1st draft 520k ETF/LIC portfolio strategy, criticism wanted

And of course those following a total return approach can create their own dividends from capital proceeds when rebalancing. Then there’s tax to consider. Of course it’s nice if one can live off the natural yield of the portfolio.

But yes it would be of interest for @The Falcon to expand on this.

 

Would it be worth rolling your own index fund?

With $600K to play with, you could buy a $3000 stake in each of the ASX 200 companies. You'd need to check trading and holding costs, but it might work out cheaper than using ETFs, and would provide you with a modicum of security in the event that the funds management company went belly up.

The other suggestion would be to consider a 60/40 split between equities and bonds. Historically that's been a good strategy.

 

I assume that’s one of their Diversified Funds?

I’ve looked at these occasionally but gee some of the distributions are capital heavy at times from memory.

Personally If behavioural issues can be managed I still think holding separate assets class index funds is better. And as one ages it gives you better control over tailoring the allocations to suit a changing Risk profile. But the big issue is that Vanguard mess with the allocations periodically. Last change resulted in REITs being completely dropped from the portfolio. Likely that these events result in CGT.

 

I think it would be unusual for an individual to buy 200 companies. Don't forget they have to rebalance it from time to time also, which the ETF does for you. Rebalancing 200 companies sounds like an unfeasable amount of time each year for a single persons investments.

I have been reading more and more about bonds lately to try and get a stronger handle on why it is recommended by some and discouraged by others (in particular Peter Thronhill).
From what I have read so far, the case for bonds is that
1. Historically they have provided better returns than now (6% I think?), vs the stock markets long term roughly 9% so there was less of a trade-off than right now;
2. You can rebalance to move money from the asset that has increased in value to put it in the one lagging so you actually get to buy low and sell high without guessing;
3. When the stock market crashes, you lose less since you had less money in the stock market, and additionally you have a whole lot of cash that you can buy stocks that are undervalued giving you a much bigger return (the bigger the crash, the better your return in this scenario).

The case against it (aka Thronhill) is that
1. Bonds and fixed interest now are around 3% which is insanely low, so the more money you have in bonds, the much bigger hit you take by missing out on the better long term returns of the stock market. Even if you retire today, you still will have investments for the next 20, 30, or 40 years, and the gains you would miss out on by getting 3% vs 9% compounded over 20-40 years would be mind blowing.
2. If the market has no major downturn for 10+ years and you had no chance to buy low with the proceeds from your bonds, you have missed out on a ton of money. For instance say you had 40% in bonds in 1990 after the markets doubled and you wanted to be conservative. For the next 10 years the market hit new peaks every single year for the rest of the decade. The amount of money you would have missed out would make you throw up.


Here is an article where Thornhill explains it.
Give me the long-term predictability of shares, at any age - Cuffelinks
And summarised by someone on this forum (sorry, forgot who):

People associate 'risk' being the volatility of capital in shares but ignore the very real risk of the low returns of bonds.​

And another comment by someone else (again, sorry for forgetting who it was from):

Holding large amounts of fixed interest and cash during accumulation phase is silly. When you have ample human capital remaining (wages = inflation linked bond) you should be heavily tilted to risk assets.​

So it seems that if you are more than maybe 8 years from retirement, then bonds seem a complete waste, but if you are already in retirement, they seems sensible to have some portion in bonds but maybe less than 40% due to the cost sacrificed by the current low yield of bonds.

I have not yet figured out what to do if you say 8, 6, 4, or 2 years from retirement. Both arguments are big ones with enormous consequences. The idea of stability of capital and ability to actually profit during a crash appeals to me, but the idea of sacrificing long term profit is equally unappealing. Would be great if I eventually acquire enough knowledge to come to some sort of conclusion on this because right now it seems like a problem too difficult for me to solve.

People associate 'risk' being the volatility of capital in shares but ignore the very real risk of the low returns of bonds.

 

Not advice, but part of the mix for some "fixed rate" type of investment could be that offered by Balmain Private in their commercial mortgage loan offerings.
Balmain Private

 

@Anthony Brew I wasn't necessarily thinking of replicating the ASX200, but maybe approximating it. You could even go with fewer companies (say fifty instead of two hundred) to keep the administration overhead down, but still spread the risk around.

It was really just thinking aloud whether it might be cost effective to do it this way.

I don't get bonds either, but it seems to be a standard recommendation. Maybe when interest rates pick up, they'll become more attractive.

 

@CDizz It’s funny because it sounds just as simple to have plenty of long term holdings, but in truth it feels different.

Although it may sound silly, it creates mental clutter, more stuff you look at and you can’t help but think whether you should put more in this or that, also known as fiddling!

I don’t follow it but I can see the pure beauty and simplicity in having only a couple of index funds as holdings.

Given you have income goals (as I do) it’s not that easy to meet our needs with a limited amount of capital, but I still think simplicity is something we should aim for.

Being overly passionate about it, unfortunately can do more harm than good. It’s often a game where you get a better result from doing nothing at all once you’ve done the buying.

Thats not to say don’t bother, if you really love this stuff (as many of us do), keep reading the forums, here or bogleheads, and look at the LIC annual reports etc to get your fix

 

Ok, how's this for a second draft:

AFI/ARG/MLT - 40%
WAX - 10%
PMC - 20%
DJW - 10%
CMW reit - 10%
VHY asx etf - 10%

So that's 80/20 AU/int and 80/20 LIC/ETF&REIT

Based on history that should provide me with a return of over 6% in dividends, dividend stability from the etf and reit, exposure to small-mid caps, exposure to international holdings, and a bit of growth from the large cap lics

 

With index funds the manager is not the custiodian, so no issue around manager going arse up. As an aside, basicallly never invest with any manager who is also custiodian...massive warning Will Robinson scenario.

Running ones own index type fund = a terrible idea. The portfolio admin for one, let alone management....

 

40% VAS or STW
35% VGS
15% DJRE
10% VAF

4% gross yield using company structure.

 

Why CMW? Why not a reit ETF? Not sure CMW would be the reit I'd choose! (I've owned it in the past). Why VHY? Why not STW,VAS or IOZ? Index trackers are my ETFs of choice!

 

Yes it is a Diversified fund! So it has international exposure in it. My wife has quite a low risk tolerance. I don't disagree with what you are saying howeverthe Vanguard index funds are a simple set a forget product. I'm certainly not recommending it, but it is a product I'm happy to own.

 

Geezus. “Custodian”. Too much wine last night, visitors from the country in town!

 

The ETF versions of the diversified funds should be better from a tax standpoint I think.

 

The Hedged components of the fund probably contribute the most toward less efficient tax distributions. I haven’t looked into it but I wonder what effect periodic rebalancing has on the investor tax wise? Then there’s the occasional major changes to the fund such as when they dropped REITs?

But certainly from a behaviourial perspective the Diversified Funds offer a huge advantage especially the unlisted Funds where one can setup BPay and forget about it all!

 

Both CMW and VHY seem to give good dividends. Around 8%. To be honest so far most of my research has been on LICs and I've just been throwing in ETF/REIT to complete the picture. I'll read up on ETF watch (which doesn't work on my phone, hence why I haven't got to it yet).

 

My partner is thinking of a similar set up in either borrowing an amount to get into the vanguard wholesale fund at lower fees and set up bpay and set and forget.

The 2 choices she has come up with include get the 100k amount and open a wholesale vanguard Aust share fund and then open a wholesale international fund with an additional 5k and from that point set up bpay and dca into both funds or the other option is to get the unlisted diversified fund which does it's own rebalancing again set up with dca which again limits behavioural factors which is critical!

Only issue is down the track in regards to redeeming units in the diversified funds in comparison to the Aust v international wholesale fund holdings and the associated tax implications.

 

If wanting to withdraw, separate funds allows you to redeem units in the best performing fund rebalancing in the process which will incur CGT unless in tax free Super environment.

In the diversified fund there may potentially be CGT as a result of Vanguard periodic rebalancing and again when you redeem units. So could potentially be taxed twice? It depends on how well Vanguard can offset inflow with outflows at a fund level. Then again does AMIT force them to apply CGs at a member level even when rebalancing?

I personally like to have control over tax planning and so separate funds appeals to me. However it could all turn to **** if one is prone to bad behavioural tendencies.

 

When buying LIC's it's important to check price against nta.WAX is currently trading around 25% above it's nta,given the dividend is paid on nta not price of share you are effectively receiving less than the current div.yield if you pay over the nta,in WAX's case 25% less than current price.I personally prefer WLE as it's trading below nta,it's a relatively new addition to Wilson stable & given their record they will aim to steadily increase the dividend up in line to their other offerings(WAX,WAM,WAA).As regards VHY there are thoughts on this one in the ETF thread.Not advice just musings.