lifting my savings rate does.

What would happen if I had a black swan event at year 3 and it takes 10 years for the market to get back to where it was pre crash?

With 4.8 million debt I reach my 8M target at year 12 from the time I commence investing.

With 2.4M it takes me 9 years.

Without debt it takes me 10 years.

Taking out 2.4M debt & leaving 2.4 on the table is basically having a 50:50 portfolio. The remaining equity can be mobilized if there's a crash to buy at a discount. It cost me nothing as it's sitting as equity in the house ready to be mobilized. With time if the Sydney housing market doesn't pop this amount will increase as well.

Once I get to my goal I'll go to a 30:70 or 20:80 share to bond portfolio to crystallize my gains. I've learnt how many extra years a black swan adds to me reaching my goals & the vulnerability of a 100% stock portfolio.

I think if I never wanted to retire & my horizon extended to leaving assets to my kids then I would use the whole 4.8M and I'd be much better of. But that's not my goal.

Thanks again for everyone's input.
Jaymover
Posts: 214
Joined: Wed May 12, 2021 8:19 pm

Re: Australian investor seeking advice on a 20 year plan

Post by Jaymover »

Translumination2002 wrote: Tue Oct 05, 2021 7:23 am It's only by sitting down & doing the numbers myself that I really appreciated what risk means & the value of bonds.

I've found that by taking out 4.8M in debt I can achieve my target in 4 years. My target is 8M total assets excluding my house.

With 2.4M it will take me 5 years.

If I simply saved & invested without debt I will hit my target in 7 years.

This demonstrates how crap the returns are going forward ( I assume 7% nominal) & how much heavy lifting my savings rate does.

What would happen if I had a black swan event at year 3 and it takes 10 years for the market to get back to where it was pre crash?

With 4.8 million debt I reach my 8M target at year 12 from the time I commence investing.

With 2.4M it takes me 9 years.

Without debt it takes me 10 years.

Taking out 2.4M debt & leaving 2.4 on the table is basically having a 50:50 portfolio. The remaining equity can be mobilized if there's a crash to buy at a discount. It cost me nothing as it's sitting as equity in the house ready to be mobilized. With time if the Sydney housing market doesn't pop this amount will increase as well.

Once I get to my goal I'll go to a 30:70 or 20:80 share to bond portfolio to crystallize my gains. I've learnt how many extra years a black swan adds to me reaching my goals & the vulnerability of a 100% stock portfolio.

I think if I never wanted to retire & my horizon extended to leaving assets to my kids then I would use the whole 4.8M and I'd be much better of. But that's not my goal.

Thanks again for everyone's input.
Sounds like a good plan. No-one mentioned it but make sure you have enough Death, TPD, income protection insurance to cover outgoings whilst you carry that debt. It will cost alot but might give you the confidence to hang in there.
Hockey Monkey
Posts: 93
Joined: Thu Aug 13, 2020 10:23 pm

Re: Australian investor seeking advice on a 20 year plan

Post by Hockey Monkey »

Translumination2002 wrote: Tue Oct 05, 2021 7:23 am
Taking out 2.4M debt & leaving 2.4 on the table is basically having a 50:50 portfolio. The remaining equity can be mobilized if there's a crash to buy at a discount. It cost me nothing as it's sitting as equity in the house ready to be mobilized. With time if the Sydney housing market doesn't pop this amount will increase as well.

Once I get to my goal I'll go to a 30:70 or 20:80 share to bond portfolio to crystallize my gains. I've learnt how many extra years a black swan adds to me reaching my goals & the vulnerability of a 100% stock portfolio.
Going from a 150:-50 leveraged portfolio to 30:70 is quite the shift in risk.
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Translumination2002
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Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

I got income protection & life insurance. TPD is too costly & my income protection should cover my debts if I get in trouble. I can liquidate a small part of the portfolio if I need emergency funds.

Hockey I got spooked when I sat down & did the numbers. Seeing all the years it adds to my life to reach the retirement goals of there was a crash made me appreciate why I need to keep what I've already accumulated.

Maybe 30:70 stock to bond is too extreme. I'll have to give that more thought. I was thinking maybe having enough reserves to last 10 years in bonds & the rest in stocks might work? For my goals 2M in bonds 6M in stocks. That's 75:25 bond to stock which seems aggressive.
Jaymover
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Re: Australian investor seeking advice on a 20 year plan

Post by Jaymover »

Translumination2002 wrote: Wed Oct 06, 2021 7:57 am I got income protection & life insurance. TPD is too costly & my income protection should cover my debts if I get in trouble. I can liquidate a small part of the portfolio if I need emergency funds.

Hockey I got spooked when I sat down & did the numbers. Seeing all the years it adds to my life to reach the retirement goals of there was a crash made me appreciate why I need to keep what I've already accumulated.

Maybe 30:70 stock to bond is too extreme. I'll have to give that more thought. I was thinking maybe having enough reserves to last 10 years in bonds & the rest in stocks might work? For my goals 2M in bonds 6M in stocks. That's 75:25 bond to stock which seems aggressive.
Target funds seems to be around the 55/45 stock bonds mark on retirement. Try out the portfolio visualiser to see what might work. 7-10 years in bonds on retirement seems to be referred to on this site and the consensus seems to be that early retirees can and must be more heavily in stocks as they have more decades ahead of them . I don't think most future retirees will have much choice other than to take on more risk on retirement. In the old days people used to live off the interest on term deposits.
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Translumination2002
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Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

Finally got my SOA from my financial planner & hopefully the cash will be in the bank in 2 weeks.
2.4M to invest 2.49% IO for 4 years.
2.4M SVR ? rate which I'll just leave sitting to wait to mobilize if needed.

My next thing is to execute the plan.
I'm moving all my Super into SMSF. This will be 3.1M. Outside of Super I'm setting up a discretionary trust. So the whole portfolio will be 5.5M

I'm just wondering whether I should mirror the whole portfolio within Super and the Trust. This would give me the most flexibility as in the future if I pay down the loan and purchase bonds within the Trust then I can just leave the SMSF portfolio alone to grow. Otherwise I'll have to sell within the SMSF
& realise capital gains just to restructure the portfolio back to the desired allocations.

The only advantage of investing across both the Trust & SMSF it's that I can put all the Australian shares within the Trust and use the dividends to pay the interest from the loan. If I put all the Australian shares within the SMSF then the dividends are taxed at only 15%. In this scenario the Trust may not generate enough income to service the interest costs but the losses can be carried forward into the future when I can use them to offset the capital gains.

What do you guys think?
Hockey Monkey
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Re: Australian investor seeking advice on a 20 year plan

Post by Hockey Monkey »

If you use Australian equities dividends to pay interest that’s effectively a withdrawal and you struggle to keep the portfolio allocations balanced.

A common school of thought is to hold the highest yielding assets in the tax advantaged superannuation environment.

To truly optimise asset location you to know
- The magnitude of future returns
- The characteristics of future returns (interest/dividend/capital gain)
- Future tax rates

Historically you would hold bonds in superannuation, however with low bond yields currently, this seems suboptimal and doesn’t apply in your case given leverage.

Future regulations around franking credits, discounted capital gains etc can also change the optimal asset location.

One argument for holding growth assets in super is that on conversion to pension, all deferred capital gains (over 30+ years) are wiped.

Personally, I just mirror my equities portfolios inside and outside of super.
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Translumination2002
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Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

Well it's taken awhile and I agonized over my portfolio's asset allocation. In the end I finally got my home loan approved:

2.4M interest only fixed 4 years at 2.49%
2.3M standard variable rate ( 3% currently). This will serve as a reserve in case of a market buying opportunity in the future.

I drew down the full 2.4M interest only and added 1M of my own cash ( which should've been invested but wasn't!). I put this is my discretionary trust. I used interactive brokers for the US ETFs because of the amazing exchange rates & Selfwealth for the Australian ETFs to get Chess sponsorship.

I allocated:
30% VAS Vanguard Australian index
26% VTI Vanguard Total US
9% AVUV Avantis US small cap value
20% VEA Total developed ex-US
6% AVDV Avantis developed ex-US small cap value
4.5% VWO Vanguard emerging markets
4.5% AVES Avantis emerging markets value

This allocation was mirrored in my self manage super for myself 1.7M in total.

I came to this allocation because the US market is so highly priced. Going forward the expected returns will be lower. This is the reverse for the rest of the world. However you cannot use market indexes to time the market, the US bull run can go for another 5 years & who knows they could be the best 5 years ever. Therefore I didn't exclude the US but instead allocated half to US & half to the rest of the world. I also allocated 25% to small cap value & 50% emerging markets value to lean away from the large cap growth stocks that are so dominant now. No intentions to rebalance or fiddle once set up. Simply market weighted with a 20% small value tilt.

For my wife I kepted it simple 1.487M in DHHF. BETASHARES 100% high growth ETF. Its in the same account as my own self managed super account so I wanted to have a way of keeping her money seperate from mine. Also it would be simpler for her to manage it herself if I'm not around. I'll top her super to 1.7M next July with some value stocks.

Going forward after next June I'll add both my in-laws into my self managed super account and top up any savings into there. They'll have a will set up with testimentary trust and pass the money back when they become infirm.

If the investments hit my target in 5 years I'll start adding bonds to preserve my capital and start working part time.

Thanks again for everybody's input.
Jaymover
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Re: Australian investor seeking advice on a 20 year plan

Post by Jaymover »

Translumination2002 wrote: Sun Dec 19, 2021 8:07 am Well it's taken awhile and I agonized over my portfolio's asset allocation. In the end I finally got my home loan approved:

2.4M interest only fixed 4 years at 2.49%
2.3M standard variable rate ( 3% currently). This will serve as a reserve in case of a market buying opportunity in the future.

I drew down the full 2.4M interest only and added 1M of my own cash ( which should've been invested but wasn't!). I put this is my discretionary trust. I used interactive brokers for the US ETFs because of the amazing exchange rates & Selfwealth for the Australian ETFs to get Chess sponsorship.

I allocated:
30% VAS Vanguard Australian index
26% VTI Vanguard Total US
9% AVUV Avantis US small cap value
20% VEA Total developed ex-US
6% AVDV Avantis developed ex-US small cap value
4.5% VWO Vanguard emerging markets
4.5% AVES Avantis emerging markets value

This allocation was mirrored in my self manage super for myself 1.7M in total.

I came to this allocation because the US market is so highly priced. Going forward the expected returns will be lower. This is the reverse for the rest of the world. However you cannot use market indexes to time the market, the US bull run can go for another 5 years & who knows they could be the best 5 years ever. Therefore I didn't exclude the US but instead allocated half to US & half to the rest of the world. I also allocated 25% to small cap value & 50% emerging markets value to lean away from the large cap growth stocks that are so dominant now. No intentions to rebalance or fiddle once set up. Simply market weighted with a 20% small value tilt.

For my wife I kepted it simple 1.487M in DHHF. BETASHARES 100% high growth ETF. Its in the same account as my own self managed super account so I wanted to have a way of keeping her money seperate from mine. Also it would be simpler for her to manage it herself if I'm not around. I'll top her super to 1.7M next July with some value stocks.

Going forward after next June I'll add both my in-laws into my self managed super account and top up any savings into there. They'll have a will set up with testimentary trust and pass the money back when they become infirm.

If the investments hit my target in 5 years I'll start adding bonds to preserve my capital and start working part time.

Thanks again for everybody's input.
Interested to know how your investment strategy is going. Is it more of a white knuckled ride with all the unexpected stuff going on?
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Translumination2002
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Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

Both my Super and my Trust are down 7%. Both have lost about 180K each or so. I still have 2.3M within my home loan that I can redraw to buy more but it's not in my policy plan unless it drops more than 30%. My debt level is 2.4M & I'm sticking to that.

Anyway I still got my job so nothing to worry about. I just need to cough up 5K a month. My dividends have already covered the interest.

Staying the course!

On another note unfortunately my grand scheme to add non-concessional contributions into my parents in law super accounts has fallen apart as they're not comfortable with it. They're also uncomfortable with me using them to reduce my tax via the Discretionary Trust. Together these would be tens of thousands extra cash that we could've had every year. They must think I've invented something fishyI & don't realised that I've spent over 6K getting tax advice for this!
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Translumination2002
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Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

I'm just posting my thoughts to see what people think I should do.

At the moment my Trust and Super are down about 8%. Not much to really worry about really not even a personal bear market. It shows what a diversified portfolio should do. No bonds since I'm already leveraged and bonds still did their job as ballast but didn't go up as stocks went down.

My biggest fear when setting up my allocations was that US stocks were overvalued and it was time to come back to earth. It pretty much did came to fruition... right after I entered the market of course! I retrospect it should've been obvious that the unwinding of the covid stimulus and the increase in interest rates would dampen speculation and lower the US stock valuations. Everybody was predicting lower returns for US stocks next coming decade, they just couldn't say when. But now it seems that the "when" question has been answered. I'm wondering if I should veer away further from US stocks? Currently my VTI is down by 11% what I bought it for. If it ever comes back to what I got it for I wonder if I should just sell it down in my Family Trust and buy more international/value/emerging and Oz stocks? My wife's Super will reach 1.7M this year and its with DHHF therefore I will still have exposure to some US stocks. Of course if it never comes back I'm not selling. I know fiddling with your portfolio implies that you didn't set it up right to start off with BUT US valuations were my biggest issue when I was setting it up.

Secondly my Trust Tax return cost me a handsome 3.8K which was a rude shock. I know its deductible but still my whole 3.77 million portfolio MER is about 0.25% which is about 9.5K. The accountant tracked every last cent and wasn't happy with the Sharesight software because it was off by $350! It felt like an audit the way she did it, tracking every dollar from the loan into the brokerage account through to where the dividends went.I'm wondering if I paid 3.8K just to track down $350. I thought my affairs were simple. Interest from the loan minus the dividends minus the withholding taxes and distribute it to my wife to pay tax on since she's the lowest income earner. I'm wondering what you guys pay for your Trust Tax returns, does it have to be this strict and expensive? I'm feeling rather pissed off about it actually.

Thirdly my situation to work has also changed. I'm burnt out from the extra work during Covid and I don't think I can continue working 50hrs plus weeks with on call duties as well. I'm thinking my kids will be teenagers and my parents may get illnesses in 5 years time ( they're in their early 70's now). So if I persist in doing these hours to reach my goals in 5 years I may be burning the best 5 years of my life. I'll retire to look after sick parents and teenage kids who may not want to hang around me. Therefore I'm thinking of halving my hours and spending the afternoons to be with the kids and grandparents. At the moment I leave for work at 6am and finish work at 6 or 7pm and spend 2 hours commuting every day. There's not much left in the day.Then on call overnight and weekends on top of this. The consequences of halving my hours is that I can only save 150K a year. If I calculate a return of 7% pa then after taxes and interest cost by 5 years I'll be short of my goal of 8M (total within the Trust and Super accounts) by about 2 million or so. I guess this will mean I will have to remain in employment for much longer but these reduced hours may make it much more sustainable. Therefore I'm wondering should I pay down the debt over the next 3 years until the fixed loan expires? I'm paying 2.5% as you know so its a great rate and its deductible as well.
Tellurius
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Re: Australian investor seeking advice on a 20 year plan

Post by Tellurius »

Some of the worst decisions I saw were made by people who were not satisfied with “good enough”

Best not to tinker and maybe accept slightly lower spending rather than reach for more and make decisions which will be counter-productive

Did you get the loan in the end?
“And how shall I think of you?' He considered a moment and then laughed. 'Think of me with my nose in a book!” | ― Susanna Clarke, Jonathan Strange & Mr Norrell
Hockey Monkey
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Re: Australian investor seeking advice on a 20 year plan

Post by Hockey Monkey »

Translumination2002 wrote: Mon Sep 19, 2022 2:20 am I'm just posting my thoughts to see what people think I should do.
I'm not going to tell you what to do, but suggest you may have learnt something more about you risk tolerance in the latest downturn.

- Using dividends (making a withdrawal) to cover interest payments
- Not rebalancing from defensive assets to growth assets
- Contemplating reducing your exposure to a recent under performers (US stocks) and increasing exposure to (over performers)

These examples might tell you something about your risk tolerance which is the only factor that should change your asset allocation rather than trying to time the market or chase past performance.
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andrew99999
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Re: Australian investor seeking advice on a 20 year plan

Post by andrew99999 »

It's human nature to assume what has happened recently will happen into the future indefinitely (or for a very long time). Have more of a think about whether you really think that is likely in the long term.

As for the rest of your questions — if you want to ease up your life, you certainly have the means, but you will need to look more closely at whatever is driving you to these unreasonable requirements. Nobody needs a 6M house and 14M worth of assets to retire.
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Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

Hockey I promise I'm not performance chasing. Like I said the drop in my portfolio is quite modest and there's no stress with the loan repayments, they're all covered by the dividends. I haven't done a single thing this year except buy more VEA yesterday since it's 18% less than what I paid for last December & I had 20K worth of dividends leftover.

I'm just thinking about the longer 10 year returns for the US compared to the rest of the world. If Vanguard is predicting much lower returns given the high valuations of US stocks and given that I'm not an investor with big capital gains to realize I do have some flexibility to adjust the percentage of US stocks in my portfolio. It stands at 33% at the moment. The drop in the US stock just confirms for me that the valuations were only held up by cheap credit. Wouldn't it be prudent to use this information? I'm not dumping them simply because they are doing bad. I got 2.33M in ammunition if there's a real crash & I would buy more VTI but it never dropped below 30% as per my plan so I didn't.

Andrew9999 you are right. I'm thinking my goals/wants are set too high and a more modest goal would mean I can get more years of financial freedom much earlier. I've been trying to crunch my numbers as well as thinking which part of my work I can give up and what is most valuable to keep
Jaymover
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Re: Australian investor seeking advice on a 20 year plan

Post by Jaymover »

Translumination2002 wrote: Mon Sep 19, 2022 8:59 am Hockey I promise I'm not performance chasing. Like I said the drop in my portfolio is quite modest and there's no stress with the loan repayments, they're all covered by the dividends. I haven't done a single thing this year except buy more VEA yesterday since it's 18% less than what I paid for last December & I had 20K worth of dividends leftover.

I'm just thinking about the longer 10 year returns for the US compared to the rest of the world. If Vanguard is predicting much lower returns given the high valuations of US stocks and given that I'm not an investor with big capital gains to realize I do have some flexibility to adjust the percentage of US stocks in my portfolio. It stands at 33% at the moment. The drop in the US stock just confirms for me that the valuations were only held up by cheap credit. Wouldn't it be prudent to use this information? I'm not dumping them simply because they are doing bad. I got 2.33M in ammunition if there's a real crash & I would buy more VTI but it never dropped below 30% as per my plan so I didn't.

Andrew9999 you are right. I'm thinking my goals/wants are set too high and a more modest goal would mean I can get more years of financial freedom much earlier. I've been trying to crunch my numbers as well as thinking which part of my work I can give up and what is most valuable to keep
Hey Mate. I was wondering how you were going with your leveraged investment strategy and nice to see some reflection. I too have a pretty aggressive portfolio ( but with a pretty meagre savings rate). And even though it is not leveraged I have been losing some sleep over the current investment pessimism and climate plus the never ending bear market. It does feel this time that it is different. However we may find that inflation suddenly plummets and then we will be looking at this as a bad patch as our portfolios recover. Or maybe not.

I think I suggested when you were looking at things to hone in on your true life goals (health, happiness, friends, family) rather than a set value to have in retirement. On top of that the white knuckled ride of an aggressive investment strategy, even if you manage to stick it out, might not even be the right bet in the end if our timing is unlucky.

The life factors are variables too that cannot be quantified in a financial model. For instance it is easy for me to think that "in 5 years time when the kids are older I will seek a promotion and earn a higher income" However you dont really know if your kids will be any easier in 5 years time and if your physical and mental health will be up for the additional stress in 5 years time. Ive got kids, single parent, and my choice to stick with 4 days a week kills me financially but at least I can ensure that for the sake of the kids and myself I dont burn out.

I really suggest you read Mr Money Moustache to get some ideas on the importance of what really is important. He is one of the FIRE movement ambassadors but with a philosophical take and practical ideas. A really admirable fellow. Reading your story I was quite surprised that with a $5m house you could not contemplate, at some stage, moving into a 2 million dollar house and then putting the rest into a nice safe investment and then happily living off the $90K guaranteed income for the next 30 years or so. Id be happy with a 1 million dollar house and retiring even earlier if I were you.


The tricky thing at the moment for you and I is that the advice in the current depressed market is to "stay the course" and not reduce your risk profile even if it looks to be going down further until the market capitulates. There are so many examples of people selling out early, not getting back in and it having a huge impact on their net wealth.

As I see it, a stock heavy portfolio is still a good hedge against inflation in the long term, better than bonds. The danger is that interest rates may go up alot further as inflation seems so sticky and so this is to the detriment to many debtors. And yet a 5% loan when inflation is at 7% is still a 2% free lunch in the long term for the debtors who are able to stick it out.

It is interesting that you are using the dividends to pay the interest bill. THis means that you are relying on capital gain until the point where the loan is paid off. I guess that means that you are relying on capital gains to do the heavy lifting until such point as the loans are paid off.Seems that my total gains have entirely been driven by distributions and not capital gains (which are almost all negative now after 3 years in the market).
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andrew99999
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Re: Australian investor seeking advice on a 20 year plan

Post by andrew99999 »

Jaymover wrote: Sun Sep 25, 2022 9:14 pm It is interesting that you are using the dividends to pay the interest bill. THis means that you are relying on capital gain until the point where the loan is paid off. I guess that means that you are relying on capital gains to do the heavy lifting until such point as the loans are paid off.
When investing with your own money, to get the real return, you have to take off inflation.
So a nominal return of 8% becomes around 5% (using the RBA's long term goal of 2-3% inflation)

However, when you borrow to invest, inflation eats away at the real value of your debt, giving you a bonus that is equivalent to the money that was put into investments. Additionally, the interest is tax-deductible, so with OP probably on the 47% tax bracket, that will almost reduce it to half.

So with interest rates of 6%, the after-inflation expected return ends up:

8% (nominal return)
-3% (inflation on the invested assets)
+3% (inflation on the debt)
-3.25% (interest cost after tax deductions)
= 4.75%

Not materially different to what you get on your own cash.
Jaymover wrote: Sun Sep 25, 2022 9:14 pm Seems that my total gains have entirely been driven by distributions and not capital gains (which are almost all negative now after 3 years in the market).
After the recovery, it will switch. And during the next downturn, it will switch back, and so on.

Also, splitting your returns into capital growth and distributions is rather arbitrary with shares since distributions with shares are not equivalent to income on a fixed-term deposit.
Jaymover
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Re: Australian investor seeking advice on a 20 year plan

Post by Jaymover »

andrew99999 wrote: Sun Sep 25, 2022 10:12 pm
Jaymover wrote: Sun Sep 25, 2022 9:14 pm It is interesting that you are using the dividends to pay the interest bill. THis means that you are relying on capital gain until the point where the loan is paid off. I guess that means that you are relying on capital gains to do the heavy lifting until such point as the loans are paid off.
When investing with your own money, to get the real return, you have to take off inflation.
So a nominal return of 8% becomes around 5% (using the RBA's long term goal of 2-3% inflation)

However, when you borrow to invest, inflation eats away at the real value of your debt, giving you a bonus that is equivalent to the money that was put into investments. Additionally, the interest is tax-deductible, so with OP probably on the 47% tax bracket, that will almost reduce it to half.

So with interest rates of 6%, the after-inflation expected return ends up:

8% (nominal return)
-3% (inflation on the invested assets)
+3% (inflation on the debt)
-3.25% (interest cost after tax deductions)
= 4.75%

Not materially different to what you get on your own cash.
Jaymover wrote: Sun Sep 25, 2022 9:14 pm Seems that my total gains have entirely been driven by distributions and not capital gains (which are almost all negative now after 3 years in the market).


After the recovery, it will switch. And during the next downturn, it will switch back, and so on.

Also, splitting your returns into capital growth and distributions is rather arbitrary with shares since distributions with shares are not equivalent to income on a fixed-term deposit.
I used to be proud that I was debt free. These days I feel stupid about it. HOwever it all depends on negative real interest rates continuing. Everyone has their fingers crossed that they do.
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Translumination2002
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Re: Australian investor seeking advice on a 20 year plan

Post by Translumination2002 »

I re-read this thread from time to time to reflect on the valuable advice I get.

It's only been a year and abit since I've started this journey but it sure feels like alot longer & bumpier. We still got inflation, war, a bear market & now the banks are collapsing from the rising interest rates in Europe and the US.

My net position across my Super & Trust down 11%. Doesn't sound too bad but in absolute terms it's 800K. Feels rather painful. Luckily I'm not drawing down on it & I got a job. I imagine losing your job would generate alot of stress.

The only silver lining was that the value of my Super had gone down so much last June that it brought my wife & my own Super balance down below the 1.7M cap. I've just topped up my Super by 440K. Unfortunately I'm fully invested so I don't have any spare cash to buy any more.

In retrospect if I had dollar cost average my way in over the past year I would've been laughing. It's clear in hindsight that the pandemic support had inflated all assets and my timing was impeccable to see it deflate. I wasn't totally silly though. I knew US stocks were inflated and was very reluctant to buy any at all but I made my peace by reducing the exposure to 33% of my portfolio and a big chunk of the US exposure was in small cap value.

What is my plan going forward now? I still got 3 years on my 2.33M debt at 2.49%
I'm just going to ride this out & continue buying stocks. No more US stocks, they've taken a haircut but they're still richly priced. I'll just buy everything else. I don't have enough money to materially change the allocations anyway. I'll reasess in 3 years what to do with this debt. It depends on the interest rate I guess & what returns I'm getting & whether I'm going to quit work.

My savings rate has taken a haircut to 150K. I'm just not going to work as much anymore. I guess I could pay down the debt but that'll take 15 years with this saving rate.

Bonds are earning some decent returns now but I don't really think it makes sense to take debt then buy bonds. Bonds are for return of capital not income.
simont
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Re: Australian investor seeking advice on a 20 year plan

Post by simont »

Hi Translumination2022, I've been reading through this old thread (in January 2024), do you have an update on how your plan in tracking now 10 months from your last post?

I'm looking at doing something similar, on a smaller scale, with my home loan that is moving from an IP to a PPoR using debt recycling. The key difference to yourself being I'll be FIREd and not working.
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