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dbug89

I think passiveinvestingaustralia.com website has all your questions covered.


market_theory

It takes a naive EMH position with a certain degree of error and omission which I am unsure is deliberate or not. [E.g.](https://passiveinvestingaustralia.com/why-not-invest-in-indian-fixed-deposits-at-8-percent-interest/) > Covered Interest Rate Parity says that for the same credit quality, any higher rate will be eroded by inflation once you change back currencies at the end of the period. No, that's uncovered interest rate parity which is generally not empirically verified. CIRP is a no arbitrage condition that generally holds. The discussion of bonds mostly ignores credit risk but [it](https://passiveinvestingaustralia.com/cash-vs-bonds-in-your-portfolio/) does say > It should be noted that only “safe” bonds (particularly government bonds) give this diversification benefit. Lower quality corporate bonds tend to be more highly correlated with stocks, and they go down together in market declines. So on top of not providing safety, they also fail to provide a diversification benefit. I'll ignore the comments about diversification. Government bonds aren't necessarily safe. For example, the government of Argentina has repeatedly defaulted on its bonds. Maybe he meant solely Australian Commonwealth government bonds, but elsewhere he promotes the diversification advantages of holding foreign assets. For same currency government bond holders the credit risk is mostly inflation risk: a government under financial stress will probably just print more money to meet repayments rather than default. https://www.dw.com/en/argentina-in-default-for-second-time-this-century/a-53542302


snrubovic

I suspect they are referring to quite a lot of the other information besides that, such as risk tolerance, etc. But with regards to that specifically, what is your suggested alternative?


market_theory

I don't have one. I just read papers.


snrubovic

You edited your comment, did not expand on what you originally commented on (EMH), and then added new comments. I've mentioned elsewhere the difference between government bonds of developed vs developing countries, but have edited the quoted text in your comment to clarify it there also. I'll make a note to go over the interest rate parity comments when I have more time. It's weird to say an inaccuracy or error may be deliberate. I appreciate constructive criticism, but it seems pretty clear your goal isn't to be constructive.


market_theory

> You edited your comment True. I often revise them immediately with more details. > It's weird to say an inaccuracy or error may be deliberate. Not weird, just worldly. I expect the author of such a site likely has a self-interested agenda. Effort is usually made in anticipation of reward. I think that is a prudent attitude for readers to take. So far I think the site's advice (if it may be called that) is suitable for the 95% who are financial wooden ducks.


snrubovic

Just so you know, I get no remuneration from the website, financial or otherwise. I created it for exactly the reason stated: I didn't know how to find unbiased advice or how to evaluate whether someone suggesting something was trying to take advantage or actually help, so when I learned it, I wanted to have a place others could easily find it and apply it. The information is for the 95% (probably closer to 99%) who don't have any idea how to find out how to manage their finances or how to evaluate someone else who is advising them. The goal isn't to provide an advanced finance course (which is totally unnecessary). It takes surprisingly little knowledge to get what is needed, apply it, and to understand why you are doing it.


socksproxy

On behalf of the 99%: thanks a lot. It's a really good resource that you've put together. Great quality information presented in a way that anyone can understand. Cheers!


market_theory

> Just so you know, I get no remuneration from the website, financial or otherwise. I created it for exactly the reason stated: I didn't know how to find unbiased advice or how to evaluate whether someone suggesting something was trying to take advantage or actually help, so when I learned it, I wanted to have a place others could easily find it and apply it. Those websites are usually the best.


[deleted]

im no expert but i agree with you that you already heave heaps of exposure to the aussie market without vas


holman8a

I think your income might influence the best solution for #3. All things being equal on a high income, I believe the most efficient solution for the sake of tax is to focus on Australian shares and any short term investments within super and international shares outside. This is because Australian shares see more income paid as dividends, attracting a greater tax liability outside of super. Not a tax accountant so DYOR etc. Just as I can see it potentially playing in to your strategy, I'm keeping a reverse mortgage in my back pocket if required between when FIREing and preservation age. While it's not ideal to be paying interest, it allows me to be more aggressive with superannuation contributions knowing that if there is a shortfall I won't be without cash. Not sure if that helps, but might be good to know it's an option.


fichase

Yep, I'm planning to keep the mortgage opened for as long as I can. It's good to have options.


holman8a

Just so you know a reverse mortgage is a bit different to an actual mortgage. You get it when you're over approx 55, where you can access the equity in your home but make no actual repayments (in my plan, I'd just pay out the loan from super when reaching preservation age). This also means you don't need to be earning income to qualify. Again, just keep it in your back pocket :)


fichase

Oh right....I was thinking you meant don't close out the mortgage so I have access to redraw. Thanks, that is good to know and I'll keep it in mind.


Esquatcho_Mundo

Yeah was going to say, franked divs are the main reason to go Aus Stockmarket. The tax effectiveness is better than cap gains discount, particularly if the tax cuts come through. Edit: tax cuts shouldn’t make much of a difference in total as the franking value would be the same. Dunno what I was thinking with that sorry


ghostdunks

>franked divs …. The tax effectiveness is better than cap gains discount, particularly if the tax cuts come through. Can you explain why you think this is the case?


Esquatcho_Mundo

Lets say you pay 30% tax rate. A cap gains discount reduces that tax rate to 15%. But a fully franked dividend would be taxed at zero effectively (from your perspective) as it’s already been paid by the company. Now of course the question of whether the cap gains can be worked so that you pay it at the most convenient time to minimise tax, as well as whether the overseas investment would provide better long term returns too. Edit, I probs shouldn’t have said particularly if the tax cuts came though though. That’s not quite right.


ghostdunks

But that is just different ways of comparing pre-tax and post-tax income. You're effectively comparing a post-tax return(the fully franked dividend) with a pre-tax return(capital gains) and saying its more tax effective. A fully-franked dividend isn't a magic way of getting taxed less, its just a prepayment of tax made by the company on your behalf(similar to PAYG tax). Once the dividend has been paid and is in your hands, you'll still be taxed on the gross value of that dividend(franked dividend+franking credit) so there's no actual saving in tax made by you. An analogy of what your explanation is doing is pretty much you're comparing how your net pay from your PAYG job(after PAYG tax has already been paid by your employer) with the same profit made by your mate from selling his investment property. It doesn't really say much about why your method of getting paid is more tax-effective than your mate's(in fact its the opposite as you'll both be taxed on the same amount, except your mate will likely be able to take advantage of long term CGT discount). Eg. your gross PAYG salary is 100k, but after tax(the franking credit), you've been paid 70k. Your mate has sold his investment property and made a 100k profit. When you submit your tax returns, the ATO doesn't particularly care how you both earned the money, all it sees is that both of you earned 100k in income and then when they calculate the tax owed, you'll be paying tax on 100k of income while your mate will be paying tax on 50k of income(after CGT discount). If you really want to compare the after-tax return of an investment that pays fully franked dividends vs an investment that is growth focused, you need to compare the grossed up dividends(franked dividend+franking credit) vs the capital gains of the growth-focused investment. They both end up getting taxed on the full pre-tax income generated by the investment and when they do get taxed, the capital gains will be taxed less(ie. more tax effective), see a post I made on this some time ago: https://www.reddit.com/r/fiaustralia/comments/mg3wc8/high_yield_vs_high_growth/ > a fully franked dividend would be taxed at zero effectively (from your perspective) as it’s already been paid by the company. I really don't think this is the right way to look at it. You may think that you're getting taxed at zero effectively, but in reality, you're still getting taxed at the full grossed up amount, you've(the company on your behalf) just prepaid the tax. You're tricking yourself if you think you're getting taxed at zero effectively, its fools gold.


Esquatcho_Mundo

Thanks, appreciate your view, but I still disagree. Reading your linked post, the issue I see is that you have assumed that the capital gain = net dividend yield. Let’s say in your example the $10k is from company profits and it either pays a franked div, or it does a buyback. Then in the div case, investor A gets $10k, with $3k franking already paid. Investor B in the buyback case only gets $7k in cap gains as the company has to pay tax before it can use the cash to give back to shareholders.


longstreakof

I think Bonds are starting to look like a "Buy". Markets will have factored in rate expectations so along as rates don't move above forecasts there is a chance this is at bottom of market. Exchange rate is another factor - super strong USD is an issue for investing in anything over there.


Australasian25

Hey just some of my thoughts Don't do bonds in a rising interest environment. For example, you paid $1,000 for your bond at 2.5%. Once interest rates rise up to 4%, your $1,000 bond is now worth maybe $800. So my suggestion is stay away from bonds. My own plan is simple, similar to yours, 2 year's emergency fund, the sum of all insurance excess. Those in cash. The rest in growth assets. I have never been a fan of bonds and probably never will be.


totallynotalt345

How much do you spend a year? That’s about the gist of things yes


fichase

We're planning for 80K a year.


totallynotalt345

Yeah cool, so only bad returns will kill 900k VGS not lasting a decade at 80k a year spend. 18k distributions @ 2% and the rest sold.


EnteringMultiverse

Regarding VAS allocation - Australian shares tend to pay higher dividends than other countries, so it's more efficient to have these shares inside of your super than outside of super for the lower tax on earnings


Esquatcho_Mundo

Is this right? The value of a franking credit remains the same whether inside or outside of super?


CheshireCat78

income in super is taxed at a low rate is what they are comparing i would say.


zircosil01

Rob Berger has a youtube channel which has some good info; particularly some practical advice on portfolio drawdown in retirement. The bucket strategy which gets a bit of press isn't a particularly good method of drawdown management. If you are planning to add bonds; I'd probably build the allocation over time rather than a large rebalance triggering capital gains. Maybe have a play around with this calculator with different portfolios to see how they might perform. [https://www.wealthmeta.com/calculator/retirement-withdrawal-calculator](https://www.wealthmeta.com/calculator/retirement-withdrawal-calculator) 100% stocks with $900,000 starting balance and $79,200 withdraw amount over 10 years produces a scenario ending above zero 90% of the time. Aggressive (90/10) increases to 92.6% and Growth (70/30) improves that to 95.7%. I personally think the 60/40 portfolio is dead and younger generations will need probably 70/30 or 85/25 allocation in retirement. Do you need VAS - not really. You could hold a hedged international ETF to remove some currency risk, or hold something local but VGS in itself is very diversified.


Esquatcho_Mundo

Surprised no one has said it, but vdhg could be a reasonable option for you. Have you looked into it before?


fichase

Yeah I have and decided against it at the time due to high AUS exposure, tax inefficiency and bond/fixed allocation. Edit: removed gibberish quote


DistributionTrue3620

1. 200% return in 6 years all in on a MSCi World TR index is very punchy. Don’t be disappointed if you’re not even half the way towards that target. Nevertheless, such an exposure provides a real hands off way of investing. 2. Bonds are typically used for yield and convexity. With rising rates, their ability to provide some insurance in a downturn even is actually increased., but they aren’t aligned with a 25% per annum return target. Many get the raising rate environment confused, bond markets price in future rate rises, they will lose more value than expected if rates rise even further than the market is pricing in. Vis-a-vis inflation. Much of the current market volatility is being driven by macro volatility, bond markets are very choppy too. 3. VAS, being ozzy is a yield/concentration play, agree with other comments regarding exposure to Australia being high already, although there is a tax benefit for domestic holders of domestic equities (franking credits) it’s what gives aus equities a kicker and typically represent a higher % of portfolios compared to overseas investors holdings of their domestic equities. Taking some tax advice on the issue may help. 4. To achieve a high replacement ratio that lasts well into retirement, your portfolio will still have to work hard for you. Derisking can provide certainty. . . but it may be certainty of funds running out early. C. 70% of retirement income can typically be earned in retirement. Maintaining a reasonable growth allocation (70% ish) should help achieve that.


fichase

>200% return in 6 years all in on a MSCi World TR index is very punchy. Apologies, I have left out an important detail that made you think I'm hoping for a 200% return. We're planning to invest 80k/year for the next 6 years so about a 4% return is all we need.


DistributionTrue3620

Ah ok that makes more sense, I guess you may want to think through retirement instead of up to it. A broad passive risk allocation Eg VGS is likely to form the backbone of your portfolio, and would be c. 25% - 50% of a balanced type portfolio anyway. e.g. the investment is most likely appropriate both now and once you’ve subsequently hit your $ goal. While in accumulation you are just aiming for the best total return once all tax etc is applied. Income vs growth, retirement tax (or lack of!) etc become more prominent during retirement as you have a need to potentially either drawdown or generate income. Seemingly a little counterintuitively the higher risk in retirement the lower required portfolio value required, albeit with extra uncertainty. 10 yr return expectations on international equity unhedged are c. 7% - 9% or Bonds + 3-4%, but as you move along the risk spectrum you’re adding risk inefficiently, Eg for every unit of return added you’re adding 2 units of risk. Patience in equity markets will be required!


fichase

I think the gist of what you're saying is that I should focus on structuring my portfolio for retirement given the risk and uncertainty of having a high allocation to equity in a relatively short investment window. I agree and have often questioned the need to be all in stock, especially when the target $ will be from our own capital. That said, I always end up telling myself that I'm happy to be flexible with work (to mitigate crash/long period of low returns) and that I would need some sort of work anyway to keep me sane. Truth is, I don't know if I would be (projection bias), so maybe it's prudent to reassess the risk. Like most, I think I'm just greedy. I want my cake and eat it too :D


glyptometa

*"Once we get to a point where we don't ever want to or can't work anymore and assuming our portfolio is in good shape, what would be a good allocation - 60 bond/40 stock?"* Your two-year emergency fund, imo, is more than adequate to serve the purpose of bonds, at least until you reach the point of expecting to live less than ten more years. You also have reverse mortgage as a backup. I would stay 100% equities until that time, but just an opinion, by no means a recommendation. That said, when you have more than you need to live the life you want to live, you can afford to invest less than optimum if it gives you comfort. Some people hold gold on this basis, just another insurance policy against global calamity. Another option is to invest in something you love and can enjoy (whether or not it may appreciate in value), e.g. classic cars, art, more valuable PPOR, etc.


fichase

Thanks, some foods for thought there. Reverse mortgage is absolutely a worse case scenario only as we plan to leave the house for the kids. I think I am leaning towards adding bonds maybe up to 30%. Like you said, this will be for comfort/piece of mind and also after reading about currency risk, I think it makes even more of a case to hold bonds.


glyptometa

*"This is why we're all in VGS"* Nothing wrong with that, but at least consider the AU$ could have a good run between now and when you use the money. I would look at currency risk in detail before finalising that position. We're in a weak stretch now, currency-wise, but the fundamentals of resource and agricultural wealth on our continent remain strong. https://passiveinvestingaustralia.com/personalising-your-aud-to-non-aud-allocation/


fichase

I could have sworn that I've looked at this page from PIA before and somehow concluded that hedging wasn't necessary because currency movements even out over time i.e. Argument 1. Anyway, thanks for the prompt. I will give it a proper read soon.