International Asian exposure in portfolio: LICs, ETFs or other

Fair point @Nodrog

I especially liked Thornhill’s comment recently on Cuffelinks about strategies to cope with Labour’s proposed changes.

In a nutshell, he said that it will be business as usual for him. He said that he would cope with it the same way he (and others presumably like you @Nodrog) coped with 19% interest rates and the various others market and other political tribulations that have happened since he first started investing way back in 1987.

It was very instructive and a good insight into the clarity of thought he brings to the investing table.

 

Great post, I have often wondered if all these tweakings you have mentioned would actually help or hurt an investor given the additional buy decisions which need to be made in rebalancing the portfolio and this would then challenge investor psyche and behavioural finance issues within the investor in him or her forecasting or speculating global events and viewing past performance as future performance.

I have tried to simplify the decision making process as much as possible and often think if I had to make the investment process as simple or uncomplicated as possible how and what lic/etf or fund would I select and why in order to capture the Australian market for the franking and passive income approach as well as international component and a cash at bank or bond component.

Then the next stage would be focusing on spending less than I would earn and investing the rest for life (10 to 20 percent of income) and then give the process enough time for compounding to weave it's magic.

It seems in today's investing world we are bombarded with new investments it seems daily and i sometimes think I would of loved investing back in the day as we weren't overwhelmed with decisions and theories like we are today!

Just a little off topic ish rant!

 

Yep I had a Home Loan when interest rates were through the roof and was in the market during the 87 Crash. I also remember having cash at bank earning huge interest at the time. I remember it vividly as I forgot to declare it and copped an audit from the ATO. But unlike Thornhill I didn’t experience that horrendous time during the 70’s oil crisis.

I deleted the later part of my earlier post that you quoted as I thought it inflammatory. But it does seem others are wowed by the regurgitation of what’s been read in a textbook as opposed to experience. And rest assured that Thornhill’s knowledge and experience is extraordinary especially in the Australian environment as opposed to American authors. Technical knowledge is easily learnt, experience and wisdom in the Australian environment however is priceless!

 

Sounds like you are after the global market portfolio, easily put together with just 4 funds. As
@Nodrog quoted from Swensen, it makes sense that portfolios are tailored around individual preferences. For me, I’ve come to less is more.
Avoidance of regret / avoidance of poor outcomes is a worthy goal rather than stretching for the last %.

 

Thank you. After my mini brain snap good to see the thread back on track. Some textbooks are worth quoting.

 

Textbook regurgitations are based on what happened in the past, as is PTs material which is based on his unique experience. PT is actually very close in mindset to a number of American “authors”. All stocks, long term, never sell, domestic bias = Charlie Ellis for one. Both are equally dogmatic.

One needs to find their own wisdom I think, chances are you will outlive your gurus. To suggest that PTs stuff is more valuable than others doesn’t hold water with me. It’s all important to know. Take it all on board and find your own course.

 

Yes wise words.

Again I suppose Swensen’s comment is very relevant, it makes sense that portfolios are tailored around “individual preferences”. Regardless of what that is anything else will only result in failure. God forbid Bill Bernstein’s (big name in asset allocation field) solution for a retiree is to invest until one reaches approx 30 years of living expenses then basically dump the lot in “Term Deposits”. So no right or wrong, only what let’s one sleep well at night.

 

Whilst on the topic of EM and International exposure in general for that matter, of great importance especially for retirees is the issue of “currency”. Despite Currency over the long term being a wash it can go against an investor for long periods of time. For an investor close to or in the earlier stages of retirement then just like sequencing risk, if an adverse currency movement happens at the wrong time it may cause problems. Of course one can hedge but that comes with its own issues including messing up distributions badly. And in theory currency can act as a diversifier reducing portfolio volatility. But it doesn’t always do as expected.

So in my case I’d ideally like to have much greater exposure to International equities but as stated earlier an investor’s portfolio has to reflect his / her’s (and their partners) concerns. So that not only means no EM for us but also less International exposure. That is despite the technical part of my brain suggesting more International exposure would be worthwhile I know in the end the emotional part of my brain would win out and sabotage my efforts should I do this!

 

In the reading that I have been doing, it's becoming clear that it is all well and good to optimise one's portfolio for risk vs return but at the end of the day, the biggest risk to the portfolio is ME. One can diversify to the nth degree but if it makes a portfolio unnecessarily unwieldy and only add more anxiety towards buying decisions what is the point? Imagine stressing out like that for the next 20 years, not worth it for that extra 1% I don't think.

 

This is a really good discussion.

I am:

• just a very inexperienced investor trying to avoid learning the hard way
• probably too risk averse and over analytical for my own good
• always willing to admit mistakes and change course at any time

My rules/assumptions:

1. No-one knows the future, but decision making must be based on logic and the known - ie history and current situation.
2. The market tends to increase in the long term, but there is no guarantee we won't fall into the long tail and see 30 years of dismal performance (think Japanese bear market).
3. Follow the KISS principle. (@The Falcon - does this 4 fund portfolio you refer to include infrastructure / REITs?)
4. Listen to those who are more knowledgeable. In particular thanks @Nodrog and @The Falcon. You don't always see eye to eye but there is no right and wrong (see point 1). The Devil's advocate is essential in risk based decision making and generally speaking, humans are bad at it. We tend tp take offence if anyone suggests alternatives / contradictions instead of taking it on board and working out the best course of action given the new information.

The difficulty comes in that some of these rules are contradictory, eg keep it simple but take on and use all data available to understand a highly complex system - I am always changing my mind and reconsidering - is this a good thing?

I'll keep plugging away, tweaking here and there, until I reach a point where I am happy to sit back and see how it unfolds.

Now that's a rant.

 

This is pretty much me to a T at this point in time, I’m trying to learn as much as I can but the more I absorb the more I realise that I probably have no idea what I’m doing. I haven’t even considered other asset types like AREITs, Industrials, Bonds etc. My asset allocations are just between Aus/Int equities and then sub divided into Large/Small or Developed/Emerging split across different LICs with ETFs as a base. Perhaps it’s too simple but it will do for now until I understand other investment vehicles better. At the same time I don’t want portfolio rebalancing to be this onerous exercise every time I have funds to contribute, anything greater than 4 will just make my head spin not to mention the paperwork around tax time!

I’m very grateful to have found you guys on this forum, would have been very stuck otherwise and in my personal life there is nobody I can really talk to about this or be mentored by (money talk is a pretty uncomfortable topic for a lot of people).

 

@ErYan the market portfolio is market weight global listed equities and bonds. So you would not tilt to reits for example. You’d choose your bond allocation (hedged global aggregate bond fund perhaps) and then market weight global equities. Then you need to make currency hedging decisions. This is your “avoidance of regret” portfolio for the global citizen. Not for me, but it is a way to construct a well diversified portfolio. In Oz you’d need 4 funds or 3 if using VTS/veu

 

@Nodrog i haven’t looked closely at Bernstein’s “liability matching” stuff, does he not suggest maintaining some equities allocation?

 

Hi mate,

In a nutshell a retiree around normal retirement age should ideally aim for approximately 30 x living expenses in risk free assets allowing for inflation. This includes any “guaranteed” sources of income such as Public Service pensions etc. If you read carefully he suggests that 50% of a market’s dividend income could perhaps be considered as “safe” income but this is more applicable to the wealthy? This is the so called Liability Matching Portfolio (LMP) or essentially an “income floor” to protect the retiree if a “deep risk” event occurs including a drawn out Great Depression type event.

This is in line with his well known saying “when you’ve won the game stop playing”!

The main assets he considers suitable for a LMP are short term treasuries and Government guaranteed GICS (Term Deposits). He did suggest TIPs earlier on but I think he has cooled on these somewhat.

Bond Funds are not suitable at all as there is no guarantee X amount of dollars will be there at a given time to meet personal liabilities / living expenses. In a Bond Fund over time interest rate rises will likely compensate for loss of capital in a rising interest rate environment but that’s makes it extremely difficult to plan for Liability Matching given unknown time lines.

Yes you can own equities if and only if there is excess capital remaining after allocating for the income floor. This can be invested however you want be it small caps, Emerging Markets or whatever. That’s for your heirs.

Some choose to implement a LMP only for essential living costs to keep it at a workable level.

I have a problem with the Liability Matching approach though. How can you ever plan for an outbreak of high inflation in a future 30 year period? Liability Matching is nothing new in the insurance / pension / annuity environment. But it typically requires a large member base to work effectively. Some die young, some don’t etc.

I think there are more realistic approaches than Bernstein’s LMP.

I quite like Bogle’s Stocks for their dividends, bonds for their interest suggestion. However can’t be done without a large amount of capital.

To best bet is aim to get wealthy. Just about any approach will work then.

 

Cheers for the summary @Nodrog , I need to look at this in more detail as I share your concerns viz high inflation - surely Bernstein has thought about this? Individual TIPS would make sense for this purpose I would have thought? Not something I would do but interesting nonetheless.

I agree with your final point. My model portfolio creates gross yield of c.4% p.a, there will be no need to sell anything.

 

You would be aware of it but for total return investors using the three fund index portfolio in retirement this article from Canadian Couch Potato founder is one of the better strategies I’ve seen. Cash and Term desposits combined with Bonds and Stocks works together nicely. A more sensible strategy compared to a full on LMP approach.

A better way to generate retirement income

 

Bernstein was originally suggesting a TIPS ladder or Indexed Annuity (less preferred). But if my memory serves me correctly I thought he felt TIPs were poor value in more recent times and hence suggesting Short term bonds and GICs.

It’s been awhile so I need to do a refresher. Perhaps TIPs are still his preferred option and the other was a fill in whilst rates are so low?

This is interesting also in relation to dividends:

 

@The Falcon the following might be of interest also:

 

Like that book by Robert Fulghum, All I Really Need to Know I Learned in Kindergarten, all one needs to know is in the first 10 pages of the original LIC, ETF and Peter Thornhill threads.

If you are the kind that gets your kicks from mentally stimulating yourself with all sorts of investing theories, knock yourself out by reading everything. Otherwise, do the smart thing and continue to invest sensibly and regularly in your preferred investing vehicle and forget about the rest.

Your net worth, eventual wealth or investment returns will not give two hoots about how complex your investment knowledge was or if you considered EVERY little thing before you invested in the perfect investing pattern there ever was.

NOT advice.

 

He he yes. I do enjoy the mental stimulation. Better than watching TV. Learning keeps the aging little grey cells functioning.

Then again if all one needs to know is the first 10 pages of those threads why are you still reading this then. Perhaps most here enjoy this stuff more than they’re willing to admit.